The Perils of Piketty

posted at 9:31 am on May 25, 2014 by Ed Morrissey

In order to get an expert look into the controversy over Thomas Piketty’s work and the Financial Times’ exposé of the errors and “constructs,” I asked Ricochet writer and my good friend King Banaian to break it down for us. King also has a Saturday morning show on KYCR in the Twin Cities on economics and business policy, and is a professor of economics at St. Cloud State University. King is also a senior fellow at the Center for the American Experiment.

A small bombshell exploded Friday with the publication by the Financial Times of an article by Chris Giles and Ferdinando Giugliano detailing data errors in Prof. Thomas Piketty’s unlikely bestseller Capital in the 21st Century. As noted there, most every reader of the book, fans and critics alike, had praised the detailed data Prof. Piketty has provided. The argument heretofore has been entirely over his theory that, because the return on capital inexorably rises above that of GDP, wealth increasingly concentrates in fewer and fewer hands.

Like many people who have bought the bestseller, I haven’t been able yet to wade through all 577 pages.  I expect many copies are sitting on coffee tables next to unopened books of art or architecture that help us make statements in our homes.  (Mine is on my iPad like so many others these days.)  So I will refrain from discussing the theory and only focus on the issues Giles and Giugliano (hereinafter GG) raise.

GG show some examples, first, that there were transcription and “fat-finger” errors in the datasets that Piketty put out in an online annex. This kind of error is every scientist’s nightmare. I produce many datasets for local and regional policy makers and scholars, and even on a third or fourth read you sometimes find gremlins in the data. The errors of this nature are of a kind that were made in the criticism made of Ken Rogoff and Carmen Reinhart’s book This Time is Different. Another book with centuries of data, at one point Rogoff and Reinhart had improperly filtered their Excel spreadsheet. The result, it turns out, wasn’t greatly changed by the properly-filtered data. If this was the total of what GG found, there’d be little to report here, and I’d be inclined to give him the benefit of the doubt:  “Happens to the best of us, Thomas.”

(Steve Hayward wonders why Harvard University Press didn’t find these errors. The simple answer, from my own 30 years of publishing experience, is that there is almost no review process in academic book publishing, and not much more in the vaunted “peer-review” process. It’s worth noting that Harvard U.P. doesn’t keep the dataset on its website; Piketty does that himself. For that he should be praised: science is only science when your results are transparent and replicable.)

There is a second similarity between Piketty and Rogoff/Reinhart. GG say that Piketty didn’t weight the observations of Europe properly, saying “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.” Well, that’s probably something I might change, but that doesn’t make what Piketty did an error or dishonest. He just picked a different averaging method that you did. The critics of Rogoff and Reinhart made the same claims, and found that the averaging method made a difference in the claims those authors make about the impact of government debt on economic growth. It isn’t obvious to me or anyone else that one way is right and the other wrong. They are just different, and it will not surpise you to find people cheering the averaging method that comes up with their preferred result.  Fun for econo-bloggers but not many others.

This criticism, however, is more serious and troubling. Let me quote GG once more:

A second class 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.

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.

It turns out the differences are huge. In a companion blog that details what they found, Giles shows that the data Piketty cited for wealth of the top 10% in the UK was different from the official source … by 71% for Piketty versus the official number of 44%. In some places Piketty’s spreadsheets had had random digits added that seemed to make the data smoother, fit better than it would have otherwise. Some data appaered to be cherry-picked and other data simply “constructed” (what the non-economist probably calls “made up.”) It’s one thing to interpolate or average over two data points when the middle one is not available, but what Piketty has done appears to be more aggresive in constructing data than that.

Piketty responded to the FT with an explanation that is not altogether satisfying:

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). [Emphasis mine.]

But how do you do that without doing things that could be construed as biased towards your outcome? It is a basis of scientific analysis that we agree what the data are, but it seems in some cases Piketty is saying “this is my data, there isn’t a perfect dataset out there, if you think you can do better go ahead.” Well, that is hardly a defense for your own data being definitive, Professor.

No single graph or statistical analysis will ever convince someone that the theory he didn’t think was true in fact is true. Scientists value results that are robust, meaning the results are the same across different times and places. This last error appears to make Piketty’s results less robust and so less likely to change anyone’s mind about what they already thought of inequality, and more likely to make Capital in the 21st Century an expensive, unread table book.


