Merijn Knibbe — Wealth inequality *did* increase in the UK in the most recent period

ONS data.

Real-World Economics Review Blog
Wealth inequality *did* increase in the UK in the most recent period
Merijn Knibbe

Matt O'Brien — Piketty’s ‘errors’ aren’t mistakes: They’re questions, and he answered them

Thomas Piketty thinks the Financial Times knows nothing of his technical work. 

That's the Cliff Notes version of his 4,400-word response to the criticisms the Financial Times leveled against the data in his best-selling book "Capital in the Twenty-First Century." Piketty says that even though he expects people to improve on his work in the future, he still stands by it today, and the mistakes the Financial Times thinks it's found aren't actually mistakes — and that they'd know this if they'd read the appendices he put online.

Now, to recap, these alleged — emphasis here — errors fall into three categories: 1) transcription mistakes, 2) unexplained data tweaks and 3) in the case of Britain, incorrect data. But the problem with these problems, as I pointed out, is that they aren't ones. They're questions. How did Piketty choose which source to use when they told different stories? How did he adjust them? And how much did his big-picture results depend on these decisions? All good questions — but still just questions.

Well, now that Piketty has answered the FT's criticisms, let's go through them one by one.

The Washington Post — WonkBlog
Piketty’s ‘errors’ aren’t mistakes: They’re questions, and he answered them
Matt O'Brien

Nick Beams — Financial Times’ attack on Piketty under fire

[Christine] Lagarde told the conference that progress in building a safer financial system was being held back because of “fierce industry pushback” against the introduction of new regulations. 

[Mark] Carney went much further, warning that the entire capitalist system is at risk. Unbridled faith in financial markets, corruption and rising inequality had damaged the “social fabric,” he said. Inequality was “demonstratively” growing and risked undermining what he called the “basic social contract” based on fairness.

“We simply cannot take the capitalist system, which produces such plenty and so many solutions, for granted,” he declared. “Prosperity requires not just investment in economic capital, but investment in social capitalism.”

Unchecked market fundamentalism, he warned, could “devour the social capital essential for the long-term dynamism of capitalism itself.”

In its editorial on Piketty, the Financial Times asserted that if there were problems in the accumulation of extraordinary wealth derived from “monopoly profits,” then “enlightened governments” should step in and “remove barriers to entry so that unfair rents disappear.”

In other words, let the “magic of the market” and competition do their work in lessening inequality.

The fundamental flaw in this analysis was exposed by Marx more than 160 years ago. As he explained, the very aim and logic of competition is not more competition, let alone fairness, but the creation of monopoly as “one capitalist kills many.” [economies of scale]

The present economic situation, in which a few dozen major banks and transnational corporations monopolise and dominate the world economy, providing ever greater wealth to the ruling corporate and financial elites and their hangers-on, is precisely the outcome of the “free market” and competition.

The FT’s attack on Piketty is an attempt to deal with social inequality and its explosive political consequences by denying it.

Carney has decided to follow a different course in an attempt to head off deepening opposition and hostility to the capitalist system.

He is calling on the very financial interests that have plundered the wealth of society for their own benefit to undergo a miraculous transformation and become more socially responsible, in order to prevent political and social upheaval. Both efforts are doomed to failure as social reality brings an intensification of the class struggle.

WSWS
Financial Times’ attack on Piketty under fire
Nick Beams

Simon Wren-Lewis — What the Financial Times got (very) wrong

 So the mistake the Financial Times made was not that they allowed one of their best investigative journalists to look at Piketty’s spreadsheets (which Piketty had, to his great credit, made publicly available). As I said in my earlier post, a FT article that looked at the alternative sources for UK wealth inequality data, and questioned the idea that wealth inequality was inevitably rising in most countries, would have been an interesting piece. [1] The paper’s mistake was to write the story as an exposé.   

Why did the Financial Times want to run a ‘gotcha’ piece in the first place? Of course Piketty has become something of a celebrity, and tabloids love to knock celebrities down. But the FT is no tabloid, and to think it was just about celebrity may be politically naive. As Henry Farrell and Mike Konczal noted in a typically acute pair of posts, a focus on inequality as a central issue in economics is very threatening to some, and many of those who feel threatened will read the Financial Times.

Headline: Oxford professor calls the Financial Times political hacks.

Mainly Macro
What the Financial Times got (very) wrong
Simon Wren-Lewis | Professor of Economics, Oxford University

Mark Thoma — Piketty, Krugman, and Wren-Lewis Respond to the FT

Rolling out the big guns against the big guns. The FT rejoinder is Martin Feldstein's WSJ hit piece.

Piketty's full response from Vox EU (see also Paul Krugman: Thomas Doubting Refuted and Simon Wren-Lewis: What the Financial Times got (very) wrong)

Economist's View
Piketty, Krugman, and Wren-Lewis Respond to the FT
Mark Thoma | Professor of Economics, University of Oregon

Jeremy Smith — Have Giles and the FT gone too far in the attack on Piketty?

