Since late January, I’ve posted four pieces at Daily Kos on French economist Thomas Piketty’s latest book, “Capital in the Twenty-First Century.” Over the past four months, many leading economic thinkers have referred to it as a “watershed” work in their field, and/or the most important book on economics of the year/the decade/our generation.
Inevitably, when one writes an extremely popular work which questions—if not outright undermines—the supposed social benefits of unbridled capitalism, it’s to be expected that the status quo will
discredit that person respond.
The first major salvo (we've only witnessed minor potshots, until now) of the status quo’s “response” to Piketty’s work has arrived during the overnight over at the Financial Times (just signup at their firewall and you’ll receive free access for a limited number of articles per month) , where it’s already wreaking havoc throughout the economic pundit class. What else may one call it when Piketty, himself, publishes a response at the FT; and, Paul Krugman delivers up a response post to the FT piece at 3:15 on a Saturday morning over at his NY Times’ blog? Never mind the lead business story in Saturday’s NY Times, as well.
Today’s exercise in economic punditry is a prime example as to what happens when you present information to the world that strikes at the very underpinnings of the uppermost class; not to mention one of their most closely-held spiritual tenets: greed.
So, in chronological order (of publication) during the past 12+ hours, much ado about not so much (as Krugman tacitly concurs, further down in this post, too), IMHO; at least after one reads the fine print…
Data problems with Capital in the 21st Century
May 23 19:01
Professor Thomas Piketty’s Capital in the 21st Century has data on wealth inequality at its core. His data collection has been universally praised. Prof Piketty says he has collected, “as complete and consistent a set of historical sources as possible in order to study the dynamics of income and wealth distribution over the long run.”
However, when writing an article on the distribution of wealth in the UK, I noticed a serious discrepancy between the contemporary concentration of wealth described in Capital in the 21st Century and that reported in the official UK statistics. Professor Piketty cited a figure showing the top 10 per cent of British people held 71 per cent of total national wealth. The Office for National Statistics latest Wealth and Assets Survey put the figure at only 44 per cent.
This is a material difference and it prompted me to go back through Piketty’s sources. I discovered that his estimates of wealth inequality – the centrepiece of Capital in the 21st Century – are undercut by a series of problems and errors. Some issues concern sourcing and definitional problems. Some numbers appear simply to be constructed out of thin air.
When I have tried to correct for these apparent errors, a rather different picture of wealth inequality appeared.
Two of Capital in the 21st Century’s central findings – that wealth inequality has begun to rise over the past 30 years and that the US obviously has a more unequal distribution of wealth than Europe – no longer seem to hold.
Without these results, it would be impossible to claim, as Piketty does in his conclusion, that “the central contradiction of capitalism” is the tendency for wealth to become more concentrated in the hands of the already rich and “the reason why wealth today is not as unequally distributed as in the past is simply that not enough time has passed since 1945”…
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Piketty response to FT data concerns
Thomas Piketty (via Chris Giles)
May 23 19:00
…Let me first say that the reason why I put all excel files on line, including all the detailed excel formulas about data constructions and adjustments, is precisely because I want to promote an open and transparent debate about these important and sensitive measurement issues (if there was anything to hide, any “fat finger problem”, why would I put everything on line?).
Let me also say that I certainly agree that available data sources on wealth are much less systematic than for income. In fact, one of the main reasons why I am in favor of wealth taxation and automatic exchange of bank information is that this would be a way to develop more financial transparency and more reliable sources of information on wealth dynamics (even if the tax was charged at very low rates, which you might agree with).
For the time being, we have to do with what we have, that is, a very diverse and heterogeneous set of data sources on wealth: historical inheritance declarations and estate tax statistics, scarce property and wealth tax data, and household surveys with self-reported data on wealth (with typically a lot of under-reporting at the top). As I make clear in the book, in the on-line appendix, and in the many technical papers I have published on this topic, one needs to make a number of adjustments to the raw data sources so as to make them more homogenous over time and across countries. I have tried in the context of this book to make the most justified choices and arbitrages about data sources and adjustments. I have no doubt that my historical data series can be improved and will be improved in the future (this is why I put everything on line). In fact, the “World Top Incomes Database” (WTID) is set to become a “World Wealth and Income Database” in the coming years, and we will put on-line updated estimates covering more countries. But I would be very surprised if any of the substantive conclusion about the long run evolution of wealth distributions was much affected by these improvements.
