An interesting article I found in the FT...I don't think many of you will have access to the link so I am posting the entire article here.
May 23, 2014 7:00 pm
Thomas Piketty’s exhaustive
inequality data turn out to be flawed
By Chris Giles and Ferdinando
Giugliano
He writes, in the introduction:
“Compared with previous works, one reason why this book stands out is that I
have made an effort to collect as complete and consistent a set of historical
sources as possible in order to study the dynamics of income and wealth
distribution over the long run”.
While the conclusions of his work,
including his call for an international wealth tax, have stirred
controversy among academics, commentators and policy makers, even his critics
have generally praised the ambition and quality of the data presented in the
text.
Reviewing the book this month, Lord Mervyn King,
former governor of the Bank of England, said, “the principal weakness of the
book is that the carefully assembled data do not live up to Piketty’s rhetoric
about the nature of capitalism”.
The sense of diligence in Professor
Piketty’s compilation of trends in wealth is bolstered by an online technical annex and spreadsheets
containing the data, with sources.
An investigation by the Financial
Times, however, has revealed many unexplained data entries and errors in the
figures underlying some of the book’s key charts.
These are sufficiently serious to
undermine Prof Piketty’s claim that the share of wealth owned by the richest in
society has been rising and “the reason why wealth today is not as unequally
distributed as in the past is simply that not enough time has passed since
1945”.
After referring back to the original
data sources, the investigation found numerous mistakes in Prof Piketty’s work:
simple fat-finger errors of transcription; suboptimal averaging techniques;
multiple unexplained adjustments to the numbers; data entries with no sourcing,
unexplained use of different
time periods and inconsistent uses of source data.
Together, the flawed data produce long
historical trends on wealth inequality that appear more comprehensive than the
source data allows, providing spurious support to Prof Piketty’s conclusion
that the “central contradiction of capitalism” is the inexorable concentration
of wealth among the richest individuals.
Once the data are cleaned and
simplified the European results do not show any tendency towards rising wealth
inequality after 1970.
The US source data are also too
inconsistent to draw a single long series. But when the individual sources are
graphed, none of them supports the view that the wealth share of the top 1 per
cent has increased in the past few decades. There is some evidence of a rise in
the top 10 per cent wealth share since 1970.
The FT uncovered several types of
defect.
One apparent example of
straightforward transcription error in Prof Piketty’s spreadsheet is the
Swedish entry for 1920. The economist appears to have incorrectly copied the
data from the 1908 line in the original source.
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.
A third problem is that 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.
There are also inconsistencies with
the years chosen for comparison. For Sweden, the academic uses data from 2004
to represent those from 2000, even though the source data itself includes an
estimate for 2000.
Prof Piketty’s documents explaining
his sources and methods, suggest that he uses similar data from death duty
records around the world. In fact, he interchanges between such source material
and surveys of the living, which often give very different answers. Switching
between the two sorts of data series, particularly for the US is important to
his results.
Some of the biggest defects relate to
the UK data, where his original sources consistently show very large declines
of near 10 percentage points in wealth held by the rich in the highly
inflationary 1970s.
Conversely, Prof Piketty shows the
super rich held a greater share of wealth by 1980 and the top 10 per cent saw
their share fall only 1.5 percentage points.
The official data series that Prof
Piketty says he used for the UK after 1980 shows little increase in inequality
over the next 30 years, while his figures show a steep rise.
