Six days after The Financial Times launched an attack on the data behind Thomas Piketty’s much-debated tome on inequality, “Capital in the Twenty-First Century,” Mr. Piketty has offered his first detailed response to the newspaper’s criticism.
The short version: He doesn’t give an inch.
In response to a request from The New York Times to further address the criticisms, which The Financial Times published on Friday, Mr. Piketty, a professor at the Paris School of Economics, wrote that his data were correct, and his conclusions stood: Wealth inequality in Europe and the United States was high in the years before World War I, fell for much of the 20th century, and has been rising sharply again in the past three decades.
He argued that many of the things that The Financial Times identified as sloppy or arbitrary were in fact considered choices, which he explained in footnotes. Reasonable people might disagree with some of his choices of how to handle the data, he says. But even where there’s room for debate, any reasonable changes to his methodology would be small and not alter the broad conclusions, he suggested.
The part of the newspaper’s critique that throws the most doubt on his overall conclusions is its argument that wealth inequality in Britain has risen much less than Mr. Piketty contends. For that, he has sharp words. He says the newspaper’s analysis rests on apples-to-oranges comparisons of past data from tax returns mixed with current data from surveys, which makes the conclusions they reach deeply flawed, and contrary to what a wide range of other studies have found.
“My problem with the FT criticisms is twofold,” he wrote, in a 4,400-word response on his website. “The FT suggests that I made mistakes and errors in my computations, which is simply wrong, as I show below. The corrections proposed by The FT to my series (and with which I disagree) are for the most part relatively minor, and do not affect the long run evolutions and my overall analysis, contrarily to what The FT suggests.”
And those arguments by the newspaper that are not so minor and do undermine his findings, he writes, “are based upon methodological choices that are quite debatable (to say the least).”
Here’s how he addresses many of the specific charges raised by the newspaper:
Wrong numbers? In what seemed the clearest-cut (though minor) error that The Financial Times identified, the newspaper pointed to a case of apparent transcription error that led Mr. Piketty to use 1908 data for Swedish wealth inequality where he should have used data from 1920. “In fact, this adjustment was intended to correct for the fact that there is a break in a data sources in 1908: Pre-1908 series use estate tax data, while post-1908 use wealth tax data, resulting into somewhat lower top wealth,” he writes. “This is standard practice, but I agree that this adjustment should have been made more explicit in the technical appendix and Excel file.”
Arbitrary adjustments to data. Here, too, Mr. Piketty argues that he reasonably adjusted the data to make it more useful — which was disclosed in his footnotes. For example, with French wealth inequality data, The Financial Times wrote that “Prof. Piketty does not explain” why he adjusted data from French estate tax records.
Mr. Piketty acknowledges that adjusting estate tax data to try to assess wealth trends among the living is tricky, but responds that the explanations are indeed in the technical research paper on which the data is based. He writes: “Differential mortality is a complex issue, and we do not have perfect answers; but we do our best to address this issue in the most transparent way. In particular, we put online on this website the large micro files that we have collected in French inheritance archives, so that everybody can reproduce our computations and use this data for their own research.”
He writes that “The FT journalists evidently did not read carefully the technical research papers and Excel files that I have put online; whatever adjustment one makes to correct for differential mortality (and I certainly agree that there are uncertainties left regarding this complex and important issue), it should be clear to everyone that this really has a relatively small impact on the long-run trends in wealth inequality. This looks a little bit like criticism for the sake of criticism.”
Picking the wrong years for comparison. The Financial Times questions Mr. Piketty’s use of different, arguably random years to stand in for an entire decade, for example 1935 for 1930. Mr. Piketty replies: “The raw series are usually not available on annual basis, so I compute decennial averages on the basis of the closest years available. This is clearly explained in the chapter 10 Excel file.” He also wrote: “These choices can be discussed and improved, but they are reasonably transparent (they are explicitly mentioned in the Excel table, which apparently The FT did not notice), and as one can check they have negligible impact on long-run evolutions.”
What about Britain? The sharpest attacks by The Financial Times — and those that most strongly undermined Mr. Piketty’s thesis about rising wealth inequality — concerned his use of wealth inequality data for Britain. By using more reliable survey data, as opposed to tax receipt data, the newspaper argues that no clear-cut trend on wealth inequality is evident. If true, that would undermine Mr. Piketty’s broader argument that wealth is on an upward march in the developed world, becoming ever more concentrated in the hands of the very rich.
The difference is huge: Using the survey data, as The Financial Times does, results in a finding that the top 10 percent of British households control 44 percent of total wealth in 2010. Mr. Piketty’s preferred source puts that number at 71 percent.
“This is a very large difference indeed,” Mr. Piketty concedes. The problem, he writes, is that for older periods the only data available are studies of estate tax data, including careful research based on estate tax data from the 1920s to 1980s. Mr. Piketty then updated that old research using estate tax data over the decades since then.
He argues that The Financial Times’s approach requires apples-to-oranges comparisons, using estate tax data for older periods and then switching to surveys for more recent information. “This is problematic because we know that in every country wealth surveys tend to underestimate top wealth shares as compared to estimates based upon administrative fiscal data,” he writes. “Therefore such a methodological choice is bound to bias the results in the direction of declining inequality.”
Indeed, if the survey data cited by The Financial Times is correct, it “would mean that Britain is currently one of the most egalitarian countries in history in terms of wealth distribution; in particular this would mean that Britain is a lot more equal than Sweden, and in fact more equal than what Sweden has ever been (including in the 1980s). This does not look particularly plausible.”
“Of course the estate records based estimates also raise significant methodological concerns, and I do not claim that the resulting estimates are perfectly reliable,” Mr. Piketty continues. “But they definitely seem more plausible than the estimates based upon self-reported survey data.”
How to average? Mr. Piketty averages results from Britain, France and Sweden to estimate trends in inequality across Europe. The Financial Times argues that because Sweden is a much smaller country, the average should be weighted by population or the size of their economies.
But Mr. Piketty says that under his data, the three countries show the same basic pattern, so the choice of how to average doesn’t change the resulting conclusions much. That changes if one believes The Financial Times’s data that indicate wealth inequality is much lower in Britain; if that data is right, then weighting the average results in a much different story.
“But in case Britain did follow a markedly different pattern than the other countries in recent decades (with a decline in wealth inequality rather than a rise), then putting more weight on Britain than on Sweden becomes a significant issue,” he writes. “So we are back to the previous question: What happened to wealth inequality in Britain in recent decades?”
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