Michael Strain and James Kwak debate Econ 101

Very interesting debate over Econ 101, between Michael Strain and James Kwak. Strain attempts to defend Econ 101 from the likes of Paul Krugman and Yours Truly. He especially criticizes my call for more empirics in 101:

Critics suggest that introductory textbooks should emphasize empirical studies over these models. There are many problems with this suggestion, not the least of which that economists’ empirical studies don’t agree on many important policy issues. For example, it is ridiculous to suggest that economists have reached consensus that raising the minimum wage won’t reduce employment. Some studies find non-trivial employment losses; others don’t. The debates often hinge on one’s preferred statistical methods. And deciding which methods you prefer is way beyond the scope of an introductory course. 

As you might predict, I have some problems with this. First of all, I don't like the idea that if the empirics aren't conclusively settled, we should just teach theories and forget about the facts. I agree with Kwak, who writes:

I don’t understand this argument. The minimum wage may or may not increase unemployment, depending on a host of other factors. The fact that economists don’t agree reflects the messiness of the world. That’s a feature, not a bug.

Totally! This clearly seems like the intellectually honest thing to do. It seems bad to give kids too strong of a false sense of certainty about the way the world works. When a debate is unresolved, I think you shouldn't simply ignore the evidence in favor of a theory that supports one side of the debate.

As a side note, I think the evidence on short-term employment effects of minimum wage is more conclusive than Strain believes, though also more nuanced than is often reported in the media and in casual discussions.

Strain also writes this, which I disagree with even more:

Even more problematic, some of the empirical research most celebrated by critics of economics 101 contradicts itself about the basic structure of the labor market. The famous “Mariel boatlift paper” finds that a large increase in immigrant workers doesn’t lower the wages of native workers. The famous “New Jersey-Pennsylvania minimum wage paper” finds that an increase in the minimum wage doesn’t reduce employment. If labor supply increases and wages stay constant — the Mariel paper — then the labor demand curve must be flat. But if the minimum wage increases and employment stays constant — New Jersey-Pennsylvania — then the labor demand curve must be vertical. Reconciling these studies is, again, way beyond the scope of an intro course. (emphasis mine)

Strain is using the simplest, most basic Econ 101 theory - a single S-D graph applying to all labor markets - to try to understand multiple results at once. He finds that this super-simple theory can't simultaneously explain two different empirical stylized facts, and concludes that we should respond by not teaching intro students about one or both of the empirical stylized facts.

But what if super-simple theory is just not powerful enough to describe both these situations at once? What if there isn't just one labor demand curve that applies to all labor markets at once? Maybe in the case of minimum wage, monopsony models are better than good old supply-and-demand. Maybe in the case of immigration, general equilibrium effects are important. Maybe search frictions are a big deal. There are lots of other possibilities too.

Strain's implicit assumption - that there's just one labor demand curve - seems like an example of what I call "101ism". A good 101 class, in my opinion, should teach monopoly models, and at least give a brief mention of general equilibrium and search frictions. And even more importantly, a good 101 class should stress that models are situational tools, not Theories of Everything. Assuming that there's one single labor demand curve that applies to all labor markets is a way of taking a simple model and trying to make it function as a Theory of Everything; no one should be surprised when that attempt fails. And our response to that failure shouldn't be to just not teach the empirics. It should be to rethink the way we use the theory.

Anyway, I agree with what Kwak says here:

People like Krugman and Smith (and me) aren’t saying that Economics 101 is useless; we all think that it teaches some incredibly useful analytical tools. The problem is that many people believe (or act as if they believe) that those models are a complete description of reality from which you can draw policy conclusions [without looking at evidence].

Exactly.