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This among a few other threads on HotAir has taught me a valuable lesson.

Before bothering to read a comment, scroll to the bottom of the comment to see who wrote it. If it’s some leftist, nutless, brainless piece of socialist crap, treat it as a troll and keep scrolling down to the next one.

I’m sick of, and hate with maximum vitriol, the leftist dumba$$es in this and every crowd. Logic not only evades them, their heads are completely incapable of recognizing that there actually IS logic out there.

Middle finger to the lefties and RINOs, hope you choke on your own puke.

Diluculo on May 25, 2014 at 6:24 PM

I got your point now.

jimver on May 25, 2014 at 2:52 PM

The RINO War Cry….

Socialism, centralized economic planning, wealth confiscation and redistribution, and Big Government are inevitable. And can be good. So let us do it rather than those idiotic Lefties. We know how to do it the Right way. Trust us.

Forward, prudently!

farsighted on May 25, 2014 at 2:59 PM

He was very clear on that in his response to my post. Parroting D Frum and D Brooks and other likewise commentators on the ‘right’

jimver on May 25, 2014 at 6:35 PM

pfff, there is nothing wrong in questioning inequality! if our ancestors did not question it, we would be still kissing the british kings ass! calling it envy will not stop anyone from questioning wealth inequality and its fairness.

The American Revolution had nothing to do with inequality.

You just made that up.

Lusting over other people’s things is sin. It’s coveting. Envy is sin. Envy is a sort of a sneering, sniveling hatred directed at someone, something like a bowl of mixed jealousy and hatred. Resentment. You’ll know envy when you laugh when they fall down dead; you’ll know covetousness when you pocket their stuff. A dead giveaway for envy is the word “unfair” being applied to someone’s comfort.

And since we’re talking about envy, it should be called envy.

there is also the greater concern of R > G and what it means to the stability of the capitalist system we and our childreen will live in. growing inequality will breed violence and political dysfunction

You just made that up, too.

nathor on May 25, 2014 at 12:52 PM

Axe on May 25, 2014 at 6:38 PM

The other problem I have, although perhaps it is explained away later in the book is this whole r > g thing. For starters, it completely conflates wealth and consumption, two entirely different things. He seems to make the bizarre assumption that all capital is owned by the rich, and they never spend any of it, but just build up their empires in a maniacal manner until it takes over the universe.

JamesB on May 25, 2014 at 2:41 PM

That’s the biggest problem I have with his whole argument.

jimver on May 25, 2014 at 6:39 PM

Data normalization is pretty… normal in the course of scientific work, and is conducted in standardized ways.

You cannot say since dome of this occurred that his analysis is wrong. So long as it is statistically significant, it should be viewed as evidence for his hypothesis.

antisense on May 25, 2014 at 10:26 AM

Not when the conclusion of the book is not backed up by its own data.

From Giles’ FT article:

‘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 theUS. 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.’

jimver on May 25, 2014 at 7:15 PM

The American Revolution had nothing to do with inequality.

You just made that up.

using your words, americans were just envious of king george, they should have not questioned his divine right to rule, they were just envious and envy is a sin! american people were sinful!rofl!

Lusting over other people’s things is sin. It’s coveting. Envy is sin. Envy is a sort of a sneering, sniveling hatred directed at someone, something like a bowl of mixed jealousy and hatred. Resentment. You’ll know envy when you laugh when they fall down dead; you’ll know covetousness when you pocket their stuff. A dead giveaway for envy is the word “unfair” being applied to someone’s comfort.

