On May 23, the left’s favorite new socialist-themed economics book was criticized in one of the world’s leading business newspapers. This sharp criticism caused both The New York Times and The Washington Post to rush to defend the book and criticize the criticism.
A new critique by the Financial Times of Thomas Piketty’s book, Capital in the 21st Century, insists that the author’s findings are “undercut by errors”–mistakes in his spreadsheets that skew the results toward supporting his thesis.
This criticism has alarmed the left, as Piketty’s book is their favorite new endorsement of confiscatory taxation, socialist economic policy, and an exposition on the efficacy of massive growth in the power of government.
Piketty’s book has been hailed by big government fans the world over and has become their newest explanation of why capitalism is bad. Much to the left’s applause, Piketty says capitalism inevitably causes income inequality, a problem that can only be fixed by a “global wealth tax” and massive government regulations.
But the Financial Times says that “the rock-star French economist appears to have got his sums wrong.”
“The data underpinning Professor Piketty’s 577-page tome, which has dominated best-seller lists in recent weeks,” FT columnist Chris Giles writes, “contain a series of errors that skew his findings. The FT found mistakes and unexplained entries in his spreadsheets, similar to those which last year undermined the work on public debt and growth of Carmen Reinhart and Kenneth Rogoff.”
Reinhart and Rogoff are famous, or perhaps infamous, as influential economists whose work was later shown to have major spreadsheet errors, which called into question their whole body of work. It was quite a controversy among economics professors last year.
FT goes on to say that “there are transcription errors from the original sources and incorrect formulas” in Piketty’s spreadsheets. Worse, the paper charges that some of the data was “cherry-picked or constructed without an original source.” The latter is a dire accusation if proven accurate.
“The central theme of Prof. Piketty’s work,” FT concludes, “is that wealth inequalities are heading back up to levels last seen before the first world war. The investigation undercuts this claim, indicating there is little evidence in Prof. Piketty’s original sources to bear out the thesis that an increasing share of total wealth is held by the richest few.”
This was all too much for The New York Times. First, the Gray Lady’s own celebrated economist, Paul Krugman, was effusive with his praise of Piketty’s book on March 23. After that, the Times, unsurprisingly, was quick to blast the Financial Times for daring to criticize Piketty’s work.
One NYT columnist seemed too decided that even if Piketty is wrong, it doesn’t matter because the Frenchman highlighted income inequality, something that every liberal just feels in his bones is the real problem in this world today.
Justin Wolfers briefly explores some of the criticism of Piketty’s work but concludes, “The clearest effect of Mr. Piketty’s efforts is that he has brought new attention to the distribution of wealth.”
“I believe that interest will continue to improve and refine our understanding of the evolution of wealth inequality,” Wolfers insists.
So, for the Times, even if everything Piketty wrote is wrong, it’s okay because the seriousness of the issue is bigger than the mere facts.
Matt O’Brien seems to come to a similar conclusion as Wolfers, but also avers that even if Piketty’s numbers are wrong, “they don’t change the big picture.”
In The Washington Post, O’Brien insists that the errors in Piketty’s work are not really big deals. Asking if the problems are serious and if they should “change what we think about inequality,” O’Brien answers his own query, saying that “the answer seems to be” that the errors are “not too serious.”
Journalists such as Wolfers, O’Brien, and Krugman have also defended Piketty’s book by claiming that there has been no legitimate criticism of the book. But in fact there has been quite a lot of criticism.
Just to name a few, one such critic is Kevin A. Hassett, director of Economic Policy Studies at American Enterprise Institute. Hassett points out that a major flaw in Piketty’s numbers is that they do not seem to recognize that much of the observed increases are attributable to increases in housing. And if housing is excluded, Hassett says, the sharp increase in capital is almost eliminated, and the imminent collapse of capitalism Piketty assumes disappears.
James P. Pinkerton also points out flaws in Piketty’s thinking, saying that Piketty–and his liberal fans–view income inequality as a simple matter of math: the evil rich just have too much. But simple math does not ask or answer the question of what might cause income inequality. Is it born of the various levels of technological expertise of individual workers, their education, their culture, their intellect, their motivations? These are important questions that need to be asked.
Additionally, Hunter Lewis of AgainstCronyCapitalism.org points out that even if this “global wealth tax” is a one-time tax, it would force “the rich” to begin trying to divest stocks, bonds, real estate, and other holdings to pay the tax. “But how will that even work?” Hunter asks.
“How will markets absorb all the selling? Who will be the buyers? And how will it help economic growth for markets and asset values to collapse under the selling pressure?” he wonders.
Clearly, such a tax would cause chaos.
Still, Piketty has a plethora of fans, but naturally, those fans are made up of those who want to grow the power of government. Perhaps unsurprisingly, Obama has feted the socialist author, the Council on Foreign Relations has hailed him, and so have the International Monetary Fund and the United Nations. And just last week, it was announced that Massachusetts Senator Elizabeth Warren is going to appear with the Frenchman to extol the virtues of his confiscatory “global wealth tax.” Warren is, of course, one of the most extremely liberal–or “progressive,” as they like to say–members of the U.S. Senate. She is so liberal, in fact, that she is constantly dogged by rumors that she is herself a socialist.
Still, instead of being the economics answer the left have been waiting for, it seems the debate over Piketty’s assertions is far from settled.
Follow Warner Todd Huston on Twitter @warnerthuston or email the author at igcolonel@hotmail.com.