Piketty’s Mistakes, What They Mean for the Message of Cap21, and Other Data Thoughts

May 24th, 2014 at 12:23 pm

Industrious data probers at the Financial Times have raised good, tough questions about some of the wealth data in Thomas Piketty’s influential book (specifically, the material in his Chapter 10).  Though we’ll need to wait for a full response from the author to questions they raise, their careful forensics provide a must read by anyone who relies on Cap21’s wealth data.

A few responses:

–The key question is whether the apparent mistakes and inadequately-explained adjustments uncovered by the FT change the trends in Cap21 in a way that would alter fundamental conclusions.  According to an initial response by TP, wealth data using “…more systematic data than I used in my book, especially for the recent period,” and “completely different data source and methodology” find similar trends.

OK, but I haven’t taken the time to scrutinize those data either, and they too are constructed using a series of imputations and adjustments that, while necessary, involve judgments by the authors.  More on this problem below.

More supportive of TPs original work are the trends in the FT charts themselves, which for much of the data they’ve corrected, look a lot like TPs original figures, though the UK trends are an exception (with considerably less wealth concentration evident in the FT version).  Here, for example, is the figure for France, where the FT’s trends are about the same as TPs.


Source: Financial Times

–TPs income data, which come from tax records, are more reliable than the wealth data.  It’s true that the income data, as I and others have stressed, generally leave out taxes and transfer payments, so they’re incomplete too.  And TP and colleagues make adjustments to these data as well (something called “Pareto imputations” to estimate the distribution at the top of the income scale).  But I trust those adjustments and believe their market income inequality trends are reliable.  In fact, they’ve been around for a while now and have held up well to forensic scrutiny.

–There’s other solid evidence showing the increase in US wealth inequality over the past few decades, presented in the wealth chapter of EPI’s State of Working America, such as the figure below from the work of economist Ed Wolff.  Also, especially in recent years, various national data sources, and not just in the US, reveal a shift in “factor incomes” from labor to capital, and capital ownership is more highly concentrated among the wealthy.  I’m confident that recent trends in wealth accumulation are reliable.


Source: State of Working America.

So while the FT is absolutely correct to raise these questions, I’m quite certain their findings will not change the fundamental conclusions of Cap21.  Specifically, the mechanics he emphasizes regarding wealth accumulation look to me like they will stand once these errors are fixed.  But, pending TPs response, they may be significant enough to change some of what those of us who read book but applied less scrutiny to its findings believe to be true about certain countries’ wealth trends.

Which leads me to some closing thoughts about data work in empirical economics.

In reading a work like Cap21, I did what most people did.  One, you made sure trends comport with your understanding of other sources and developments, like Wolff’s wealth work, which I know well, and the fact that years of growing income concentration and shifting factor shares contribute to growing wealth inequality.  Two, you try to gauge the scholarship of the author which you correlate with getting the data right.  Piketty is a well-established economics scholar so let’s see his response.

But really, especially if you’re in the business of researching and explaining these trends, there should always be a lot more digging than that before folks like me accept a lot of new evidence in this work.  I generally trust what the scientists tell me regarding their work on stuff like the Higgs boson.  I’m less certain about what economists say about their data work.

Even if I’m right that when all’s said and done Cap21 will stand just about as strong as it did before, this episode combines with other stuff going on in my work that has triggered these reactions:

–Generally speaking, I like simple, understandable data of the type produced by government agencies with large statistical staffs and many layers of scrutiny, like the BLS, BEA, SSA, Statistics Canada, and so on.  I’m not saying that the unemployment rate, for example, or the hourly wage, median earnings—all BLS statistics I know well—are always exact.  By the definition of a “statistic,” they’re not.

But I know how they’re derived, in no small part because the agencies print reams of explanations.  Also, while they too undergo adjustments—weighting, seasonality, birth/death estimates for firms when counting jobs–I know how they work and can handily gauge their impacts.  Even here though, the deeper you dig, the more you run into uncertainty-increasing imputations (e.g., the BLS local labor market variables are largely model based, as opposed to survey based like the national statistics).

