Friday, May 30, 2014

Howard Reed — Piketty, Chris Giles and wealth inequality: it's all about the discontinuities

A Financial Times piece criticising the data underlying Thomas Piketty's book Capital in the Twenty-First Century sparked a heated debate. Economist Howard Reed argues that data discontinuities play a major role in the discrepancies
Overall, the Piketty series, while not a perfect representation of the raw data (adjusted for discontinuities), fits the pattern of underlying changes in wealth inequality much better than the Giles series, which is largely an artefact of the discontinuities.
To summarise, Chris Giles's investigation of Piketty's data has uncovered some errors and inconsistencies which Piketty will hopefully address in future work. This shows the importance of quality assurance and third party checking of all results from statistical analysis – particularly when they involve spreadsheets, where it is very easy to make errors.

However, Giles then goes on to make a very serious error of his own in handling the UK data: he treats changes in the way wealth inequality is measured over the decades as if they were real changes in the underlying distribution of wealth. This error leads him to the misleading conclusion that wealth inequality fell in the UK between 1980 and 2010, whereas in fact it has increased (although not by quite as much as Piketty's published results would suggest).
If you are interested in parsing the details of the data discrepancies, Howard Reed lays it out. The takeaway is that Giles did not adjust and admits it, while Piketty did. Although there are always points to pick with respect to such adjustment, Piketty has a rationale for his choices. The raw data that Giles provides is a red herring.

The Guardian (UK)
Piketty, Chris Giles and wealth inequality: it's all about the discontinuities
Howard Reed, director of the economic research consultancy Landman Economics

No comments: