Wednesday, February 23, 2011

Is there a law school bubble?

I listened to a law school dean talk about the law school bubble.  It was interesting.  We talked later as well and then I talked with others.  This is a mix of what was said, my thoughts and the thoughts of others on the recent discussion about the law school bubble.

First, one thing that a law school can do to move itself up in the rankings is to spend more money (it does not matter on what), which has been driving increased tuition rates.  The explosion in tuition has occurred across the board.

Second, historically, about 1 to 1.5% of lawyers were in “big” firms, that is, firms with nine or more lawyers.  Those firms made about four to five times as much money per lawyer as the small firms did, but most legal services were “general practice” style services.

If you take the benchmark date, when lawyers made 4k and 21k (normal and “large firm”), 45% of lawyers had graduated college, 75% had graduated from a law school.

In 1975 7% of lawyers were government lawyers.  In 1995, 7% were government lawyers.  The shift was to firms doing “corporate” law of one type or another while the government sector remained the same. 

All of the change was pushed by the Cravath model, which involved many associates rather than traditional law firms where the partners always outnumbered the associates.

’74 154 schools.  In 2008 we were closing on 200 -- because law schools generate revenue for univesities.

Third, income for law school graduates has always been trimodel.  There is a sharp peak at the high extreme (whether $21k in the benchmark year of $140k+ now – note a non-equity partner at a biglaw firm will make between $140 to $200k after overhead).  The modes are the two extremes (the sharp narrow peak at the high end, a wide and flatter peak at the low end, and a wide, shallow plateau that bridges the middle -- often ignored as it is quite shallow, but it is quite wide -- so it picks up a lot of people). 

In 1991, the average/mean was very close to the low peak (which was more like ^|--  That is a peak and a short shelf, with the average for lawyers on the low end of the shelf – and the higher compensation part of the distribution was a long and very flat tail).  The size of the large peak on the high end has gotten bigger and “average” or mean income is now in the middle so that average numbers vastly over-report the income of most lawyers (--^^-----|----^ for the distribution).  

Remember, “biglaw” is a category that did not exist, really, in 1970 and that has really grown since – fueled by the use of associates to leverage things (associates that, mind you, are often negative in their contribution to actual net output for a client).

Fourth, higher education has been very resistant to bubbles collapsing.  Instead the burn rate of students into educational waste product just increases – much like the old models for law schools that flunked out half of each incoming class.  That failure rate did not dissuade people from applying to law schools in the past. 

For a modern equivalent, consider the MFA degree, or the PhD in Philosophy.  A narrow band of philosophy programs can find employment for their PhDs.  The rest graduate them to zero job prospects.  MFAs seem to exist to complain about the lack of meaningful employment.  Yet the students keep coming

Note that if legal education cost less, you would be graduating students who could be expected to be able to afford being the kind of lawyers that they will be employed as (if you have $10k in debt, a $40k job isn't so bad.  If you have $200k in debt, a $40k job is a real issue).  Instead, all (ok, almost all) of the schools are charging tuition that only makes sense if you are going to a “top 25” (one of the 40 schools in the top 25) and with sufficient class rank (which varies by school) to go biglaw.  Once you drop into the bottom 75% of schools, (or the bottom 150 schools) big law employment from those schools is so small as to be statistically not sufficient for the tuition model.

The solutions that have been proposed include:

·                    Having law schools teach skills that would turn students into attorneys.  Law schools dislike this solution as it requires them to teach things they are currently not set up to teach.  Especially for traditional law employment, where a law student would go into solo practice (when 75% of all lawyers were solos and 15% were two person partnerships), skills training is really important.           
o       Law schools want law firms to provide this training.  That is fine for biglaw set-ups. It is, of course, almost impossible for the economics of smaller offices.
o       The alternative is some sort of post law school training by law firms, the bar association or post graduate education systems. Some sort of 2 years of law school, then one year somewhere else where they promise the proper post-law school training will occur.
·                    Reducing law school to two years (would cut the cost by 1/3 but would also accelerate the growth of lawyers in society)(and reduce even further the amount of possible training).
·                    Capping law school expenditures and tuition.
·                    Closing law schools that do not pass sufficient proportion of their students through the bar exam.  The ABA has stated it will be withdrawing accreditation, I have not seen that happen yet, but then there is lots I don't see.
·                    On-line and other non-traditional methods of educating students for less.

The dean did not think there was a bubble as far as law schools were concerned, but that does not mean that there is not a bubble as far as the profession is concerned.  No one benefits from human detritus being created by law schools the way many universities produce failed PhD candidates.  Schools owe students more.  Just imagine if the number of graduates went up by 50% (which is what reducing law school from three years to two years does) and that increased 50% was less qualified (by grades and test scores) and less skilled.  The economic model that law schools are in requires the same number of students at each school.  If students go through more quickly, you can imagine the results.

Anyway, you’ve got what he said and my comments and glosses, mixed together, together with some observations from a friend who is a partner at a biglaw firm and some others.

            Interesting to think about.

As an aside, it also makes an interesting point of BYU's resistance to raising tuition.  One, that makes it easier for graduates to have successful careers that are economically justified even if they do not get into large law firms.  Two, once you calculate the impact of tuition changes on rankings, it explains a good deal of the slide from around 30 to around 40 (expenditures per student, even if just in tuition that is off-set by giving scholarships back or even if it just goes straight to salaries of teachers, while it does not have a large weight in the rankings, can have a large impact because of the way the distribution sets.  Interesting things you learn from statistical analysis).

Also helps me understand why so many schools have embraced increased tuition.  Of course it results in something similar to an arms race once it gets started.  Not to mention, the math was fascinating to see explained. 


LSTB said...

How could the dean not conclude there was a bubble? If he wanted evidence, one could point out that between 2008 and 2018 the BLS projects a net growth of fewer than 100,000 new lawyer jobs for 440,000 new law grads. Link my sig.

I'm curious what the benchmark year was and what other sources the dean referred to.

Stephen said...

A while back, Texas only had about 800 new jobs for every 3k people passing the bar.

Still, law school is not as bad as some other graduate programs -- which does not justify what is going on, just reflects on what the market allows people to get away with.

Which means that on the real issue I agree with you very much -- and just think of what will happen if law school goes to 2 years and they increase the number of graduates by 50%.

Stephen said...

To everyone: has some great discussions -- looks like good work by an applied economist, readily understandable and clear.

Don't know what the author's background is, but the blog is well done.