Kot sem pisal že pred meseci, je lepota razcveta ekonomske blogosfere v hitrem odzivu ekonomistov v realnem času na aktualna vprašanja. Podobno se je zgodilo ta vikend. Kot sem pisal včeraj v Kako resne so napake v Pikettyjevih podatkih?, je v petek Chris Giles v Financial Timesu objavil zapis o napakah, ki naj bi jih zagrešil Thomas Piketty v “Capital in the Twenty-First Century“. Na ta zapis so se takoj odzvali različni ekonomisti.
Včeraj sem objavil prvo serijo odzivov. Spodaj na kratko povzemam še drugo serijo odzivov: odziv britanskega The Economista, odziv Branka Milanovica, vodilnega strokovnjaka za neenakost, ki je desetletja v okviru Svetovne banke zbiral in urejal podatke o svetovni neenakosti ter odziva Mika Konczala in Jonathana Hopkina. Vsi odzivi ugotavljajo podobno kot ostali, da so Gilesovi očitki v pretežnem delu neupravičeni in da ne spreminjajo ključnih ugotovitev Pikettyjeve knjige – torej da je naravna tendenca kapitalizma v koncentraciji bogastva pri peščici posameznikov.
There are four important questions raised by the FT’s work. First, which data are wrong? Second, how did errors in the work, if they are errors, come to be introduced? Third, how do the errors affect the specific points made in the relevant chapters? And fourth, how do the errors affect the fundamental conclusions of the book?
Start with the first question. “Capital” is a sprawling book based on an enormous pile of reference material and data. Much of the data was collected by Mr Piketty and other economists in a series of published papers that have since been used to create the World Top Incomes Database. None of this work appears to be at issue. Rather, Mr Giles focuses on wealth inequality, to which Mr Piketty turns in Chapter 10 of his book. Mr Piketty has not published nearly as much research on the question of wealth inequality, and it seems that much of the analysis in Chapter 10 was done specifically for the book, based on others’ research. Mr Piketty’s wealth-inequality analysis certainly matters as a component of the book’s argument, but it is not accurate to say, as Mr Giles does, that the results in Chapter 10 constitute the “central theme” of the book.
Are the data wrong? Mr Giles identifies discrepancies between source material cited by Mr Piketty and the figures that appear in the book. He identifies cases in which Mr Piketty appears to have chosen to use data from one source when another would have made more sense. Further, the calculations in Mr Piketty’s spreadsheets (which have been available online since the book’s publication) seem to include adjustments in the data that are not adequately explained, and some figures for which Mr Giles cannot find a documented source. Finally, Mr Piketty has made choices concerning weighting of data used in averages, and assigning of data from one year (1935, for example) to another (1930) when such assignments seem unnecessary or inadvisable.
It is not easy to verify whether the data are in fact wrong. There are a couple of cases where it looks as though a transcription error has been made (where Mr Piketty may have grabbed a figure from one line in a chart rather than another), but one cannot be certain. There are other examples where adjustments have been made to the data that are difficult to parse out. But as Mr Giles allows, the data sources underlying the book are often sketchy and rarely perfectly comparable; any analysis would require tweaks to the data (though one would, of course, like those tweaks to be explained and documented in detail). As economist Justin Wolfers writes in the New York Times, “it’s not yet clear whether the cause is obvious errors as pointed out by the newspaper, or judgment calls where perhaps the professional economist deserves the benefit of the doubt.”
The second question concerns how such errors came to be made, if errors they are. As mentioned, transcription mistakes are one possibility. But while some of the data and adjustments in the spreadsheets lack adequate documentation, Mr Giles does not have the evidence to justify the implication that figures are drawn “from thin air”. Data fabrication is a serious charge to make, and I am surprised Mr Giles would allege it without clearer proof.
The third question is the one many readers will find most relevant: how do the data change the picture? Mr Giles examines the figures on wealth concentration in four countries: Britain, France, Sweden and America, as well as the European average. For France and Sweden the picture is most clear: there are some differences in Mr Giles’s work and Mr Piketty’s but the trends are basically unchanged. For America, the outcome of the analysis is relatively muddy (based in part on the fact that the source data themselves are harder to parse, according to Mr Giles). The trend for the top 1% share does not seem to be affected. For the top 10% it is harder to say; here is a chart Mr Giles produces:
Mr Giles reckons data presented by other economists show a gentler rise in inequality, which is a fair criticism, but it is not obvious that Mr Piketty has made any glaring error. The British case is the hardest to gauge. Here is another of Mr Giles’s charts:
Mr Giles writes that the gap “appears to be the result of swapping between data sources, not following the source notes, misinterpreting the more recent data and exaggerating increases in wealth inequality.” The FT has published a response letter from Mr Piketty (who was told of the analysis on Thursday) but it does not address specific allegations. It is a challenge to understand what might have happened without more explanation from Mr Piketty. For the moment, Mr Giles’s work suggests that a mistake has been made in the Britain analysis, and that as a result of that mistake the level of wealth inequality is overstated. It is less clear that Mr Piketty’s analysis has overstated the recent trend toward rising inequality, as Mr Giles suggests.
Finally, Mr Giles argues that if one uses a Britain series of his own construction and uses a Europe average weighted by population rather than a simple average, the trend toward rising wealth inequality across Europe flattens out. Without more clarity on the Britain question it is hard to judge this claim. It is not obvious that weighting by population is a better choice than alternatives (like weighting by GDP). A broader point concerns whether an average of Britain, France, and Sweden should be represented as “Europe”, but that of course is the way Mr Piketty presented the data in the first place.
The fourth question is whether the book’s conclusions are called into question by Mr Giles’s analysis. If the work that has been presented by Mr Giles represents the full extent of the problems, then the answer is a definitive no, for three reasons. First, the book rests on much more than wealth-inequality figures. Second, the differences in the wealth-inequality figures are, with the exception of Britain, too minor to alter the picture. And third, as Mr Piketty notes in his response, Chapter 10 is not the only analysis of wealth inequality out there, and forthcoming work by other economists (some conclusions of which can be seen here) suggests that Mr Piketty’s figures actually understate the true extent of growth in the concentration of wealth.
I think the FT case is blown out of proportion. It is well-known that wealth data are uncertain. I for one do not know where Piketty’s wealth data come from and I am sure very few people do. There is also a myriad choices you have to make re. wealth estimations (e.g. capitalization or not; forward-looking or backward-looking) which you do not have do when you use income.
(Although there are there, that is re. income too, many issues and many choices. If one were to go through my data, point by point, he could also detect a number of problems or inconsistencies: treatment of zero and negative incomes, imputation for housing, imputation of home consumption, what prices do you use for home consumption, how to get correct self-employment income etc etc. And many of these decisions vary from survey to survey and are not well documented, or the documentation is so immense that you cannot go through it or figure it out.)
The situation with wealth data –that much I know– is much worse. I was a referee twice for Davies et al. global wealth inequality papers: there were many assumptions used in their papers, and there are even many more things you have no idea about, e.g. how is wealth defined in India, who is covered or not, how reliable it is, what prices are used etc. You just have to accept the numbers they (Indian statistical office or Davies et al) come up with. People may not realize that behind one such summary number there are 1000s of household-level data or even hundreds of thousands and no one can go through hundreds of surveys and 1000s of individual data to verify them all.
And if you create (as Piketty did) bunch of data for a bunch of countries, there are bound to be issues. The question is, was there intentional data manipulation to get the answer one desires. I do not know it but it strikes me as unlikely that if one wanted to do it, he would have posted all the data, complete with formulas, on the Internet. And Thomas’s data are not there since the book was published but were there for months or even years.
Now. consider FT points one by one:
“One apparent example of straightforward transcription error in Prof Piketty’s spreadsheet is the Swedish entry for 1920. The economist appears to have incorrectly copied the data from the 1908 line in the original source.”
Okay, quite likely. When you transcribe hundreds of data, transcribing some wrongly is very likely. They give only one example. Are there more?
“A second class (sic!) of problems relates to unexplained alterations of the original source data. Prof Piketty adjusts his own French data on wealth inequality at death to obtain inequality among the living. However, he used a larger adjustment scale for 1910 than for all the other years, without explaining why.”
Piketty has to explain why he used a a different adjustment scale. Let’s wait to hear from him.
“In the UK data, instead of using his source for the wealth of the top 10 per cent population during the 19th century, Prof Piketty inexplicably adds 26 percentage points to the wealth share of the top 1 per cent for 1870 and 28 percentage points for 1810.”
“A third problem is that when averaging different countries to estimate wealth in Europe, Prof Piketty gives the same weight to Sweden as to France and the UK – even though it only has one-seventh of the population.”
This is neither here nor there. Perhaps the weights should be country wealth shares, not population shares. At times, you want to have unweighted averages and at times population- or income- or wealth-weighted. The question is whether one or another averaging makes more sense for the issue at hand and whether you stick to whatever you have chosen.
“There are also inconsistencies with the years chosen for comparison. For Sweden, the academic uses data from 2004 to represent those from 2000, even though the source data itself includes an estimate for 2000.”
I do not understand this well. I have sometimes used (say) a 2003 survey to stand for the benchmark year 2000, sometimes for the benchmark year 2005. It just depends for what countries you have what data and also when. My data for (say) benchmark year 2011 improve as time goes by and I get more countries and more recent surveys. So if you compare my global inequality estimate for a given year in the first draft of the paper and in the final version, they would often differ a bit.