–Though I use such data a lot, I’m increasingly suspicious of analyses that add a bunch of different sources on to a base data set and then crunch it back down into small bits.  For example, CBO and many researchers add lots of other sources to income to get “comprehensive incomes.”  They adjust incomes for different family sizes, the valuate publically provided health care, typically at market values, and add it onto microdata-level incomes.  Some researchers even try to impute unrealized wealth gains, like home or stock appreciation.

Don’t get me wrong.  As Gary Burtless convincingly stresses, a lot of that spending makes the families who receive it better off (though even here, it’s easy to get it wrong: assigning inflated US health care spending at market values to families is a clear over-valuation of its worth to them).  But the simulated income distributions that result from these add-ons can end up yielding questionable results once you start breaking things down by quintiles and narrower percentiles.  That’s “questionable,” not wrong.  My point is that the more you’re simulating and adding on, the more you may be drifting from the truth.

I don’t know what the right answer is…I’m working on it.  On the one hand, I’m increasingly drawn to Matt Yglesias’s point that “empirical evidence is overrated.”  On the other, I’m much more convinced by data like the first chart here which uses administrative IRS data, right off W2 filings, to generate what I consider a highly reliable series on real annual earnings (worth noting that these data are a core component of TPs US income data).  And you’ll note both the inequality pattern and the earnings stagnation from the bottom 90% of earners.  These data and the story they tell strike as about as close to truth as you’re going to get in this work.

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10 comments in reply to "Piketty’s Mistakes, What They Mean for the Message of Cap21, and Other Data Thoughts"

  1. Robert Buttons says:

    I think Piketty should receive the exact same treatment Prof Krugman provided to Rogoff.

  2. Fasaha M Traylor says:

    So glad that you (and others) are keeping up with this stuff. Although I like the idea of “empirical evidence [being] overrated,” I really don’t know how one can rely on it heavily for climate change, and give it a pass on a few centuries worth of data in economics. That’s why I’m hoping that your analyses and re-analyses turn out to be right. I’m only 1/3 of the way through, so it would be nice to know whether where there will be any changes in his destination…

  3. Perplexed says:

    “–The key question is whether the apparent mistakes and inadequately-explained adjustments uncovered by the FT change the trends in Cap21 in a way that would alter fundamental conclusions. According to an initial response by TP, wealth data using “…more systematic data than I used in my book, especially for the recent period,” and “completely different data source and methodology” find similar trends.”

    What a tremendous debt we all owe to Piketty, Saez, Zuchman, Wolff, Gabriel, Stiglitz, et. al. for finally dragging this debate, kicking and screaming, out into the open after what can be considered nothing short of centuries of willful blindness and intentional concealment on the part of the “science” and “profession” of economics. The exposure of the almost complete absence of systematic data collection on how income & wealth are actually distributed and accumulated in supposedly democratic societies is mind numbing. Exposing how economists have been hiding behind “marginal products theology” and systematically and intentionally ignoring, or even measuring and tracking, what really drives income distribution and capital accumulation could potentially be the single best thing to happen to the “science of economics” since Adam Smith. While economists now quibble over the details, at least the public can now recognize the very limited understanding that economists actually have about the distribution of income and wealth and act accordingly. As Piketty stated in his response to the FT questions “I would be very interested to see these statistics, and I would be happy to change my conclusion!”

    So let the debates ensue; its centuries past the time the public should have some answers, not only on how this is really working, by why the science of economics is working to conceal what’s happening instead of working to develop a thorough understanding of it!

    So what’s the ration of rents/GNP again? Not important right? So why is again that we are listening to economists about such critically important matters if they refuse to even carefully scrutinize their their foundational assumptions and systematically collect the data that might reveal how wrong they are?