Thomas Piketty has now published his detailed reply (dated 28th May) to two withering attacks by Chris Giles, the Financial Times’ economics editor, on his data and use of data, in particular in relation to the proportion (over time) of wealth-ownership of the top 1% and 10%. On most points, Piketty has answered the points in a reasonable (and to me generally persuasive) way. But the way Chris Giles kick-started the debate, it was clear that this is not simply an economic issue and battle, but a political one too. 

So no doubt the argument will continue, with left and right contesting the terrain. But has the quite personalised form of attack by the FT’s Economics Editor had the effect of damaging his newspaper’s reputation for even-handedness and objectivity?... 

This is sharp and effective journalism, but not unbiased journalism. It is attack dog Daily Mail style, calculated to damage the reputation of the adversary. But it is at variance with the FT’s usually even-handed way of dealing with controversy, and was followed up with an editorial – in less virulent terms – premised on the assumption that Piketty was materially wrong.

I believe, in short, that the FT and Mr Giles have handled this affair badly and unfairly through what looks like an ad hominem attack with a political dimension - and that many others also see this. That cannot be good for the FT’s reputatoin, even if it helps with short-term sales.

Surprise. It's about politics and not economics. Who could have known.

Having said all this, in my view there are serious issues around the definition of “capital”, “wealth” and “patrimony”, and the consequences to draw from them, in Piketty’s work, which tend in the opposite direction to Giles. The issue is one of power of the very wealthy, and the access to leverage to impose that power. Think Manchester United and the Glazer family, where being a billionaire allowed Mr Glazer to use debt (therefore a subtraction from wealth in official statistics) to obtain a key asset and power.

There it is again: wealthy = power.

PRIME Economics
Have Giles and the FT gone too far in the attack on Piketty?
Jeremy Smith

Jonathan Hopkin — Piketty Debunked? Not So Fast

By adding the raw data from the UK Inland Revenue figures, used by Piketty and colleagues to extend the series, and the ONS data, which they did not use, Giles is able to throw doubt on the uptick in wealth inequality Piketty claims for the period since the 1970s. This, alongside other errors and questionable decisions, means that the books 'central findings... no longer seem to hold'.

That's quite a big claim. Is it true? Well, here I'll just look at the data for the UK. There is a problem with the chart posted just above - it takes Piketty et al's series from 1810, and then, for the final few decades of the series, throws in other data sources which show a lower level of inequality. The picture that leaps out of the page is that instead of a U-shaped trend over the 20th century, claimed by Piketty, the FT's alternative data suggests a flatlining distribution since the 1970s, thus invalidating the claim of rising inequality.

But this is misleading, because by throwing in new data that gives a lower figure in the same chart, the visual impact is of a different trend that is not really supported by the data. The IRS numbers that Giles throws in raw were used by Tony Atkinson and Piketty to construct the longer series, with adjustments to attempt to make them consistent with different sources for earlier periods. The fair test of whether Piketty's trend exists or not is to compare the IRS numbers with data for the earlier period. In fact those numbers track the trend of the Piketty series fairly closely, but with lower absolute values. As for the ONS numbers, they give us only 3 data points over a 6 year period, which happens to include the biggest shock to asset prices since the Great Depression and the Second World War. You can argue that the ONS's lower estimate of wealth inequality is better than Piketty's, but you can't say anything about the trend.

However, the IRS numbers do still suggest rising wealth inequality. If we place these numbers in their own chart, with no tricky juxtaposition against the longer data series, this is what we get:

 A clear, though unspectacular upward trend in wealth inequality as measured by the Inland Revenue data, on which the Atkinson series used by Piketty is based. It's also worth pointing out that the HMRC numbers, although not much help with the long-term picture, do attribute 70% of wealth in the UK to the top 10%. As far as I can see, the main difference between Piketty and Giles's alternative data is that the latter suggests that inequality started to rise in the late 1980s rather than the 1970s.

Piketty Debunked? Not So Fast
Jonathan Hopkin
(h/t Mark Thoma at Economist's View)

Branko Milanovic — My view on Piketty’s critique by the FT

Now. consider FT points one by one:

EcoThunder
My view on Piketty’s critique by the FT
Branko Milanovic
(h/t Yves Smith at Naked Capitalism)

Steven Pressman — Live-Blogging Piketty: An Interlude (Response to Chris Giles)

The important issue, the bottom line, is always whether these changes lead to a different empirical conclusion. This does not seem to be the case for the transcription problems and data tweaking. Presenting numbers based on worse data refute Piketty also does not change the story. 

In sum, Giles has offered up a weak critique of Piketty. At best, he shows that wealth inequality is increasing less than Piketty says it is. At his worst, he ignores the argument made in Capital. To repeat, the problem is that Giles does not mention and does not question of the 5% returns on wealth. Piketty’s point is that because wealth is distributed so unequally (a point that virtually no one objects to), high returns to wealth (relative to economic growth) will push up inequality. This is not an empirical matter that may contain lots of mistakes. It is a fundamental property regarding how capitalist economies work. This is the brilliant insight of Capital. Giles has not refuted it. Even worse, he does not even attempt to do so. In many respects, and in retrospect, it is hard to see what all the fuss has been about.

