31 May 2014

The Entire Inequality Debate Summed Up In One Chart

Inequality, Piketty 39 Comments

I missed this on my first look, but the most widely cited PowerPoint presentation of all-time–namely Saez-Zucman (2014)–has a chart that explicitly contrasts Saez’s latest findings with his 2004 paper (co-authored with Kopczuk). Here’s the slide:

Saez vs Saez

We see the same pattern as I pointed out earlier, where the Saez (2004) and (2014) estimates move in lockstep, but suddenly diverge in the mid-1980s. (Incidentally, the connection is much tighter for the wealthiest 0.1%–Phil Magness did a great job overlaying the two series.)

In reference to the slide above, Saez and Zucman title it “Estate tax returns fail to capture rising top wealth shares.” In other words, since there is a discrepancy, and since they JUST KNOW that the richest have been getting richer, the explanation is that the estate tax data (red line) must be flawed. Even though it wasn’t flawed for most of the century.

Looking at the exact same chart, here are equally applicable slide titles:

==> “Oh crap, we did something wrong.”

==> “Zucman, you double-checked those Excel formulas, right?”

==> “Saez, you were an idiot a decade ago, weren’t you?”

==> “Why are we the only dataset showing growth since the mid-1990s?”

==> “It’s us against the world!”

==> “Shouldn’t the 1% have lost more in the 2008 crash?”

In closing, let me say that there’s a strategic danger in arguing so much over the empirical results. If it turns out that the new capitalization method is closer to the truth, and the old estate tax return series is horribly flawed, then it’s not as if I’m suddenly going to favor taxing the heck out of rich people.

Nonetheless, I think it’s useful to occasionally point out to you innocent readers the skullduggery that is afoot here.

39 Responses to “The Entire Inequality Debate Summed Up In One Chart”

  1. Joseph Fetz says:

    Shit Bob, I would promote and repost this if it weren’t for the fact that almost nobody will know the background and setting, let alone the intricacies of what is going on in the cited data. This is econ-nerd territory, but you’re nailing it all!

    • Bob Murphy says:

      Yeah I faced a tradeoff between explaining everything and making it long, versus just throwing the picture up there for the true nerds.

      In any event, it’s no reason to curse.

      • Joseph Fetz says:

        Have you ever known me to say *anything* without some sort of “verbiage” fancifulness?

        (I actually did question whether I should start off with that word, “shit”. There were many others that I could have used (shoot, darn, dang, …), but I found that they didn’t really capture my meaning or tone.

        I swear, that is just how it goes: I’d rather be real than to cater to some conception of how I *should* be.

        If it is offensive, then I apologize.

  2. 6000 yr old earth says:

    1) income inequality is a scam
    2) global warming is a scam

    people need to stop picking on these poor billionaires.

    • guest says:

      When billionaires trade their wealth for goods and services provided by poorer people, to satisfy their OWN preferences, thats eeevil.

      • Philippe says:

        6000 yr old earth,

        the government is building a wall along the mexico border to stop picked-upon billionaires from escaping.

        Or the billionaires who control the government and use it to enrich themselves at other people’s expense are building the wall to stop average Americans from escaping.

        I can never remember which one it is.

        • Bob Murphy says:

          Philippe, there’s no wall stopping you from leaving this blog if you find my views so ridiculous.

    • Z says:

      If they haven’t stolen anything, then yes, stop picking on them.

  3. Philippe says:

    “the skullduggery that is afoot here”

    You haven’t pointed out any skullduggery.

    • Bob Murphy says:

      Sure I have, Phillippe. Krugman & Piketty led their readers to believe that only Chris Giles (and maybe some hacks at National Review or the WSJ) argue that wealth inequality has been constant the last few decades. Yet we see that there are different techniques, including Saez (2004), showing just that.

      • Philippe says:

        I haven’t been following the debate very closely, but it seems to me that 2004 was ten years ago.

        • skylien says:

          1. Obviously the lines in the chart above do NOT match until 2004.

          2. So Picketty’s argument only kicked in 10 years ago? And what did his argument do the decades before?

          • Philippe says:

            “So Picketty’s argument only kicked in 10 years ago?”

            That’s not what I said or meant.

            • skylien says:

              Then what did you mean?

              • Philippe says:

                Saez wrote the paper Bob mentions ten years ago.

