Thomas Piketty’s Capital in the 21st Century has the story on inequality and growth backwards, says Allen Meltzer. Where Piketty sees redistribution and labor market regulations as the explanation for the downward trend in income inequality up to 1980, Meltzer sees a different process at work: “Taxing the rich to redistribute did not produce growth. On the contrary, growth reduced the share earned by the highest earners.” Meltzer continues:
During the early twentieth century, the United States absorbed millions of immigrants, many unskilled. Many began employment at low wage jobs. Minimum wage laws did not come until the 1930s. By working, the immigrants learned new skills; their productivity increased and with it their wages. That narrowed the gap between the incomes of the top and the bottom earners. But many did something else. They sent their children to colleges and universities where they learned professional skills that earned middle class incomes.
This process continued in recent decades for immigrants from Korea, China, Mexico, and Latin America. That history sends an important message. The growth of the middle class and the narrowing of the income distribution was in large part a result of working to acquire new skills and higher productivity.
President Obama’s program works against this process. It doesn’t reward work. It gives the unemployed and underemployed food stamps, healthcare, housing allowances, and income. Instead of working, many learn to live on the government benefits, supplementing them occasionally by working in the underground economy. Instead of acquiring productive skills, they learn how to live without working at regular jobs. That’s one way that the welfare state worked to increase the share of the highest paid 1 percent after 1980. The welfare state contributes also by weakening and even destroying family structure. Single family women are often on the bottom rung of the income distribution.
A different process is at work now. The capital that is most highly rewarded is now human capital—the education and skill that produces innovations like the internet, social media, popular apps, fracking, and three dimensional manufacturing. The top 1 percent of the earners in any year include people like Steve Jobs and Bill Gates who made the internet into a commercially successful, widely used means of communicating. But the top 1 percent also includes leading sports stars with unique skills and rock musicians with enormous popular appeal. [Defining Ideas, April 17]