Two Worlds, Side by Side: ABA Journal & Letter from Law School

I received a letter from my law school subtly informing me that my name would be placed on “the permanent donor wall located near the entrance” if I gave a gift or commitment of $5,000.

The same day, the ABA Journal published Bill Henderson’s article titled, “The Law School Bubble: How Long Will It Last if Law Grads Can’t Pay the Bills?” in which the author writes in a section called, “ENDGAME”:

“Given the likelihood of some form of curb in federal student lending, there are gut-wrenching times ahead for law schools—even those that continue to enjoy a surplus of applicants … [T]he U.S. Bureau of Labor Statistics acknowledges a shortage of [doctors and dentists] and a growing glut of lawyers. Further, the Bureau projects that these shortages and surpluses will continue over the next decade.”

I don’t bring this up to attack my law school specifically—mine’s not alone in asking for alumni donations—and it’s no secret that my dollars are better spent on rent, groceries, and Screaming Trees’ discography than to have my name placed on a wall for vanity’s sake. Rather, I wonder aloud if lawyers who do have the disposable income and the class/professional/generational identity will gift their law schools money after reading Henderson’s argument that law schools are over-enrolled, overbuilt, yet devouring excessive amounts of federal debt money nonetheless.

I have four thoughts on Henderson’s article.

(1)  The law graduate surplus is not new. Here’s how Henderson characterizes the situation:

“Youthful overoptimism, bleak job prospects for college grads and the entry of several more universities and for-profit businesses into the legal education business are some of the root causes for the supply-and-demand imbalance in entry-level lawyers.”

The Bureau of Labor Statistics wrote in 1996:

“During the 1970s, the annual number of law school graduates more than doubled, outpacing the rapid growth of jobs. Growth in the yearly number of law school graduates tapered off during the 1980s, but again increased in the early 1990s. The high number of graduates will strain the economy’s capacity to absorb them.”

I repeat this point once again because (a) it still shocks me, and (b) it not only illustrates the scope of the law school bubble, but it also speaks to the ABA’s carelessness. Although I wrote last week that the Association’s Section of Legal Education’s accreditation system doesn’t cause tuition hikes, that doesn’t mean it’s blameless for the situation the profession is now in. The ABA was in the best position to inform the public that there were too many law graduates and it could’ve encouraged existing law schools to taper enrollments while dissuading universities from initiating new programs on frivolous justifications. It may’ve even been able to hamper enrollments by requiring more undergraduate prerequisites the way medical and dental schools do. These steps might not’ve worked, but contrast them to the ABA’s current ideology, which to this day has been to encourage access for anyone at any cost.

Now, the costs are coming in, and worse, otherwise excellent economists tell us that the ABA is greedily engineering a lawyer shortage contrary to the evidence. Catastrophe and ignorance do not combine for effective solutions, and the ABA will now have to manage both.

(2)  Speaking of the ABA, Henderson hints at the question that’s been slowly festering: Will the ABA, ED, and Congress throw indebted law grads under the bus?

“Although IBR may be viewed as a boon to law students, law school graduates may view it differently—15 percent of their monthly income paid over more than half of their career span is a severe burden, especially if the sought-after gains in earning power fail to materialize…”

“Still, scrutiny by the scamblogger movement and legal and mainstream media may speed up the process. One plausible outcome has the Education Department using its accreditation authority to force law schools to demonstrate, as a condition of receiving federal loan money, a minimum threshold of employability and income upon graduation.”

I’m more in the boon category than Henderson. When I enrolled, law school debtors had to make the monthly payments or watch the interest capitalize onto principal forever, so I still see IBR as better than the world without it. Plus, it’s now 10 percent of disposable income, and I’m guessing that a lot of people who have a few kids will see their monthly payments drop to the level of a utility bill they don’t discuss. They’ll worry about the income tax issues later, but that’s a long way off and there is an insolvency exclusion in the tax code.

Still, his is a fair point: there is no justice in forcing someone to pay a debt for something they cannot directly use. The whole point of student debt is to increase human capital more quickly so the economy can benefit from it sooner. If there is little human capital created or it’s unnecessary, then it’s morally wrong to force people to pay a cent for their degrees. Such is the risk of making unsecured loans.

