Piketty’s numbers on inequality don’t add up

The Financial Times, a center-Left British publication, has the story here.

Piketty, an economist at France’s most prestigious business school, recently wrote an almost 600-page treatise on the growth of economic inequality in the West. The book has earned him lots of fame and has been discussed ad nauseum for about a month now.

Here is what I have found most interesting up to this point on the debate about inequality: The factions and their strategies regarding data and how it is interpreted. I think Dr Delacroix’s approach to the way data is interpreted is best, namely that the study design itself should be analyzed first and foremost.

Regarding factions, remember when that graduate student from the heavily neo-Keynesian UMass-Amherst found discrepancies in the work of Kenneth Rogoff and Carmen Reinhart on austerity in the West? The Left attacked savagely. The Right came up with excuses that would have earned an ‘F’ on most undergraduate tests.

Now that the Left’s own preferred conclusions have been borne out by bad data, what do you think is going to happen? Who wants to bet that the roles of Left and Right will be reversed? When Rogoff’s and Reinhart’s mistakes went public, the graduate student was invited to speak on televised talk and radio shows around the world. His work was (justifiably) hailed in the national and international press, and also (much less justifiably) as an answer to the deplorable state of the discipline of economics. What do you think the odds will be that the researchers responsible for finding flaws in Piketty’s data will get the same reception?

My money is on the answer “not good.”

All of this discussion about austerity and inequality is great, of course. The fact that researchers are expanding their findings to include more than just the data within their own countries is perhaps the most satisfying development in regards to epistemological human progress. I will await further developments to lay down my own verdict on the matter of inequality in the West. With the mistake of Rogoff and Reinhart, I decided, after carefully reading the merits and weaknesses of both sides of the debate, that their mistake was small enough to overlook and that austerity generally leads to better economic outcomes in the near- and long-term and that public debt is a drag on economic growth.

Depending on how the Left responds to its critics, I will see if economic inequality is indeed growing in the West.

22 thoughts on “Piketty’s numbers on inequality don’t add up

  1. We should actually start, I think, by asking why inequality (however defined, however poorly defined) matters. Accepting that it matters is to implicitly also accept the moral premise that inequality is bad. Maybe it is, maybe it has political consequences inimical to liberty. That would be useful to know. That is where the discussion should begin and also end.

    Personally, I think that the search for equality is in itself destructive of liberty. Our critique should, perhaps start there. And, I need not refer to the various totalitarian efforts to erase inequality that failed in the midst of long lasting blood baths. I can do it closer to home. I am a lazy immigrant, always have been. By luck, for one like me, there are fifty hard-working immigrants. (I see them all the time in Silicone Valley; I know several.) My freedom to work little and at a leisurely pace was made possible by the frenetic activity of others whose desire for wealth became fulfilled in the end. I drive a Toyota pick-up; they drive a Beemer. Their houses are twice larger than mine; often they own two houses each of which is twice the size of mine, etc.

    Bless their hearts! There is no injustice there but a kind of anonymous, diffuse generosity. Their efforts made possible the lifestyle I desired. It would be unfair to the future likes of me to stymie the next generation of hard-working entrepreneurs.

    This simple view of life is not quite relevant to much of Europe where statist societies make entrepreneurship mostly irrelevant. In the country I know best, France, millions live in despair of the future and yet have no idea of why the society in which they live is not more productive, does not afford “opportunities.” Growing numbers of enterprising young people are simply moving to the US and when they can’t (most of them can’t because of US immigration laws) to the UK where work an initiative are often rewarded. There is an initiative drain. Yet, there is no voice speaking in French explaining the simple facts of capitalism. Instead, there is a new cabinet post to stem the tide. (Would I make this up?)

    On a different register: I read in the WSJ that that guy Pickery in one of his analyses failed to count the non-money benefits that the American poor receive in such terms as free medical care, food stamps and rent support. I hope somebody will confirm this so I don’t have to open the book. Please, please, tell me.

    In my book, if you make this kind of measurement mistake even once, you have no credibility left. Please, tell me he did it!

    Buy my book; I need the money. (See above.)

    Jacques Delacroix:

    I Used to Be French: an Immature Autobiography

    is live in the Kindle Store at:

    http://www.amazon.com/dp/B00JY0G3SA

    It will be available on other reading devices other than Kindle in about forty days.

    I am working on producing the print copy of the book right now.

    • We should actually start, I think, by asking why inequality (however defined, however poorly defined) matters. Accepting that it matters is to implicitly also accept the moral premise that inequality is bad. Maybe it is, maybe it has political consequences inimical to liberty. That would be useful to know. That is where the discussion should begin and also end.

      This is a great point, and one I am willing to let Piketty and others on the Left explain and elaborate upon. So far I have not been impressed by the responses from the Left concerning Piketty’s bad numbers.

      The WSJ piece you are referring to is probably Martin Feldstein’s critique, which can be found here.