              • skylien says:

                Yes Bob knows that…

              • skylien says:

                That is why he constantly adds “(2004)” after he mentions it…

              • Philippe says:

                Nothing in Bob’s post or in his comment indicates that there is “skullduggery” going on.

              • skylien says:

                You may argue with Bob about that point, but your “2004” comment just doesn’t make any sense at all.

              • Philippe says:

                “Yet we see that there are different techniques, including Saez (2004)”

                well Saez is saying to you now that “estate tax returns fail to capture top wealth shares”. What he wrote ten years ago does not change what he is saying to you now and proves no point.

              • skylien says:

                Read Bob’s comment to you again. Your point doesn’t adress what Bob is saying at all.

              • Philippe says:

                there’s no skullduggery implied in anything that Bob has written about here.

                Saez says that estate tax returns are inaccurate because he has a different method which he thinks is more accurate. Not because he “just knows”.

                No skullduggery.

                Bob then changed the subject by saying that there is skullduggery going on because Krugman et al say that only a few guys like Chris Giles argue that wealth inequality has been constant. But Saez said that ten years ago too.

                So what.

              • skylien says:

                Philippe,

                As I said you may argue with Bob about skullduggery.

                However what you answered to Bob on his alleged change of subject (depends on what he really referred the skullduggery to) just doesn’t make sense as your own summary about his point should make clear. If you think he changed it you should have said that and not tell Bob that this was Saez’s opinion ten years ago, because, well, yes Bob knows! But that doesn’t change at all Bob’s point that Krugman at all are misleading if they say only Giles would find such charts…. Hence your answer there didn’t make any sense at all.

              • Philippe says:

                “Bob’s point that Krugman at all are misleading if they say only Giles would find such charts”

                Saez does not claim that estate tax data is an accurate representation of top wealth shares. he says the exact opposite.

                Ten years ago he didn’t seem to be of that opinion, but what he thought ten years ago is not relevant to what people think today.

              • skylien says:

                Really awesome… That is not the point!

              • Anonymous says:

                the only person he mentions, apart from Giles and some guys at the National Review or WSJ, is Saez. But Saez does not say that wealth inequality has been constant over the last few decades. He says the exact opposite. Are you starting to understand this very basic point, or not?

              • Philippe says:

                The only person that Bob mentions in his comment, other than Giles and some guys at the National Review and WSJ, is Saez.

                But Saez does not argue that wealth inequality has been constant over the last few decades. He says the exact opposite.

              • skylien says:

                Bob, you see, Saez 2004 and also Kopczuk 2004 are just another WSJ hacks…

        • Joseph Fetz says:

          “… but it seems to me that 2004 was ten years ago.”

          Whoa, that’s actually a very good rebuttal. If not for the fact that that is exactly what is being claimed by Piketty, et al. Thank you for summarizing the point.

        • RIchard Moss says:

          Phillipe,

          If critics of Giles are saying that there is no data out there supporting his contention that there is less wealth inequality than Piketty says, and it turns out that there is, and not only that there is but that it was generated by a Piketty co-author – then skullduggery applies.

          If they want to argue this data is not as reliable – fine. But that is an opinion. To suggest – as fact – that it doesn’t exist? Bzzzt! Skullduggery.

          • Philippe says:

            “If critics of Giles are saying that there is no data out there supporting his contention that there is less wealth inequality”

            Has anyone said that? As I said I haven’t followed this very closely but I haven’t read Krugman or others saying there is no data out there that says inequality (wealth or income) hasn’t been rising. For example some surveys indicate that. But they are not reliable data sources.

            • RIchard Moss says:

              Yes – “anyone” has said it.

              See Bob’s post from a couple days ago. (http://mises.ca/posts/blog/dont-trust-piketty-or-krugman-on-inequality-evidence/)

              He quotes Krugman (emphasis mine);

              And there’s also the economic story. In the United States, income inequality has soared since 1980 by any measure you use. Unless the affluent starting saving less than the working class, this rise in income disparity must have led to a rise in wealth disparity over time.

              …and Piketty; (emphasis mine)

              But in his e-mail to me [Neil Irwin], he [Piketty] wrote with an almost jovial tone: “Every wealth ranking in the world shows that the top is rising faster than average wealth,” adding, “If the FT comes with a wealth ranking showing a different conclusion, they should publish it!”

