Howard Covitz on Free Trade

Here’s one from programmer from reader Howard Covitz, who bills himself as a Computer Programmer and wannabe Economist…

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I have a question about my logic in understanding the mainstream Economic view of Free Trade. My recollection from my International Econ undergrad course (Ricardo and all that) is that the general welfare increases for all concerned when countries specialize in making what they can make at a comparable advantage. While the math impresses me, I was always doubtful about what such simple Economic models leave out (in my case, I tend to suspect Institutional and Historical issues don’t get considered). Regarding Free Trade, however, the stuff the simple model left out evaded me for many years, and only recently have I been able to articulate some very specific things.

The easiest, and perhaps trivial, “Thing It Leaves Out” is the friction on people’s psyches caused by economic disruption (which can be a monkey wrench in any economic model if considered and somehow quantified), and as pertains particularly to Free Trade economic disruption is the unequal burden such disruption causes on the least flexible…older workers, who have invested in years of skills and training (and “its harder to teach an old dog new tricks”).

The other aspect the simple Free Trade model leaves out, if my recollection is correct, is the following (and I don’t know if this is just a “conversion problem”, that is, a one time problem that happens as a country opens up its shores to free trade, or more long term). I understand how the simple model illustrates that, for all concerned, the Cost of Goods gets lower. But this does not pertain to Goods (and Services) that do not lend themselves to be exported or imported. By and large, this would seem to include Real Estate and (despite some promising technological breakthroughs) Medical Care, and Education. Aren’t these the VERY things that are causing problems in our current economy? And is it possible that Free Trade is somehow exacerbating the problem (something about relative prices, and the cost of consumer items at Wal Mart being so fricking low….lower than anyone really would need it to be, in no way making up for the rise in housing prices, medical care and education). Something Alan Blinder I think once wrote in a intro Econ textbook also comes to mind, about how there is a limit to how much technology can lessen the cost of Services, thus their relative price will always increase compared to other things in the economy.

I would love to hear some feedback. Am I missing something fairly obvious? Thanks!

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I would add he’s mostly right… what I think is left out is that while countries generally benefit (the country is better off focusing on what it does very well and trading for the rest, as opposed to focusing on things it sucks at doing), some individuals (those who are best at doing those things the country sucks at) will suffer.

Your thoughts?