  2. From Man Economy & State chapter 6.5 The Impossibility of Equality.

    “In all discussions of equality, it is considered self-evident that equality is a very worthy goal. But this is by no means self-evident. For the very goal of equality itself is open to serious challenge. The doctrines of praxeology are deduced from three universally acceptable axioms: the major axiom of the existence of purposive human action; and the minor postulates, or axioms, of the diversity of human skills and natural resources, and the disutility of labor. Although it is possible to construct an economic theory of a society without these two minor axioms (but not without the major one), they are included in order to limit our theorizing to laws that can apply directly to reality.[9]Anyone who wants to set forth a theory applicable to interchangeable human beings is welcome to do so.

    Thus, the diversity of mankind is a basic postulate of our knowledge of human beings. But if mankind is diverse and individuated, then how can anyone propose equality as an ideal? Every year, scholars hold Conferences on Equality and call for greater equality, and no one challenges the basic tenet. But what justification can equality find in the nature of man? If each individual is unique, how else can he be made “equal” to others than by destroying most of what is human in him and reducing human society to the mindless uniformity of the ant heap? It is the task of the egalitarian, who confidently enters the scene to inform the economist of his ultimate ethical goal, to prove his case. He must show how equality can be compatible with the nature of mankind and must defend the feasibility of a possible egalitarian world.

    But the egalitarian is in even direr straits, for it can be shown that equality of income is an impossible goal for mankind. Income can never be equal. Income must be considered, of course, in real and not in money terms; otherwise there would be no true equality. Yet real income can never be equalized. For how can a New Yorker’s enjoyment of the Manhattan skyline be equalized with an Indian’s? How can the New Yorker swim in the Ganges as well as an Indian? Since every individual is necessarily situated in a different space, every individual’s real income must differ from good to good and from person to person. There is no way to combine goods of different types, to measure some income “level,” so it is meaningless to try to arrive at some sort of “equal” level. The fact must be faced that equality cannot be achieved because it is a conceptually impossible goal for man, by virtue of his necessary dispersion in location and diversity among individuals. But if equality is an absurd (and therefore irrational) goal, then any effort to approach equality is correspondingly absurd. If a goal is pointless, then any attempt to attain it is similarly pointless.”

    • Thanks Adam.

      This excerpt is a perfect example, in my mind, of why I consider Rothbard to be an exemplary Cold War scholar but a poor choice for General in today’s world.

  3. “Accepting that it matters is to implicitly also accept the moral premise that inequality is bad. Maybe it is, maybe it has political consequences inimical to liberty. That would be useful to know. That is where the discussion should begin and also end.”

    @Brandon
    Consider the possibility that “good & bad” depend on the level of inequality. Ask Adam what the scripture says; if anyone knows what Rothbard has to say about inequality being straight up good/bad or varying shades of grey he would.

    • @Brandon
      Consider the possibility that “good & bad” depend on the level of inequality.

      Of course. Libertarians often acknowledge this “good and bad” inequality when they point to societies where wealth is concentrated at the top due to policies like protectionism, welfare statism, and racism (i.e. pre-NAFTA Mexico). Aside from a few Rothbardians, most libertarians are willing to recognize that inequality is a grey area (I think this applies to most Leftists as well, aside from a few Jacobins).

      What is more important, I think, at this point, is whether or not the West is seeing the type of inequality that exists in much of the post-colonial and post-socialist world today. Piketty and others on the Left are arguing that we are seeing this kind of inequality. The Right is much more skeptical of this claim, and the reactions (so far) of the Left to Piketty’s data errors are, I think, a telling condemnation of their argument.

    • Thanks Professor Terry. Tyler Cowen called my attention to the Avent piece yesterday morning, and it pretty much represents where I stand at the moment (“there is still a lot to process from the FT piece before any more conclusions can be reached”).

      I don’t think Piketty (or Rogoff and Reinhart) are guilty of fraud, but it seems to me that Piketty’s argument rests on a much less sound foundation than does the work of Rogoff and Reinart.

      Just curious: Do you think wealth inequality is as serious as those on the Left assert? Do you think the West is headed towards a post-socialist or post-colonial future?

    • “Do you think wealth inequality is as serious as those on the Left assert?”
      The short answer is no. I think moderate levels of inequality are good for a society and its economy. I think the US has crossed the boundary into the bad range but not the apocalypse I read about every day at places like the Daily Kos.

      “Libertarians often acknowledge this “good and bad” inequality when they point to societies where wealth is concentrated at the top due to policies like protectionism, welfare statism, and racism (i.e. pre-NAFTA Mexico).”

      This is my worry about wealth inequality in the US.

  4. Today’s Financial Times has two front-page stories about financial and economics fraud: One is about Barclays Bank manipulating the data to fix the price of gold to its own advantage, in much the same way that Barclays and others rigged LIBOR (London Inter-Bank Offered Rate, the fundamental benchmark interest rate) to their own advantage. By manipulating the data on the basis for these key prices, Barclays and others took advantage of small differences to trade for their own accounts and thereby cheat everyone else in the market out of billions of dollars. They engaged in their own version of wealth transfer, one which is virtually immune to taxation.

    The other front-page news in the Financial Times is that ‘Piketty did his sums wrong in bestseller that tapped into the inequality zeitgeist’. ‘In his spreadsheets, there are transcription errors from the original sources and incorrect formulas. It also appears that some of the data are cherry-picked or constructed without an original source.’