In conclusion, the only real issue is why Piketty adjusted the data for several years differently, whether it is explained in the files, whether that explanation is reasonable, and if it is not explained, whether he can provide one. Out of the three “classes” of issues raised by FT, only the second has some validity. So far.
Giles writes: “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.”
This is incorrect, or at least badly stated. Piketty’s central theme is not that inequality of the ownership of wealth is going to skyrocket. If you look at the text , he’s somewhat agnostic about this, but it’s not determinative. The central theme is that the 1% already owns a lot of the capital stock, and the capital stock is going to get gigantic relative to the rest of the economy.
Inequality expert Branko Milan also tweeted this point, but let’s go through it and break down the theory Piketty puts forward. I used three dominos in my Boston Review writeup, and I’m adding a fourth here to make Giles’ critique explicit. Let’s describe Piketty’s argument as four dominos falling into each other:
1. The return on capital is greater than the growth rate. The infamous “r > g” inequality. Meanwhile growth begins to slow, perhaps because of demographics.
2. The amount of capital, or private wealth, relative to the size of the economy will begin to grow rapidly as growth slows. This is the “past tends to devour the future” line. The size and role of wealth of the past will take on a greater relevance to the everyday economy.
3. If the rate of return doesn’t fall, or doesn’t fall that quickly, the capital share of income will increase. More of our economic pie will go to people who own capital.
4. The ownership of capital is very concentrated, historically and across a wide variety of countries. It is unlikely to fall quickly, much less spontaneously democratize itself, in response to these trends. So the income and power of capital owners will skyrocket.
So right away, rising inequality in the ownership of capital is not the necessary, major driver of the worries of the book. It isn’t that the 1% will own a larger share of capital going forward. It’s that the size and importance of capital is going to go big. If the 1% own a consistent amount of the capital stock, they have more income and power as the size of the capital stock increases relative to the economy, and as it takes home a larger slice. However, obviously, if inequality in wealth ownership goes up, it will make the situation worse. (It’s noteworthy that these numbers Giles is analyzing aren’t introduced until Chapter 10, after Piketty has gone through the growth of capital stock and the returns to capital at length in previous chapters.)
The way that Giles could put a serious dent into Piketty’s theory through this analysis is by showing that inequality of wealth ownership is falling in the recent past. This is not what Giles finds. He mostly finds what Piketty finds, except in England, where it’s flat instead of slightly growing in the recent past.
From the four dominos, we can also see what flaws in the data would make people believe that Piketty’s argument is fundamentally unsound. Remember that Piketty has constructed data for each of these trends, not just the fourth one. Piketty and Zucman’s data on private wealth and national income, for instance, is here. But to really dent the theory you need to take down one of the dominos. Most have been fighting about the third one – that either the rate of return on wealth will fall quickly, or that it is determined by institutional factors that are politically created.
But the idea that the ownership of capital will become more concentrated isn’t an essential part of the theory. Though obviously if it does grow, then it’s an even greater problem.
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Obviously, it couldn’t last. Piketty’s book was so universally lauded by such a chorus of great minds (Solow, Wolf, Krugman, even Summers with some reservations), and an even greater chorus of lesser minds (the journalists seduced by his ‘rockstar’ persona and Gallic charms), that is was only a matter of time before someone pushed back. And just as the book’s original reception was probably overdone – it’s a great book, but there are plenty of possible criticisms and counter-arguments – so the counter-offensive is similarly overcooked.
The problem is that, having been anointed the ‘rockstar’ economist, Piketty is set up to fail, and the normal business of argument and questioning which any successful research project spawns will inevitably become politicised and dramatised. The FT is, for once, guilty of a kind of tabloid simplification that is quite out of character: the headline ‘Piketty findings undercut by errors‘, ‘Rockstar economist’s wrong sums on rising inequality‘ reminds me of the debate around climate change and the ‘hockey stick’ graph. And not in a good way.
Doubtless one percenters will be happy to find that they are not doing as well compared to the rest of us as we thought. Economic liberals that have sweated to produce justifications for rising inequality in terms of productivity and innovation will maybe revise down their estimations of the contribution of the one per cent. OK, I’m being sarcastic. The direction of policy and the phenomena we observe all around us, never mind the data, suggest that wealth and income are increasingly concentrated. But of course documenting long-term trends with multiple kinds of data is difficult, as the climate scientists could attest. Maybe Bill Gates, Steve Jobs, or indeed Yaya Toure and Tony Blair, are exceptional and unrepresentative anecdotes from a world characterized by fairly evenly distributed wealth. But I really doubt it.