              • Philippe says:

                In that post, Bob also quotes Krugman as saying:

                “We have two kinds of data on distribution of both income and wealth: surveys, in which people are asked what they make or own, and tax data. Survey data are better at describing lower-income families, who often aren’t covered by taxes; but they notoriously understate top incomes and wealth.”

                So he is saying here that there is survey data which is inaccurate (which is what I was referring to).

                Perhaps this survey data also shows inequality rising, I’m not sure, but either way Krugman is saying that it’s not a reliable source.

                You said:

                “If critics of Giles are saying that there is no data out there supporting his contention that there is less wealth inequality than Piketty says”

                In this Krugman quote he is referring to rising income inequality, which is not necessarily the same as wealth inequality:

                “income inequality has soared since 1980 by any measure you use”

                Piketty:

                “Every wealth ranking in the world shows that the top is rising faster than average wealth,”

                I assume he is referring here to rankings of the ‘top richest people’ and the like, as he has mentioned these previously, such as the Forbes rankings in particular.

                Now back to your point:

                “If critics of Giles are saying that there is no data out there supporting his contention that there is less wealth inequality than Piketty says, and it turns out that there is, and not only that there is but that it was generated by a Piketty co-author – then skullduggery applies.”

                In neither of those quotes do either Krugman or Piketty say that “there is no data out there supporting [Giles’] contention that there is less wealth inequality than Piketty says”.

              • RIchard Moss says:

                Phillipe,

                Good point on Krugman – except for the paragraph before and after that quote where he is clearly referring to that income data to support rising wealth inequality – again emphasis mine;

                [I]s it possible that Piketty’s whole thesis of rising wealth inequality is wrong? Giles argues that it is…OK, that can’t be right — and the fact that Giles reaches that conclusion is a strong indicator that he himself is doing something wrong…[W]e have, as Piketty stresses, evidence from Forbes-type surveys, which show soaring wealth at the very top.…

                And there’s also the economic story. In the United States, income inequality has soared since 1980 by any measure you use. Unless the affluent starting saving less than the working class, this rise in income disparity must have led to a rise in wealth disparity over time.

                The point is that Giles is proving too much; if his attempted reworking of Piketty leads to the conclusion that nothing has happened to wealth inequality, what that really shows is that he’s doing something wrong.

                As far as Krugman referring to ‘survey’ wealth data – this was the data that Giles was using and the only data there that would support Giles’s view – except that it isn’t.

                Anyway – it appears for you this is no longer a debate about whether critics of Giles said only his (unreliable) data supported his view, but about what you need to assume in order for them not be actually saying that.

              • RIchard Moss says:

                Should have also bolded this part in that second paragraph fromt Krugman;

                this rise in income disparity must have led to a rise in wealth disparity over time.

              • Philippe says:

                “this rise in income disparity must have led to a rise in wealth disparity over time”.

                So? Krugman is in all likelihood right about that.

                Are you changing your accusation to: “Krugman says inequality must be rising”…?

                Originally you said that Krugman said there is no data out there which says that wealth inequality is not rising.

                Well, there might be some, but it’s not accurate data.

                “As far as Krugman referring to ‘survey’ wealth data – this was the data that Giles was using and the only data there that would support Giles’s view – except that it isn’t.”

                Krugman wrote about the data which Giles referred to, and why Giles was wrong in his criticism of Piketty.

                “it appears for you this is no longer a debate about whether critics of Giles said only his (unreliable) data supported his view, but about what you need to assume in order for them not be actually saying that”

                Incorrect.

  4. Daniel Kuehn says:

    FWIW, I was looking through K&Z’s NBER version of the 2004 paper and they say in that paper that SCF is a better source than the estate tax data, and that was back when they were not showing as big of a difference (pg 28 of the WP). So this whole thing about deciding estate tax data is wrong only after it doesn’t track the other data doesn’t seem quite right.

    • Daniel Kuehn says:

      Scratch that above – misread the commas in the sentence on “arguably the best data sources”. He likes them both.

  5. skylien says:

    BTW FWIW: Here are two guys on the National Review talking about Piketty:

    Nassim Taleb & Mark Spitznagel:

    http://www.nationalreview.com/article/379180/inequality-free-markets-and-crashes-nassim-taleb-mark-spitznagel

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