Dollars & Sense Blog
Live-Blogging Piketty: An Interlude (Response to Chris Giles)
Steven Pressman | Professor of Economics and Finance at Monmouth University

Mike Konczal — The FT Gets Piketty’s Capital Argument Wrong

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 [1], 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:...

Next New Deal
The FT Gets Piketty’s Capital Argument Wrong
Mike Konczal

Rob Wile — The FT Isn't Just Saying Piketty Made A Mistake — It's Saying He Manipulated Data

Financial Times economics editor Chris Giles says French economist Thomas Piketty's best-selling "Capitalism in the 21st Century," about rising inequality in the West, contains serious errors that undermine his conclusion that wealth distributions are widening. 

Giles says there are clear examples of some "fat finger" mistranscriptions and compares the situation to omissions found in Reinhart's and Rogoff's data on debt levels and growth.

But while the two Harvard professors' errors seemed to have been unintended, Giles levels a more serious critique: that Piketty actively manipulated his data.

His most damning claim: Piketty altered U.K. data to show that wealth distribution there is worse off than it appears to be.

"R & R made innocent mistakes. Piketty manipulated the data." Isn't that reasoning kinda like the Bundy bunch pointing weapons at federal agents only defending their rights against big government overreach, while Occupy protesters were domestic terrorists bent on overthrowing the government?

Is the Financial Times the new Fox News?

Business Insider
The FT Isn't Just Saying Piketty Made A Mistake — It's Saying He Manipulated Data
Rob Wile

See also Wile's BOMBSHELL ALLEGATION: FT Says Piketty's Inequality Data Is Flawed And Some Appears To Be 'Out Of Thin Air'.

Tyler Cowen — What do the Piketty data problems really mean?

That said, don’t focus on Piketty. When evaluating debates of this kind, never ever confuse a) is he right? with b) “how much should we raise/lower the relative status of the author as a result of the new exchange”? So responses like “he made all his data freely available” address b) but not the more important a). And if you are seeing people focus on b) rather than a), they have a problem themselves. On empirical grounds it does seem we have another reason for thinking Piketty’s central claim isn’t quite right, at least not for the reasons he sets out, and perhaps not quite right altogether.

Marginal Revolution
What do the Piketty data problems really mean?
Tyler Cowen | Holbert C. Harris Chair of Economics at George Mason University and serves as chairman and general director of the Mercatus Center

John Jansen on Giles and Piketty

Chris Giles's FT article and Piketty's response if you can't access FT or don't want to deal with their subscription routine.

Across the Curve
Jet Lagged
John Jansen

Philip Pilkington — Has Thomas Piketty Pulled a Reinhart and Rogoff?

Perhaps Piketty has mucked up some of the figures. But his is not the only study dealing with this issue. In that sense, I don’t think that this is a Reinhart and Rogoff moment that discredits the underlying thesis of Piketty’s book. Rather I think that it is just another lesson in data analysis for us all. Lies, lies and damned statistics, as they say.

Fixing the Economists
Has Thomas Piketty Pulled a Reinhart and Rogoff?
Philip Pilkington

Yves Smith — Financial Times Finds “Many” Errors in Piketty Analysis, Argues They Undermine His Thesis

My bet is that the Lance Taylor critique will in the end do much more to undercut Piketty’s findings than the Financial Times corrections and recalibrations, as useful as those are. Taylor challenged the widely-touted Piketty’s assertion that r > g (the rate of return on capital exceeds the growth rate of the economy). NC reader Ben Johannson provided a helpful summary of Taylor’s paper:
Naked Capitalism
Financial Times Finds “Many” Errors in Piketty Analysis, Argues They Undermine His Thesis
Yves Smith

Merijn Knibbe — Piketty’s data set. Criticisms and 3 graphs

If you are following the Piketty phenomenon, this is a must read. Merijn Knibbe provides a short analysis of Chris Giles's criticism of the data and Piketty's response in terms of a scientific debate, which he sees as being on track.

There are huge difficulties with aggregated historical data, especially in a area that is notorious opaque by design, where many if not most wealthy people take all steps possible to avoid transparency in the name of preserving personal privacy. In fact, Piketty makes the point that the problems with the data show the need for increasing transparency and if that is a result, the work will have accomplished a major part of its purpose, since then a reliable data set will be obtainable.

Piketty's research accords with what one would expect intuitively about a system in which power and the institutional privilege it involves. However, it's unlikely that the essentially neoclassical methodological approach that Piketty adopts in creating his model, along with the questionable data, will provide the strongest arguments for the conclusions he comes to. His work will cheer on the choir but not convince those who are convinced otherwise.

Purely economic models that satisfy the mainstream are unlikely to be conclusive since assumptions and data are open to attack. Moreover, mainstream economists seem to be unimpressed with data.

Only models that include institutional power are likely to provide unassailable conclusions. But mainstream economists do not consider such models to be economic models and are unlikely to give them credence. So we are back to the orthodox versus heterodox debate, which is really a political one rather than an economic one.


Real-World Economics Review Blog
Piketty’s data set. Criticisms and 3 graphs
Merijn Knibbe