And since we’re talking about envy, it should be called envy.

since i am an atheist the sin part i can completly ignore. envy for me is just another emotion which can be motivating at times but too much is unhealthy.
now the desire of social justice envy? in feudalistic times, lords would have a diferent law for them. demanding equal rights(not wealth) is envy?
regarding wealth inequality, i am ok with it as long as I percieved it as deserved. if some one steals and becomes wealthy you cant call it envy to demand that person to lose its wealth. but there is no wrong is wondering where people got their wealth from. i am no sheep to blindly accept any status quo where i get the worse part of the pie. I still think some rich(not all) did not exactly follow the rules while acquiring their wealth and justice will never be done.
on top of this its the systemic issue that piketty talks about. R>G means that even is a perfect market without corruption, wealth will accumulate. once you made your pile of capital, you can live of it and see it grow faster than the economy. if this is not balanced, wealthy people will by just playing their role of the capitalist system, make it extremely unequal without any effort. wealth inequality should be there to reward actions valued and beneficial to society, not to perpetuate piles of capital on the hands of the healthy families that managed to accumulate them thus becoming a new nobility.
again, like piketty, I dont want that wealth to be taken away from them, just taxed enough so that it balances the capitalist system.
what to do with those taxes? i would prefer to use it to reduce income taxes, especially in the middle brackets, not to use it in social programs like piketty sugests!

there is also the greater concern of R > G and what it means to the stability of the capitalist system we and our childreen will live in. growing inequality will breed violence and political dysfunction…

nathor on May 25, 2014 at 12:52 PM

You just made that up, too.

Axe on May 25, 2014 at 6:38 PM

nope, i actually read the book.

nathor on May 26, 2014 at 3:05 AM

in defense of pikety:

One “serious discrepancy” Giles said he found was in Piketty’s data on the UK While Piketty cited a figure showing the top 10 per cent of its population held 71 per cent of national wealth, a survey by the country’s Office for National Statistics put the figure at 44 per cent.

The survey cited by Giles “is based upon self-reported data and is very low quality,” Piketty said in his e-mail. Other economists agreed.

Taken as gospel

“The FT seems to take that survey as gospel, and I think that’s a mistake,” said Gabriel Zucman, an assistant professor at the London School of Economics whose research focuses on global wealth, inequalities and tax havens. “Anybody involved in this literature knows that survey data can massively underestimate wealth inequality. In this case, that is exactly what is happening.”

Giles also questions Piketty’s “seemingly arbitrary adjustments to the source data,” writing that “some numbers appear simply to be constructed out of thin air.” Economists said Giles had no basis for that charge.

resuming, piketty’s “error” was that he did not believe rich correctly self report their wealth. somehow, they tend to under report it…
ahah, ofcourse!

nathor on May 26, 2014 at 3:12 AM

resuming, piketty’s “error” was that he did not believe rich correctly self report their wealth. somehow, they tend to under report it…
ahah, ofcourse!

nathor on May 26, 2014 at 3:12

AM

BS, Piketty’s data is simply so incomplete and so sensitive that it’s not sufficient to make up the empirical half of his grand theory of the fate of capitalist societies, and so certainly not sufficient to justify the policies he recommends : an 80 percent top income tax rate and a global tax on wealth – how insane is that??? Hollande on steroids (and you can see how well Hollande does in France right now and how well his idiotic policies have been received ( see the results in the latest EU elections that brought about the total humiliation of the french socialist party).

jimver on May 27, 2014 at 3:43 AM

AM

BS, Piketty’s data is simply so incomplete and so sensitive that it’s not sufficient to make up the empirical half of his grand theory of the fate of capitalist societies, and so certainly not sufficient to justify the policies he recommends : an 80 percent top income tax rate and a global tax on wealth – how insane is that??? Hollande on steroids (and you can see how well Hollande does in France right now and how well his idiotic policies have been received ( see the results in the latest EU elections that brought about the total humiliation of the french socialist party).

jimver on May 27, 2014 at 3:43 AM

we should make a clear distinction between his empirical conclusions of unbalances of capitalism and the prescriptions to solve it. piketty says himself that his prescriptions are highly debatable.

I believe empirical conclusions are correct because mostly are and observed fact. however, like with climate change, there will be debates about the data because both left and right try to nudged it to validate their political positions. on the left there is already those who say piketty sub-estimates the rich wealth. there is already many other data, that points to growing inequality and that is also the public perception.
the R > G seems real but its sociological conclusions are open to great debate still. also, it assumes there will be no technological revolutions improving growth in a way that minimizes the problem. nanotech, better AI can easily create new growth spurts that will cancel the effects of wealth concentration.

politically its foolish to deny the “rich get richer” conclusion of piketty. i can see democrats reenforcing the repubs as the party of the rich narrative with a joyfull glee if we start to say, “piketty is wrong, the rich are not getting richer”. lol! its a political land mine! careful!