For instance, my US series have already been extended and improved by an important new research paper by Emmanuel Saez (Berkeley) and Gabriel Zucman (LSE). This work was done after my book was written, so unfortunately I could not use it for my book. Saez and Zucman use much more systematic data than I used in my book, especially for the recent period. Also their series are constructed using a completely different data source and methodology (namely, the capitalisation method using capital income flows and income statements by asset class). The main results are available here: http://gabriel-zucman.eu/....
As you can see by yourself, their results confirm and reinforce my own findings: the rise in top wealth shares in the US in recent decades has been even larger than what I show in my book.
In the attached graph, I compare their series with the approximate series that I provide in the book. As you can see by yourself, the general historical profiles are very similar. This is exactly what I expect as we collect more data in other countries as well: we will certainly improve upon my series and adjustments (some of which can certainly be discussed), but I don’t think this will have much of an impact on the general findings.
(see also this paper pp. 91-92 of pdf: http://gabriel-zucman.eu/...)
Finally, let me say that my estimates on wealth concentration do not fully take into account offshore wealth, and are likely to err on the low side…
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Did Piketty Get His Math Wrong?
New York Times
MAY 24, 2014 (page B1)
One of the most common approaches for people writing about Thomas Piketty’s blockbuster book “Capital in the 21st Century,” about global inequality, has been to critique his theories and predictions while effusively praising his data collection. Mr. Piketty, after all, did yeoman’s work compiling data from tax and other records to try to determine a history of wealth inequality around the world.
But now The Financial Times is throwing doubt on the data at the core of Mr. Piketty’s work, in a blockbuster report that will open a new debate on how reliable the book’s excavation of historical patterns of income and wealth truly are. At issue: Is the most influential economics book of the year built on bad math?
“The central theme of Prof Piketty’s work is that wealth inequalities are heading back up to levels last seen before the first world war,” writes Chris Giles, the economics editor of The Financial Times. “The investigation undercuts this claim, indicating there is little evidence in Prof Piketty’s original sources to bear out the thesis that an increasing share of total wealth is held by the richest few.”...
...Some of the issues identified by Mr. Giles appear to be clear-cut errors, and others are more in the realm of judgment calls in analyzing data that may not be fully explained by Mr. Piketty but are not necessarily wrong…
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And, we wonder why they call this "the dismal science?"
Is Piketty All Wrong?
NY Times Blog
May 24, 2014 3:15 am
Great buzz in the blogosphere over Chris Giles’s attack on Thomas Piketty’s Capital in the 21st Century. Giles finds a few clear errors, although they don’t seem to matter much; more important, he questions some of the assumptions and imputations Piketty uses to deal with gaps in the data and the way he switches sources. Neil Irwin and Justin Wolfers have good discussions of the complaints; Piketty will have to answer these questions in detail, and we’ll see how well he does it.
But is it possible that Piketty’s whole thesis of rising wealth inequality is wrong? Giles argues that it is:The exact level of European inequality in the last fifty years is impossible to determine, as it depends on the sources one uses. However, whichever level one picks, the lines in red in the graph show that – unlike what Prof. Piketty claims – wealth concentration among the richest people has been pretty stable for 50 years in both Europe and the US.OK, that can’t be right — and the fact that Giles reaches that conclusion is a strong indicator that he himself is doing something wrong.
There is no obvious upward trend. The conclusions of Capital in the 21st century do not appear to be backed by the book’s own sources.
I don’t know the European evidence too well, but the notion of stable wealth concentration in the United States is at odds with many sources of evidence. Take, for example, the landmark CBO study on the distribution of income; it shows the distribution of income by type, and capital income has become much more concentrated over time:
Concentration of Capital Income and Concentration of Capital Gains (1979-2007)
… None of this absolves Piketty from the need to respond to each of the individual questions. But anyone imagining that the whole notion of rising wealth inequality has been refuted is almost surely going to be disappointed.
Do we really need a weather forecaster to tell us that it's raining outside?
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