However, look at Henderson’s prediction of ED more rigorously regulating law schools. What does this do for “Andrea,” the twice laid-off 2009 law school graduate the article uses to illustrate the problem? Sure, fewer law grads in the future shrinks the bottleneck and increases the present value of her law degree, but even if that were to happen tomorrow, are we really supposed to believe that lawyer salaries will rise to the point that she’s making payments on a 25-year monthly plan and not on IBR? It’s unlikely to happen, which is why we should be leery of partial fixes. Unfortunately, I doubt the ABA will start advocating for those it’s effectively abandoned. It should.

(3)  Speaking of solutions, we have a law school dean who does not like them:

“Mark Grunewald, interim dean of the law school at Washington and Lee University, thinks any blanket restrictions on federal student lending would be disastrous and unfair. ‘There are real differences among prospective law students’ economic circumstances, and new blanket restrictions on lending could hurt those most in need of financial support,’ he says. ‘It’s also unclear what the legal employment market might look like after a general economic recovery. Market forces may ultimately prove to be a better corrective.’”

Washington and Lee’s tuition has grown 35 percent over the inflation rate since 2004, above $40,000. Three years then buys two years today with no discernable increase in quality. Between 2004 and 2010, its full-time student-faculty ratio dropped roughly 18 percent to 9.5. Washington and Lee could easily provide cheaper legal educations without risking its accreditation, but it chooses not to. If Dean Grunewald were serious about ensuring access, he could persuade W&L’s Board of Trustees to invest in its students by giving them free legal educations conditioned on them paying 10 percent of their salaries back for 10 years. If this causes Washington and Lee to lose money or close, so be it. It’s not the federal government’s problem if a law school doesn’t increase human capital.

But the part that riles me is the “blanket restrictions on federal student lending” being “disastrous and unfair.” Does Dean Grunewald also think the blanket restriction on discharging student debt is “disastrous and unfair”? I bet not.

(4)  Henderson writes:

“Unless the government’s actuarial assumptions on student loan repayments turn out to be correct, federal funding of higher education is on a collision course with the federal deficit.”

It’s worse than this: the government knows its actuarial assumptions are wrong. The Congressional Budget Office directly told Congress that its accrual accounting methodology overstated the revenue of student loans, and when it used fair-value accounting it found the government loses 12¢ on the dollar on average over the next decade. This is without including IBR in the mix, so we’re looking at somewhere around $120 billion in losses on top of the drain on the economy that comes from zombie-debtors making good on bad debts rather than spending on houses and kids toys.

The CBO adds:

“The costs of income-contingent repayment, or of loan forgiveness or forbearance, are generally higher on a fair-value basis than under [accrual] accounting, because borrowers are more likely to take advantage of those opportunities in economic downturns, when the value of the forgone payments is greatest. (Page XI)”

I hope the student debt write-down Henderson writes about isn’t far off, but until then our lawyers are left with two worlds, side by side. In the one hand, the dean’s letter and the name on the wall near the door? Or in the other, Bill Henderson’s shameful law school debt factories?

I choose Screaming Trees.

(Oh, and this is my 200th post. Yay!)

Am Law Daily Essay ‘ABA Regs Don’t Cause Tuition Increases, Law Schools Do’

I rewrote my post from Monday for the Am Law Daily. It’s much better than the original with thanks to the Center for American Progress’ Julie Margaretta Morgan’s paper, “What Can We Learn from Law School?” Morgan lead me to a 2009 GAO Report on law schools that I hadn’t known about.

Here’s a link to the essay:

ABA Regs Don’t Cause Tuition Increases, Law Schools Do

Also, to all you New Englanders out there, because I wrote about New England School of Law, here’s one of Boston’s finest musicians (it’s a good city for music).

Big U’s One Percenters

A while back, the ABA Journal ran a piece titled, “The One Percenters Include More Doctors than Lawyers.” I guess lawyers are supposed to take solace in not taking too much from the American till. The article was based on the New York Times Economix blog post, “The Top 1%: Executives, Doctors and Bankers,” which reported on a paper charting the changes in the composition of the one percent from 1979 to 2005. The one percent has, well, become more one-percenty since then, so it’s a little out of date for my taste, but lawyers’ share increased 1.2 times, from 7.0 percent to 8.4 in those 26 years. One percent lawyers’ share of national income doubled from 0.61 percent to 1.22 percent.

