Thomas Piketty’s Capital in the Twenty-First Century is a moving target. The book contains foundational theoretical problems, a misreading of the empirical literature that blows up his whole case, sloppy and absurd factual errors concerning tax rates and minimum wage hikes, and shocking quotations that reveal he has no desire to actually raise government revenue with his massive soak-the-super-rich schemes, but instead merely wants to prevent the formation of fortunes in the first place.
I am now beginning to suspect that this is the Frenchman’s rope-a-dope strategy. By this point, after I (and others) have been harping on one problem after another, the poor blogosphere reader is too fatigued to take it seriously when Chris Giles at the FT alleges that Piketty’s most important scholarship–the thing that supposedly warrants Piketty a Nobel Prize, according to Larry Summers–is not only wrong, but contains deliberately fudged data. Uh oh.
You can click the FT link to read the big-picture (ungated) story, and this (gated) link to see the specific allegations about Piketty’s data errors. Giles explains what led him to start questioning Piketty’s historical figures on wealth and income concentration, which most other reviewers (including me!) had simply assumed were in the ballpark:
[W]hen 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.
Whoa! Piketty’s figure for wealth concentration in the present–so we’re not quibbling over 1810 here–was off by 27 percentage points. Like Will Ferrell, that’s kind of a big deal.
Yet more amazing than Piketty’s apparent errors–and his rather odd reply amounting to “prove me wrong, kids, prove me wrong”–is the response that his defenders are mounting. For example, Danny Vinik at the New Republic tries to blow it off as the FT making a big deal about nothing. Let’s walk through Vinik’s apology for Piketty.
First, Vinik argues that the only significant changes have to do with Britain and the US; Giles’ reconstructed time series for France and Sweden match up almost identically with Piketty’s original figures in the book. OK so let’s look then at Britain and the US:
In the figure above (which Vinik reproduced from Giles’ FT post), the top lines refer to the total amount of wealth (“capital” in Piketty’s broad definition, which includes land) owned by the top 10% of wealth owners. The bottom lines show the amount owned by the top 1% (obviously it’s lower). The blue lines show the estimates as Piketty charted them in his book, while the red lines show the FT analysis (which has different options for the year 2010, based on whether one includes the “ONS Wealth and Assets survey or not”).
As the figure shows, there is an enormous discrepancy in Piketty’s figures and those that the FT computed. In addition to the figure for the top 10% being off by up to 27 percentage points–the discrepancy that originally caught Giles’ attention–we also see that, depending on which data point one uses for 2010, Piketty’s figure for the wealth held by the top 1% is off by around 9 to 18 percentage points, in the worst case with Piketty reporting a figure that is almost triple the actual value (about 29% instead of 11%, just eyeballing the bottom lines).
Yet beyond the discrepancy in values for given years, step back and look at the overall historical trend if the red lines are correct (as opposed to Piketty’s blue lines): We see that wealth inequality continued its downward trend even throughout the Thatcher years, and after a spike upward during the 1990s, is now (if we use the lower data points for 2010) at the lowest level in recorded UK history.
Let’s now look at the US:
Here things are trickier, because (apparently) there are no good long-term estimates for these data. The top lines (according to Giles) have a huge gap in them, because there are no estimates of the concentration of US wealth ownership by the top 10% between 1870 and 1960. So how, you ask, does Piketty generate that nice blue line, which zooms up to about 80% in 1910, then gradually falls through 1940, etc.? According to Giles, Piketty literally just made that blue line up (presumably guided by the trends in the other countries, and in the US 1%, for which there were better data).
For the bottom rows (showing the concentration of wealth held by the top 1%), there are better estimates, and Giles has shown some of them, along with Piketty’s reported line (in blue). Now notice: Piketty’s blue line shows a gradual trend upward in the ownership by the 1% from 1970 onward. This, after all, is the whole warning of the book: The rich are getting richer, and if governments around the world don’t start taxing the heck out of them, soon we’ll be back to the Gilded Age.