  4. Smith says:

    To those without the time or inclination to read all of the critique, the biggest and perhaps only significant problem lies in the assessing British wealth of the 10% where Piketty shows 70% vs. Giles gives data sources showing 44%. The more important (because of size, the subject of this blog, and also my economy) US numbers seem to hold up pretty well. However it is one of the central tenets of the book, that of rising wealth inequality, that is being attacked. Important questions are raised if the trend from 1970 doesn’t show rising wealth share. This is important to Piketty’s thesis of how income inequality works. What? Aren’t we talking about wealth? Not exactly. What Piketty says is wealth begets greater income which of course begets greater wealth (more detail below). One might ask are we really that much better off if shares of the 1% holding 30% of wealth and 10% with 60% of wealth don’t appear to be climbing? (U.S. numbers). Aren’t they already too high?

    My take on Piketty, a practical example:
    Average stock returns are at least 6% after inflation (plus they are taxed less than income, 6% less 20% still yields 4.8%)
    Productivity averages 2.2%
    (these numbers good for 20 year or 70 year post WWII era, but short term, your mileage may vary)
    Who wins, the rich person relying on capital for his income, or the laborer who relies on a share of productivity gains? Where do the returns of 3.8% (6% – 2.2%) over and above productivity gains come from?
    In the past, only progressive tax policy triggered by depression or war could counter this. One critique (Mankiw or Brooks, I forget) says fortunes are dispersed through descendents, a highly dubious proposition in an era of zero population growth.

    Note: The income numbers could not be attacked, so as Krugman argues it’s highly implausible the rich are earning so much more and not saving or investing any of it (we’re talking 5% of GDP increase since 1970 or $800 billion, or $800,000/per one percenter, which doubles their income, or increases 50% depending on personal or household measure). How exactly would one go about spending $800,000 (houses, cars, even works of art are investments that usually grow in value)? Of course there are over a million making that amount. Maybe they throw parties for each other.

  5. Alan Reynolds says:

    Would we not expect the top 1 percent’s share of wealth in France to fall in the postwar years when France imposed high tax rates on estates, and high tax rates on reported wealth? Without honest (or foolish) self-reporting, it is impossible for aspiring tax collectors to to know the value of personal assets (think of gold coins, uncut diamonds and Swiss bank accounts).

    As for the U.S., Emmanuel Saez and Wojciech Kopczuk found the top one percent’s share of wealth was 38.1% in 1916, 40.29% in 1930, 25.25% in 1960 and 20.79% in 2000. That does not look like a trend toward greater concentration of wealth, nor does the Fed’s survey of consumer finances.

  6. Smith says:

    http://www.newsweek.com/thomas-piketty-says-he-was-ambushed-252501 by Leah McGrath Goodman

    The story in Newsweek says:
    “According to the Office of National Statistics, however, the Wealth and Assets Survey that Giles believes Piketty should have used as the basis for his research on wealth inequality in the U.K., has collected data since 2006 and is still in what it tells Newsweek is an “experimental” stage.

    Quotes Piketty:
    “He didn’t give me proper time to respond (less than 24 hours) and most of all the mail he sent me did not include a large part of the material that they were going to publish,” he said to Newsweek in the email. “I maintain that there’s no error or flaw in my series.”

    Gile corroborates:
    “Giles, reached by phone this morning, told Newsweek the paper did contact both Piketty and his publisher, Harvard Press, on Thursday evening (British Summer Time) with some of the paper’s main questions, stipulating a deadline of 3 p.m. the following day.”

    (Seen elsewhere in blogosphere, but surely more will follow.)

  7. Larry Signor says:

    ATIF MIAN AND AMIR SUFI have a very good take on the anti-Picketty crusade…it’s all BS.


  8. George Kaplan says:

    Pikkety’s value is in raising the issue. The graph shows that 90% of the wealth accrued to 20% of the population. If this is unwise for the future of the US then take action against it. Since at least some of the accumulation is due to the tax code. Do we have the votes to change the code?