A Less Gilded Past: The SmallLaw Dead Pool

[****THIS RESEARCH IN THIS POST HAS BEEN CONSOLIDATED ON THIS PAGE. PLEASE LINK TO THAT INSTEAD.****]

A Less Gilded Future,” in the Economist [H/T JETs with J.D.s]

Opening with the tale of Howrey’s passage to the BigLaw Dead Pool, the Economist tells us:

Though Howrey was the only big firm to collapse-

***sound of needle scratching record***

Only big firm to collapse?? The BigLaw Dead Pool lists six others that failed since 2005. Let this sloppy error set the tone for tonight’s post. Permit me to begin again.

Though Howrey was the only big firm to collapse, the forces that destroyed it hit the whole profession hard … Clients became keener to query their bills—and to demand alternatives to the convention of charging by the hour, such as flat, capped or contingent fees. Small and innovative firms began obliging them, and big firms increasingly felt forced to follow suit … All this took a toll on the labour market. After a dozen years of growth, employment in America’s law industry, the world’s biggest, has declined for the past three years.

First of all, the U.S. is the third largest country on Earth by population, the largest by GDP, and it uses a common law system unlike nearly everyone else who uses civil codes. We should expect it to have the largest legal labor market. Try harder Economist.

Reading the article, you would think that the legal sector’s problems only began in the last decade:

Trends that were not part of the recession will not disappear with the recovery. Some will even strengthen. William Henderson of Indiana University points out just how good and how long a run lawyers had. Spending on legal services grew from 0.4% of America’s GDP in 1978 to 1.8% in 2003. The legal business grew four times faster than the economy. Now, Mr Henderson says, a “hundred-year flood” is hitting the profession. [Emphasis LSTB]

This chunk is a mess, yet where have I seen that italicized portion before?

Oh God, no. Please, no. *Ungh…*

Jack Crittenden’s, “A Wise Investment,” in the National Jurist (37).

I’m swear I’m that guy from Alien/Spaceballs.

Note to the legal profession: Any data also appearing in that Jack Crittenden article should first seek the LSTB’s wise counsel.

There are four problems with the italicized passage, to say nothing of the “good and long run lawyers had,” which I’ll get to.

1). The numbers are flat out wrong. According to the BEA, they are 0.8% (1978) and 1.5% (2003). More accurately, they’re 0.83% and 1.47%, respectively. So instead of a 350% increase in “percent of the economy,” we’re talking about 77%. Not the same thing.

2). Two data points does not a trend make. Unlike ABA President Stephen A. Zack’s recent frivolous comparison of law graduates per capita between 1990 and 2009, there is absolutely in no way a gentle trend connecting the legal sector of 1978 to that of 2003. This is what happened.

It’s fitting that The Economist chose 2003 as the target year: the legal sector’s percentage of GDP was the same as it was in 1992, the year before the legal sector contracted relative to GDP.

3). Legal services are more expensive than ever before! If we’re going to be comparing the size of the legal sector to the overall economy over time, at least take inflation out from the nominal GDP and use real value added with 2005 as the base year. The BEA obliges.

Nominal = Real (Quantity changes) + Deflator (Price changes (not CPI, but close))

Whoo! I cannot say I expected that! Incidentally,the BEA has a legal sector deflator series (1977-2009) for anyone else who is approaching Peak Nerd.

So in 1978, the legal sector’s real output was 2.01% of GDP; in 2003, it was 1.55%, a 22.9% contraction. In 2009 it fell to 1.37%, a record low as far as we know.

4). Growth is measured in stuff. So explain to me why we should we care about the legal sector’s percent of GDP? Gentlemen, we have the nominal value added and the deflator, so let’s just look at the damned raw output already.

If I knew nothing about the American legal sector and you showed me this graph, I would say that with an R­2 of .8822 it’s f’ing volatile. I would not, for example, characterize the run that lawyers had as “good,” or “long.” Instead, I would say that this is an industry that has been undergoing serious structural changes since it fell into stagnation in the 1990s. I suspect that non-Biglaw suffered badly during these years.

Return to this statement: “The legal business grew four times faster than the economy.”

I simply have no idea where this comes from. It is nonsense.

Even if we assume the Economist’s fantasy legal sector were true we get this:

1978 2003 Percent Growth Annual % Growth
GDP Nominal $2,293.8 billion $11,142.1 billion 385.7% 6.5%
Legal Sector Nominal $19.1 billion $163.5 billion 756.0% 9.0%
Economist’s Legal Sector $9.2 billion $200.6 billion 2,080.4% 13.1%
GDP Real (base, 2005) $5,677.7 billion $11,840.7 billion 108.5% 3.0%
Legal Sector Real (base, 2005) $114.2 billion $183.35 billion 60.6% 1.9%

Only if we divide the ludicrous 2,000% figure by GDP growth do we get a fivefold number, but nominal total growth over that time period was actually twice as fast as GDP, not four times as The Economist claims. Looking at real value added, we find very much the reverse: GDP outgrew the legal sector by 1.58 times annually.

Longtime readers have seen this story before.

I have no more will to quarrel with anything else the Economist says aside from its exclusive focus on Biglaw, whose contribution to the legal sector output is unspecified. I credit it for pointing out that American lawyers have unilaterally adopted free trade in some legal services while everyone else is protectionist. Not that anyone goes to law school to do doc review.

However, those wishing to talk about “structural changes” to the legal sector and “hundred-year floods” should at least get their facts right. Things haven’t been gilded for a long while, and the real story hints of a much eerier SmallLaw Dead Pool, unacknowledged by the profession and concealed by the law schools.

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.

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Okay, fine here’s your damn deflator.

There, happy? Hey … the cost of legal services has outpaced prices in the rest of the economy. No shit. I hope quality has improved or else things will get even worse.

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One Response

  1. If you’re the guy who the alien keeps popping out of then I’m the guy that yells “Water my ass bring this guy some pepto bismol!”

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