Yet the funny thing is, if you look at either of the longer data sets (the bottom red lines) upon which Piketty presumably based his blue composition, you’ll see that neither shows an upward trend in recent decades. In particular, if you look at the longest red series, it shows that the U.S. is currently hovering near the lowest level of wealth concentration in the hands of the 1% in recorded history.
But I’ve saved the best for last. Here is how Vinik handles the awkward fact that Giles has arguably just shown that when you correct Piketty’s factual mistakes, then the trend in both the UK and the US is the exact opposite of what everyone took away from the book:
Even if you believe that Giles’s findings dramatically change Piketty’s results, they have little bearing on his economic theory. Giles makes a passing comparison to economists Carmen Reinhart and Ken Rogoff (R&R), who drove a significant part of Republican austerity agenda, but saw their findings disproven in 2013. Liberals celebrated when Thomas Herndon, a graduate student from UMass Amherst, discovered a spreadsheet error in R&R’s results that invalidated their main finding. But unlike Piketty, Reinhart and Rogoff largely had no economic theory to ground their argument that national debt crises occur when a country’s debt level surpasses 90 percent of GDP. Once their data fell apart, their theory had no legs to stand on. On the other hand, Piketty fits data to this theory, but does not depend on it. Piketty’s theory—right or wrong—is largely unaffected by these results.
Everyone got that? Vinik realizes he has to walk a tightrope here–progressives were quite pleased to pounce on R&R when their Excel errors came to light. So Vinik is trying to avoid charges of hypocrisy by saying that R&R had no theory to back up their warnings about government debt, whereas Piketty doesn’t need no stinking historical analysis of inequality in order to push through his theories (and consequent policy recommendations).
This should sound oddly familiar for those of you have been following my Piketty posts here at Mises Canada. For in his own review of Piketty–the one where he said Piketty should get the Nobel Prize for his historical work on wealth inequality–Larry Summers wrote:
I have serious reservations about Piketty’s theorizing as a guide to understanding the evolution of American inequality.
But if it is not at all clear that there is any kind of iron law of capitalism that leads to rising wealth and income inequality, the question of how to account for rising inequality remains. After Piketty and his colleagues’ work, there can never again be a question about the phenomenon or its pervasiveness. The share of the top 1 percent of American income recipients has risen from below 10 percent to above 20 percent in some recent years.
Even where capital accumulation is concerned, I am not sure that Piketty’s theory emphasizes the right aspects. Looking to the future, my guess is that the main story connecting capital accumulation and inequality will not be Piketty’s tale of amassing fortunes.
By focusing attention on what has happened to a fortunate few among us, and by opening up for debate issues around the long-run functioning of our market system, Capital in the Twenty-First Century has made a profoundly important contribution.
In the interest of brevity, I had to limit my quotations from Summers’ review. But I hope the limited excerpts above show my point: Summers was absolutely devastating in his critique of the theory underlying Piketty’s book. Yet Summers overall kept coming back to praise it, because Piketty gosh darn it had done “meticulous” work documenting the disturbing accumulation of wealth among the super rich over the last few decades. Except, as it turns out, that maybe a big chunk of those results were due to stupid mistakes or worse. (Be careful not to conflate wealth and income; that’s part of the confusion behind the various volleys of statistics from one camp to another in this debate.)
So that’s where we now stand: Plenty of progressives up till literally yesterday were saying yes yes, Piketty’s theoretical framework leaves much to be desired, but he’s a top scholar when it comes to the trends he’s documented. And now that much of that empirical work might be totally bunk, the defense is to argue that yes yes, the historical data might be the exact opposite of what Piketty claimed, but boy he offers some compelling theoretical predictions with which we must grapple.
Until this sorry episode, I had no idea just how much progressives hated rich people, and how little regard they had for intellectual integrity. Live and learn.