Yesterday, the ABA Journal ran a blurb titled, “Michigan Law Dean Makes Almost $458K, Ranks 11th on School’s Pay Scale.” I’m aware of overpaid university administrators, so this does not surprise me. That Occupiers aren’t protesting their alma maters’ largesse on the other hand…

Returning to Times blog piece, the composition of “Professors and Scientists” in the top one percent grew 1.2 times from 1.5 percent to 1.8 percent, top percent professors’ and scientists’ share of national income also more than doubled from 0.1 percent to 0.23 percent.

According to the Wikipedia and 2006 Census data, household incomes of $350,000 or greater quantitatively depart those of us peons of the 99 percent while $167,000 and up places one in the top five percent (unfortunately, the Times post only investigated wage income and not capital gains). It would be fun if someone extended the ABA Journal‘s post on Michigan’s highly compensated public servant to a study on what percentage of law school deans also receive such generous compensation packages. It’s either publicly available (should be, at least) or on Guidestar for private law schools. Obviously, a large potion would make the cut, probably a third to half at least. One wonders if seeing the results would make them realize that they gained it from student debt rather than hard work/innovation/gumption/entrepreneurial spirit/etc.

Dean Baker Thinks We Need More Unemployable Indebted Law Grads

Center for Economic Policy and Research co-director Dean Baker is probably this blog’s number one inspiration. He’s frequently right about the big issues (spec. the housing bubble) and I recommend people regularly read his blog, Beat the Press, but ironically he is completely utterly clueless when it comes to America’s law schools. I’ve adapted this from a comment I wrote on his post, “Protectionism for Lawyers“:

“The NYT had a good piece on Sunday on how the American Bar Association limits the numbers of law schools and lawyers in the country. This inflates the salaries of lawyers.”

The ABA has many sins, but operating a labor cartel is not one of them.

(1)  The ABA in no way limits the number of law schools at all, period.

By my count, the ABA at least provisionally accredited 15 law schools in the last ten years (La Verne swaps out for UC Irvine). This doesn’t even count Cooley’s three branch campuses in Michigan and its fourth in Florida. Indiana Tech announced it’s opening a law school, and John Marshall (Atlanta) just announced it’s opening a branch campus in Savannah. There are several other proposed law schools, but I don’t have the patience to list them all. California has a swarm of non-ABA law schools, many of them correspondence schools, so the ABA doesn’t even have a total monopoly on legal education. There are 199 ABA law schools compared to ~120 med schools with smaller enrollments. (I wrote “50″ in my comment on Beat the Press. That’s dental schools.) Moreover, the accreditation rate is accelerating:

If the ABA has any power over the number of law schools, this is solid evidence it’s not using it.

(2)  The ABA does not limit the number of lawyers in the country through law school enrollments.

As the Bureau of Labor Statistics’ Occupational Outlook Handbook says, “Competition for job openings should continue to be keen because of the large number of students graduating from law school each year … As in the past, some graduates may have to accept positions outside of their field of interest or for which they feel overqualified.” This isn’t something new either. The 1996 OOH put it even more starkly, “During the 1970s, the annual number of law school graduates more than doubled, outpacing the rapid growth of jobs. Growth in the yearly number of law school graduates tapered off during the 1980s, but again increased in the early 1990s. The high number of graduates will strain the economy’s capacity to absorb them.” The BLS projects that between 2008 and 2018, lawyer jobs created by replacement and economic growth equal 240,400. ABA law schools graduate about 45,000 people per year, which suggests a 45 percent surplus by 2018, and that excludes everyone who goes through non-ABA law schools or find other means into the profession. Other professions, such as medicine and dentistry, do not have these surpluses, and the OOH projects a shortage of practitioners, using with phrases such as “excellent job prospects.”

Again, if the ABA has power over enrollments, it’s not using it.

(3)  Segal’s article didn’t really make either of the claims Baker attributes to him.

Segal said that the accreditation system was causing tuition increases at low-end law schools, but the people he quoted, such as New England School of Law’s Dean John O’Brien, said they were increasing tuition to pay for super star faculty, which has nothing to do with accreditation.

The point of this exercise isn’t just for me to play Dean Baker on Dean Baker. It’s to show how little “penetration” discussion of legal education and student debt have outside the legal media. If progressive economists like Baker–people who should be on our side and ahead of the mainstream curve–don’t understand the legal academy’s pathologies, then it will make reform that much harder. Worse, publicly claiming that the ABA is exercising power to limit entry into the legal profession and driving up salaries is no different than explicitly telling readers that law school is a wise move for applicants. This is very, very, very untrue, and I hope no one relies on Baker’s uninformed beliefs.

