Hamish McCrae: Six thoughts on Piketty’s vexing claims

Inequality: what on Earth should we make of the row about the work of Thomas Piketty?

His 557-page Capital in the Twenty-First Century, has become a best-seller but is now the subject of a hard-hitting attack by Chris Giles, economics editor of the Financial Times, for dodgy statistics, some of which he writes “appear simply to be constructed out of thin air”?

On Friday Piketty responded to this in a 4400-word piece on his website, arguing that the FT was “simply wrong”.

Piketty, a French economist, argues that inequality has been increasing in the western world for the past 30 years and that the core reason for this is that returns on capital are higher than those on labour. So people who own capital will get richer faster than those who have to work to earn a living. His remedy is a wealth tax.

Some of the numbers looked a bit odd and my colleague John Rentoul did query them. He got a stock response.

However, Giles has crawled over the stats in detail and concluded that for Britain in particular, wealth disparities have not increased over the past 30 years — in fact if anything, the reverse.

For example, Giles noted that Piketty claimed that the top 10% of people in Britain owned 71% of national wealth, whereas the Office for National Statistics puts the figure at 44%. Piketty’s response is that the ONS figures, based on the household survey returns, underestimate the wealth of the richest Brits and that inheritance tax returns give a different picture.

Oh dear. I had better make a confession. I have been trying to avoid writing about Piketty partly because I couldn’t bear ploughing through the book’s spreadsheets and partly because the whole debate has become so unpleasantly politicised.

However, nudged by my colleagues who rather kindly have said they want to know what I think about this, here goes. Six thoughts.

One, Piketty has touched a nerve, particularly in the US, where there is a profound concern both that the very rich are garnering a disproportionate share of the country’s wealth and the living standards of the middle-class have not risen for a generation.

Whatever the detail, something does seem to be going wrong with the American dream.

Two, the data on inequality everywhere are both incomplete and confusing. There are huge gaps in Piketty’s statistics but there are huge gaps everywhere, even within the UK. For example, last week our ONS explained that it will count activities such as drug-dealing and prostitution as part of the economy when it revises its methodology later this year. As a result our economy will appear quite a lot larger than was previously estimated.

Another issue: as far as wealth is concerned, do you take into account pension rights?

The answer surely should be yes, because someone who retires with a pension pot of £500,000 is in much the same position as someone on a government index-linked pension of £20,000 a year. But you can see the wealth in the first instance, not in the second.