David Altig on the Efficiency Gains from Free Trade and Kash on the Distributional Aspects

David Altig gives me too much credit – as well as some well deserved blame for the heat in the free trade debate. He then adds:

In simple terms, there are losers, but the winners can win enough to more than match those losses. All would be well with the world if the winners and losers could be easily identified, and an appropriate compensation scheme implemented.

I doubt many would disagree with this premise. My position, which I think is Dani Rodrik’s, is that without compensation, there are losers. Mind you – I’m a free trade advocate. I just wish we’d pay more attention to the appropriate compensation schemes.

We should also thank Kash for this:

Rather than work from the question that needs to be answered, Mankiw seems to be comparing them based on which model is less unrealistic (after all, we must acknowledge that both models are – by design – grossly unrealistic). Since economic models are not meant to be at all realistic, but rather are intended to help teach us through analogy, I find Mankiw’s answer unsatisfying. When I teach international trade theory, my students find that the Ricardian model is the simplest and easiest-to-grasp illustration of the answer to one big question:can international trade leave both countries better off? The Ricardian model makes it easy to see that the answer is yes, which is what the model was designed to show, and is the single best thing about it. But I don’t really think that that is the only important – or even most important – question asked about trade policy today. Instead, trade policy now is at least as concerned with much more subtle questions like what specific form(s) will the gains from trade take if we pursue trade policy xyz?, or who will gain and who will lose from trade policy xyz? For better or worse (and I think it’s probably for the better), trade policy today must have as a crucial component some consideration for the distribution of the benefits of trade, and not just be concerned with whether trade liberalization will make some aggregate measure of US economic activity go up or down. These concerns are vitally important for moral, economic, and political reasons, and must be addressed when it comes to the creation of trade policy.

The distributional aspects of trade policy WAS what Dani Rodrik was addressing. I’m delighted to see that David Altig is on the same page as the rest of us – apparently including Greg Mankiw who tells me that he never said there were no losers from free trade.

Update: Tyler Cowen adds dynamic gains from increased exports:

More empirically, having your export prices bid up is a wonderful driver of growth more than it is a distributional or efficiency nightmare. The net externalities of that process are usually positive rather than negative, even without firm- or industry-level increasing returns in the traditional sense. The exports help build a middle class and in the long run make democracy and rule of law possible. The dynamic effects are the key to the benefits of trade, and neither the Ricardian nor the Heckscher-Ohlin model is satisfactory. The best simple (ha!) model has trade bringing more innovation, new goods with high consumer surplus, greater reason to work hard and get ahead, greater domestic inequality, a growing middle class, and new and usually more liberal political coalitions.

But is this a case for free trade? Dani Rodrik notes the same dynamic argument has been by trade protectionists:

But the reason the excerpt made me jump is the similarity it has to arguments that proponents of import substitution often make in support of trade protection. After all, if you believe higher prices for your industries are good for all kind of dynamic and political effects, why not apply the same reasoning to your import-competing industries as well – especially if they are the only industries you have (your exports being dominated by traditional commodities).