regarding prescription nothing is set on stone. i dont like the income tax at 80%. but the wealth tax of some variant of it seems the way to go as long as it minimizes the impacts on the economy and the $ does not grow government provided inefficient social services.

nathor on May 27, 2014 at 7:16 AM

In the engineering circles, we had a rule of thumb, “If you can’t explain it on the back of an envelope, it probably only will not work, it will also be dangerous!” 577 pages were needed to hide a less than rigorous mathematical treatise. Or my favorite, “Statistics is the mathematical discipline that proves once and for all, that figures don’t lie, but rather that liars figure!”

mediamime on May 27, 2014 at 8:55 AM

In the USA we already have a massive wealth tax – the estate tax. Estate wealth over 5.25 million (indexed for inflation) is taxed at 40%.

Yes, there are some incredible loopholes. If we can’t even close those loopholes, talk of a general wealth tax on great wealth is idiotic/pure demagoguery.

The estate tax is the only rational way to apply a wealth tax, and we already do that, and an 80% tax on incomes is nuttiness on crack. Leftists seem to be congenitally incapable of putting themselves in the other guy’s shoes and honestly considering what they would do in response to a policy. If they bothered with that at all, they’d realize the crackpottery of their weirdo ideas.

BTW, I have taken heat from other conservatives for years in arguments over the estate tax, which I strongly favor for the same reason Piketty gives (the natural gradual concentration of wealth in a free society with free people), only I didn’t write a 577 page book full of questionable data and crackpot ‘solutions’ to make my point.

Also, the effect the constant massive inflow of cheap labor has on income inequality is far greater than any tax on incomes and wealth could ever correct without destroying the society completely, ‘leveling’ everyone down to flat broke.

fadetogray on May 27, 2014 at 8:56 AM

BTW, I have taken heat from other conservatives for years in arguments over the estate tax, which I strongly favor for the same reason Piketty gives (the natural gradual concentration of wealth in a free society with free people), only I didn’t write a 577 page book full of questionable data and crackpot ‘solutions’ to make my point.

fadetogray on May 27, 2014 at 8:56 AM

You’ve taken that heat for good reasons.

Every bit of wealth the govt taxes away upon the owners death has already been taxed. If not, it was sheltered within the existing rules at the time. If the govt wants to remove the shelters, that’s another argument, but to assume the govt has some kind of “right” to yank this money from the family for the completely unavoidable end result of life is to assume virtually no limits on their taxing powers.

After all, if they can tax the same wealth twice, why not 3 times? Or 20 times? Or as many times as it takes to take it all?

runawayyyy on May 27, 2014 at 9:31 AM

but to assume the govt has some kind of “right” to yank this money from the family for the completely unavoidable end result of life is to assume virtually no limits on their taxing powers.

After all, if they can tax the same wealth twice, why not 3 times? Or 20 times? Or as many times as it takes to take it all?

runawayyyy on May 27, 2014 at 9:31 AM

It has the right if we give it the right, just as it has the right to tax the use of my labor, an even uglier application of the taxing power. It is not a good thing for us to give the government this kind of power. It is a necessary thing.

We, as good citizens, should try to only give it the necessary power, and we should try to give it the least ugly such power.

As to double taxation, that happens constantly. I pay sales and property taxes with money already taxed. As long as we are given sufficient advance warning so that we can adjust our behaviors accordingly, deciding for ourselves if the risk/benefit is worth the tax, then there is nothing fundamentally wrong with it.

Frankly, it astounds me that so many conservatives cannot see the estate tax is less ugly than just about any other tax. It is a gift to the decedent’s heirs. If he doesn’t want to pay the tax, he can spend the money. He had the full use of the wealth he created right up until he had no further use for it.

If I need to buy a car and gasoline so I can get to work so I can buy food, I have to pay tax on those purchases. That is much more ugly.

fadetogray on May 27, 2014 at 10:18 AM

Or my favorite, “Statistics is the mathematical discipline that proves once and for all, that figures don’t lie, but rather that liars figure!”

mediamime on May 27, 2014 at 8:55 AM.

Love that.

jimver on May 27, 2014 at 2:01 PM

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