Last month the left was all abuzz about a new book written by a French (I am not making this up) economics professor who attacked wealth “inequality” as the root of all evil and prescribed confiscatory taxes on individual wealth to ensure everyone gets poorer except, presumably French economics professors and other plutocrats.
Paul Krugman, the left’s attack Schnauzer on economic issues, was nearly pornographic in his praise.
“Capital in the Twenty-First Century,” the new book by the French economist Thomas Piketty, is a bona fide phenomenon. Other books on economics have been best sellers, but Mr. Piketty’s contribution is serious, discourse-changing scholarship in a way most best sellers aren’t. And conservatives are terrified. Thus James Pethokoukis of the American Enterprise Institute warns in National Review that Mr. Piketty’s work must be refuted, because otherwise it “will spread among the clerisy and reshape the political economic landscape on which all future policy battles will be waged.”
Well, good luck with that. The really striking thing about the debate so far is that the right seems unable to mount any kind of substantive counterattack to Mr. Piketty’s thesis. Instead, the response has been all about name-calling — in particular, claims that Mr. Piketty is a Marxist, and so is anyone who considers inequality of income and wealth an important issue.
One nearly expected him to declare he wanted to have Piketty’s baby or would be willing to try anyway.
All good things come to an end, and Dr. Piketty’s book has just exceeded its “use by” date. When the Financial Times looked into Piketty’s work, they could not replicate his results:
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.
The errors fell into several categories:
- “Fat fingers.” Piketty has numerous typos in his data tables.
- “Tweaks.” Piketty changes numbers arbitrarily.
- “Averaging.” Piketty averages data from several European countries without regard to population.
- “Constructed Data.” In the Army we referred to this as MSU. Make Something Up.
- “Picking the wrong year for comparison.” Ooops. Wonder how that happened?
- “Problem with definitions.” The data Piketty lumped together or compared are not always what he says they are.
- “Cherry-picking data sources.” Start with your conclusion then work backwards to find the right data.
The chart shows that Europe did have higher wealth concentration in the 19th century and that inequality fell more than in the US. On this Prof. Piketty appears to be right.
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.
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.
When Piketty was contacted for comment he said “Sacre bleu.”
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.
Yadda yadda weasel weasel
This work by Piketty is a polemic against capitalism, not a serious work of scholarship. It is obvious that, in addition to inadvertent errors, that Piketty had a political agenda and manipulated his data to arrive at his preordained and politically driven destination.