It’s the Rent, Not the Regulations

“In 1995 … the Department of Justice in an antitrust suit … charged that A.B.A. standards had artificially inflated faculty salaries. The A.B.A. signed a consent decree, agreeing to a number of strictures intended to pry the process out of the hands of legal academics and end the fixing of salaries.

Since then, the cost of law school tuition has soared, though at the high end, those prices are not the fault of the A.B.A. They are attributable to the prestige race prompted by U.S. News & World Report’s rankings of law schools, along with the wide availability of student loans.”

So writes David Segal in his fifth NYT piece on law schools, this one focusing on the ABA’s accreditation system’s impact on costs. He is wise to hedge himself by alluding to the “wide availability of student loans,” for that’s the far bigger problem here than the ABA’s regulations.

So, is there a connection between the consent decree and the tuition bubble? Here’s what real law school tuition has been since the 1980s according to the ABA and the CPI:

Nope.

As to whether cost increases are caused at the high-end by U.S. News? Sure, it’s big factor as law school administrators confess, but, well, Segal forces my hand as I wanted to save this until after I updated the tuition numbers for 2011-2012, which I haven’t gotten to yet. Allow me to introduce you to the concept of “adjusted private law school tuition.”

  • Take all private law schools’ tuition.
  • Exclude Brigham Young’s LDS tuition.
  • Exclude the two private Puerto Rico ABA schools.
  • Take the mean of these three bullets, and then include all public law schools whose in-state tuition is greater than this mean. This adds Virginia, Michigan, and the California public schools (still ex. Irvine) to the number of private law schools as they are “public” in name only.
  • Take the averages of the new dataset and anything else you want.

Here’s the mean adjusted private law school tuition, U.S. News’ immutable T-14 schools’ mean tuition (excluding Texas, which joined them this year), and this year’s “Rank Not Published” and “Unranked” law schools’ tuition (completely excluding the three Puerto Rico ones). Rank Not-Published and Unranked (RNP/UR) law schools grew from 29 in 2004-2005 to 40 in 2010-2011 (U.S. News doesn’t list Widener-Harrisburg, but I counted it).

And here they are relative to the mean adjusted private law school tuition:

In fact, in the time period above, T-14 schools’ real average tuition grew 23.5 percent; the RNP/UR law schools’ tuition? 22 percent. Here’s a question for you: how do we characterize U.S. News‘ influence if law schools that aren’t bothering to compete in its rankings are still raising their tuition at the same rate as the T-14 ones? Shouldn’t they be left in the dust because their commitment to cheap legal education outweighs their desire to compete in a rankings race they’ve already lost?

Something to think about.

Nevertheless, Segal quotes people claiming brutal accreditation standards lead to high tuition. Accreditation standards have some bearing on tenured faculty, who do require some kind of living wage as they can’t work elsewhere, but the standards don’t require law schools to hire so many of them. Here’s the ABA’s average Student Faculty Ratios by full-time enrollment (FTE):

Here’s the distribution of law schools by FTE according to the latest Official Guide.

I have no good way to smooth this out to account for enrollment shocks, but you see the trend. Admittedly the consent decree may’ve affected this, as the slope starts dropping more quickly in the mid-1990s, and readers are free to inform me of some change to the standards at this time. However, Chapter 4 of the standards allows law schools to operate with faculty student ratios of 30:1, yet the average is obviously 15:1. Clearly, the lower ratio is a choice by the law schools, unmandated by the ABA. I also don’t see how requiring non-law school employees on ABA committees would cause law schools to hire more faculty, nor does it explain why the student faculty ratios at schools of varying sizes have converged. We know higher tuition feeds into faculty size and compensation, but I don’t see how accreditation affects that, especially if the standards haven’t changed much over time.

Here’s another example, the cheapest private RNP/UR law school above is South Texas College of Law, accredited long ago in 1959. In 2004-2005, full-time students at South Texas paid $22,821 in 2010 dollars. In 2010-2011, they paid $26,340, a 15 percent real increase.

