The Sound You Hear Is Your Paradigm Shifting

Please absorb this extremely important advance in economic methodology and basic intellectual rigor:

Income Per Natural: Measuring Development as if People Mattered More Than Places
by Michael Clemens and Lant Pritchett
It is easy to learn the average income of a resident of El Salvador or Albania. But there is no systematic source of information on the average income of a Salvadoran or Albanian. In this new working paper, research fellow Michael Clemens and non-resident fellow Lant Pritchett create a new statistic: income per natural — the mean annual income of persons born in a given country, regardless of where that person now resides. If income per capita has any interpretation as a welfare measure, exclusive focus on the nationally resident population can lead to substantial errors of the income of the natural population for countries where emigration is an important path to greater welfare. The estimates differ substantially from traditional measures of GDP or GNI per resident, and not just for a handful of tiny countries. Almost 43 million people live in a group of countries whose income per natural collectively is 50 percent higher than GDP per resident. For 1.1 billion people the difference exceeds 10 percent. The authors also show that poverty estimates are different for national residents and naturals; for example, 26 percent of Haitian naturals who are not poor by the two-dollar-a-day standard live in the United States. These estimates are simply descriptive statistics and do not depend on any assumptions about how much of observed income differences across naturals is selection and how much is a pure location effect. Our conservative, if rough, estimate is that three quarters of this difference represents the effect of international migration on income per natural.
The bottom line: migration is one of the most important sources of poverty reduction for a large portion of the developing world. If economic development is defined as rising human well being, then a residence-neutral measure of well-being emphasizes that crossing international borders is not an alternative to economic development, it is economic development.

The whole paper is here.
Note that this isn't an argument open to some kind of refutation. It's just a better way of measuring things — a way that makes the way the world works clearer. Seeing this alternative metric in action should help us realize just how much of profound moral importance is obscured by the economic nationalism at the foundations of conventional welfare economics. Soon enough, it simply won't be an option for honest intellectuals to ignore the perspective Clemens and Pritchett encourage us to adopt. Paul Krugman: hello!

6 thoughts on “The Sound You Hear Is Your Paradigm Shifting”

  1. I think AnotherBen hints at the root of this: even for those with an above-water mortgage, home ownership decreases worker mobility and therefore worker bargaining power. Anything that reduces worker bargaining power will tend to reduce wages. Thus, home ownership is good for employers. You could almost view the mortage deduction as a subsidy – but in any event there were clearly powerful economic forces behind its introduction and maintenance. As in so many other areas, the Bush presidency took this to its cynical extreme, and called it the ‘ownership society’. He bragged, several years ago, about how he was encouraging banks to lend aggressively to first-time home buyers. You can still argue, I guess, about whether the Great Society was a good or a bad thing. But I think the argument about the Ownership Society is over.

  2. How does ownership impair mobility? In normal times, you can sell your house anytime you want; if you rent, you are bound by the timeline of a lease.
    In these unusually deflationary times, homeowners may want to hold on to their homes to wait for re-inflation of real-estate values. But they don’t have to. They will be buying from the same deflated market they are selling to.
    Prices may be higher in a region with better employment prospects, but that will always be the case.

    1. In normal times, you can sell your house any time you want? Paul, I have to suspect that either you haven’t been through this process, or you’re wealthy enough to consider it a minor hassle, but…. it ain’t blueberry pancakes. You have to own it for a couple years to make back the realtor’s and closing costs, even in normal times. And don’t forget, you have to buy another one, an experience much like walking a distance over broken glass. For first time owners it’s worse – they’ve just come up with a big pile of money and it’ll be years before they have another one. In a deflationary market, many years. Bottom line, nobody wants to switch homes more than once in three years, and a lot of people CAN’T, and that’s much less mobility than the renting market offers – at worst, you have to pay an extra month’s rent to break a lease, and that’s if you have a lease; not everyone does. Your second comment is only correct if the mortgage is above water, and for the first-time home buyers we’re talking about, that’s unlikely to be the case. They’re well and truly stuck – if they are forced to sell, they can take little comfort from the fact that they’re buying in the same depressed market: the bank’s going to want the difference between the sale proceeds and the note balance TOMORROW, thus soaking up any savings the hapless Ownership Societarians had put together.

    2. Besides what Mark said, leases often have hardship outs so it is easier to move if one loses a job or is involuntarily transferred. Otherwise, you probably won’t owe more than three months rent if you have to move immediately voluntarily.

  3. Also note that the package says: 8.000,- OR 10 % of the homes value wichever is less. not sure if some houses has a value above 80.000,-. And don’t forget: its just for the 2008 and 2009 taxes.

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