Where the Piketty vs. Financial Times Debate Finally Landed
The debate between French economist Thomas Piketty and the Financial Times continued to play out last week, though it was overshadowed by VA news and the resignation of two administration figures. Here's what you may have missed.
Last Wednesday, FT wrote another long blog post criticizing Piketty's use of data. The critique was mostly focused on two areas, Piketty's U.S. data and his U.K. data. With regard to the U.S. data, FT points out that Piketty is defends himself by referring to new research published after his book came out. While Piketty argues that this proves he was right (and may even have underestimated wealth of the top 1%) it doesn't explain how he arrived at his conclusions using the data he did use.
In fact, a summary by the authors he cites as proving his case seems to say that there is no strong upward trend in the data he did use. FT's Chris Giles writes, "the two authors make the identical point I have made, that evidence from estate taxes and the Survey of Consumer Finances (the sources used by Prof Piketty in his book) do not show the rise in wealth concentration for the top 1 per cent that Prof Piketty shows in his work." So with regard to the U.S. Piketty's defends the trend he believes exists but doesn't really defend his own work.
When it comes to the U.K., both sides admit that a judgment call is being made. Piketty's chart showing increasing inequality comes down to a decision to switch data sets to one which shows dramatically higher inequality, despite the fact that the data he uses says it is not suitable for wealth comparisons.
In his lengthy response to FT last Thursday, Piketty first admits the gap between data sets underscores "major uncertainties and limitations in our collective ability to measure recent evolution of wealth inequality in developed countries." He then goes on to argue that wealth surveys relied upon by FT are unreliable, usually come in too low (especially at the top end) and are not plausible in this case. This is the Piketty quote which was probably most reproduced by his fans in the media:
a 44% wealth share for the top 10% (and a 12.5% wealth share for the top 1%, according to the FT) would mean that Britain is currently one the most egalitarian countries in history in terms of wealth distribution; in particular this would mean that Britain is a lot more equal that Sweden, and in fact a lot more equal than what Sweden as ever been (including in the 1980s). This does not look particularly plausible.
It's a valid point, but again not really responsive to the specific critiques made by FT. The FT criticism is that Piketty's data on the top 1% in Britain doesn't look much like the source data. Here's FT's explanation:
Tony Atkinson [the source of the data Piketty used] has done a better job, publishing what he thinks is a fair representation of his top 1 per cent results on his Chartbook of Economic Inequality website he has derived with Salvatore Morelli.
Go to the website or look below at the yellow line. The top 1 per cent wealth share falls in every decade since 1923 bar one, the 1990s. That is one decade of rising wealth concentration amid nine of falling wealth concentration.
FT reproduces the chart here. It does indeed show top 1% wealth declining through 1970 then remaining flat until about 1992. In his long response, Piketty says he used Atkinson's data through the 1980s. However, unlike the source data, his chart shows inequality increasing in the 70's and 80s. Piketty offers no real explanation for this difference, something FT's Chris Giles pointed out in his final blog post on the topic.
There is also the issue of why Piketty chose to use estate tax records rather than survey data for his UK data set. Piketty had previously said the UK survey data was "very low quality" but FT responds by noting that this view is not shared by others in the field:
Comparing different data on British wealth, Prof Sir John Hills, director of the Centre for the Analysis of Social Exclusion at the London School of Economics, writes about the difficulties of inconsistent data in his book Wealth in the UK: Distribution, accumulation and policy. There, he writes that the Wealth and Assets Survey is “the most comprehensive survey” and lists its drawback as its relatively short life.
The other problem with Piketty's explanation (for why he refused to use the UK survey data) is that he made the opposite choice when it came to his U.S. data set, relying on U.S. survey data that is compiled using a much smaller survey sample. FT writes:
It is inconsistent to accept a cross-section survey for the US when it gives high numbers, but reject one for the UK which gives low numbers. Prof Piketty needs to explain why he has made this choice and rejected the specific advice of HM Revenue and Customs not to use its latest survey of personal wealth survey in estimating the wealth of the UK as a whole.
Again, Piketty's detailed response does not explain this choice. FT's final word on the subject highlight's Piketty's vagues responses to some of these issues:
Further debate on many of these items is difficult because Prof Piketty
accepts he makes still undocumented adjustments to his data from his
original sources, but says they are appropriate because any alternative
would not be plausible. The sources he has appear to be secondary to
Prof Piketty’s prior expectations of what the data needs to show.
Finally, on the issue of how to average data between different countries, Piketty does admit FT's method is "generally superior." However he immediately adds " really does not make much of a difference here." Of course that's only true if you accept his explanation for his use of data for the U.K.'s top 1 percent. If you find FT's argument more persuasive, then the averaging method does indeed undercut Piketty's thesis for Europe.