    After referring back to the original sources Piketty cites in his book, FT found ‘errors of transcription, suboptimal averaging techniques; unexplained adjustments to the numbers; data entries with no sourcing; unexplained use of different time periods; and inconsistent uses of source data.’

    The FT catalogues numerous errors. Among the easiest to understand is a simple weighting error derived from giving equal weights to countries of very different populations in a figure purporting to be an equally-weighted average: ‘Prof Piketty gives the same weight to Sweden as to France and the UK, even though it has only one-seventh of the population.’ There are also numerous unexplained inconsistencies among various indicators of wealth — in some cases measuring wealth by the size of death duties, in others by estimates of wealth held by the living: ‘he interchanges between such [death-duty] sources and surveys of the living, which often give very different answers.’

    In short, Prof Piketty has a political agenda, and has rigged his data to support it. The scale of his ambition, if not (yet) the scale of his intellectual fraud, is comparable to that of Barclays and other banks in rigging the key economic indicators they were entrusted with.

    • Thanks Dr Miller.

      The fraud going on in the financial sector seems to happen so often today that I forget a) how serious it is and b) that it is a symptom of a much larger problem centered around legislated regulation and rent capture.

      So far, the Left’s response to Piketty’s bad numbers has been sadly predictable: “We all know that wealth inequality has gone up.” Yet, as economist Tyler Cowen points out: “If there is one big lesson of the FT/Piketty dust-up, it is that we don’t have reliable numbers on wealth inequality.”

      The Left, rather than acknowledging this simple, honest point, has instead become intransigent and, I predict, that it will shortly try to change the subject by delving into ad hominems. I hope to high hell I’m wrong, of course (I love it when I’m wrong!), but I won’t hold my breath.

  5. Thanks for the detailed info, Peter. I could not move myself to do anything of the kind because of my intimate knowledge of current French scholarship. I simply could not bring myself to believe that a French person working in France would be able to produce a large piece of empirical work without many big mistakes. French professors hardly ever produce even small empirical work without serious mistakes.

    Emphasis is on “current.” Things used to be different. There was once a school of economic (and other) history in France called “ecole des annales” that was simply stupendous. I don’t know where it went. I feel a sense of loss about it.

    I cast a glance at contemporary French sociology periodically. What I see has not changed from what I found when I worked briefly in France in 1967 and again in 1971. In methods, it was and still largely is pre-1880 when basic statistics were first applied to social issues.

    Picketty only resonated in the US because his warmed-up pseudo- Marxism fits in with the Obama agenda of redistribution.

    Karl Marx- who was a serious scholar – is feeling very sad.

  6. Amburgey: …”wealth is concentrated at the top due to policies like protectionism, welfare statism, and racism…” “at the top”, “racism.”
    Black millionaires still denied use of the clubhouse? The horror!

    • To be honest, I worry mostly about politics and policy and the middle class. If Oprah gets treated poorly while looking at purses worth thousands of dollars, it’s not a big concern to me.

    • Dr Amburgey writes:

      To be honest, I worry mostly about politics and policy and the middle class.

      Well gosh gee whiz golly darn gee. Isn’t that such an inconvenience, though? Since, y’know, the “middle class” can be defined in an infinite number of ways?

      I’d be careful if I were you Uncle Terry. Ambiguity is no friend of the seeker of Truth.

    • @Jacques:

      Amburgey: …”wealth is concentrated at the top due to policies like protectionism, welfare statism, and racism…” “at the top”, “racism.”

      That was actually my quote. Here is the context. Racism is en excellent example of a policy that impoverishes almost everybody and enriches a seldom few. I used pre-NAFTA Mexico as an example, but you can pretty much argue that racism (or a variant like nationalism) is prevalent throughout the post-colonial/post-socialist world and that it contributes heavily to wealth (and income) inequality.

  7. Does this help?

    “The following factors are often ascribed in modern usage to a “middle class”:
    Achievement of tertiary education.
    Holding professional qualifications, including academics, lawyers, chartered engineers, politicians, and doctors, regardless of leisure or wealth.
    Belief in bourgeois values, such as high rates of house ownership and jobs which are perceived to be secure.
    Lifestyle. In the United Kingdom, social status has historically been linked less directly to wealth than in the United States, and has also been judged by signifiers such as accent, manners, place of education, occupation, and the class of a person’s family, circle of friends and acquaintances.
    Cultural identification. Often in the United States, the middle class are the most eager participants in pop culture whereas the reverse is true in Britain. The second generation of new immigrants will often enthusiastically forsake their traditional folk culture as a sign of having arrived in the middle class.”

    Do you want me to specify a quantitative position in the distribution of income or wealth? What is it exactly, that you are looking for?

    • This was a good summary of Piketty’s response, thanks. Have you read the book review I recently linked to? It doesn’t have anything to do directly to Piketty’s book, but it does have to do with the Left’s broader response to critiques of Piketty’s book.

      Here is another good response to Piketty’s book that’s a little more current. This one too.

      Here is a philosopher’s take on Piketty’s book.

Please keep it civil

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s