If the accreditation standards didn’t change since 2004-2005, how did the ABA force South Texas to raise its tuition? New England School of Law (NESL) dean John O’Brien answers:

“The argument for high salaries has always been that law professors could earn even more money at a law firm. As for tenure, one oft-cited reason for requiring it is that the most sought-after talent demands it, putting a school that doesn’t offer tenure at a disadvantage.

‘I need to get the best teachers out there,’ says Mr. O’Brien, the council chairman, ‘and the fact of the matter is that in order to do that, to compete for top-quality faculty, I have to offer tenure.’”

That’s the reason? The so-called “War for Talent” that human resources departments scourge us with despite high unemployment?

There’s no evidence professors can earn more at firms, and given the drubbing Segal gave the law schools over their poor pedagogy last month, “top-quality” faculty don’t appear that useful in private practice due to their inexperience.

I add that NESL’s inflation-adjusted tuition grew from $25,944 in 2004-2005 to $39,990 in 2010-2011 (52 percent (!)). And with what perch did U.S. News reward NESL for such savage tuition increases?

“Rank Not Published”

There’s no evidence that previous generations of NESL grads were any worse lawyers than today’s grads are, so to say that rock star faculty are necessary to teach them is dubious. One can infer NESL is more interested in making the numbered rankings in the future than Dean O’Brien’s stated reason of finding even better teachers for its students.

Thus, private ABA law schools could try running the “minor-league hustle”: hiring cheaper full-time faculty, adhering to a 30:1 student faculty ratio, hiring more local attorney-adjuncts, skimping on the library books as best as possible, using cheaper facilities, etc. This isn’t to say that the accreditation standards and U.S. News have no effect whatsoever, but law schools, especially those that are independently run like NESL, can be cheaper under the current system.

They just choose not to be.

But why? The only answer I have is universities are outright rentiers. They have easy access to debt-revenue, so they take it. Sure, the ABA’s accreditation standards harken to an elite Industrial-era law school, but until the John O’Briens of America’s legal academy challenge themselves to kick their Direct Loan habits, they’ll simply charge more—and take more—because they can. The only thing left to surprise us is on a moral level: how can university administrator-rentiers sincerely believe their own justifications for economic rents?

Good News! The Legal Sector Grew 2.3 Percent in 2010! The Bad News? Everything Else.

On December 13, the Bureau of Economic Analysis (BEA) updated its “GDP-by-Industry” page, which means it released all sorts of useful information on what happened to the legal sector of the U.S. economy in 2010, the sector that employs the vast majority of lawyers.

Skipping the soup & salad, we find that in 2010, the legal sector posted 2.34 percent real growth ($3.9 billion). To put this in context, that’s the highest rate since 2004, and it’s the first serious growth since the legal sector started contracting from its peak in 2005. You heard that right. The legal sector has done very, very badly in the 21st century; in fact, it’s still smaller today than it was in 2000. Readers will recall this animation.

Less obviously, the BEA also changed its methodology and revised the last several years of data, which means I get to revise it on all my static pages. Joy. The good news here is that the “Great Law Depression” in the animation wasn’t as bad as it looks. By “as bad” I mean that in 2008, the legal sector did not contract but actually grew … 0.61 percent. Growth is growth, though, but 2008 was preceded by two years of contraction, and 2009 was one year of big time recession (-10.77 percent). The revised graph illustrates.

Those who go to the BEA’s Web site might be excited by this line:

“Recoveries in durable-goods manufacturing, wholesale trade, and professional, scientific and technical services industries were the leading contributors to the turnaround in U.S. economic growth in 2010.”

Private legal services are “Professional, Scientific and Technical Services,” so they contributed to the recovery, right? Nope. I’ve made much of others making much of the legal sector’s share of GDP. Despite the turnaround, the overall economy outdid the legal sector yet again, and now the share-of-GDP is at yet another record low of 1.31 percent, down 0.01 percent. Here’s that and the new rate of change.

Compared to “Professional, Scientific and Technical Services,” the legal sector lost share yet again to a new record low of 11.04 percent.

As I said, I don’t take too much from the share of GDP, but don’t say that legal services helped lead the recovery just because the BEA says its parent category did. I still think that at best legal services will never be too much more than 1.5 percent of the U.S. economy as it was in 2005.

Elsewhere in bad news land, the price of legal services continues to increase over inflation, unrelentingly as usual. The legal sector deflator grew 3.85 percent in 2010 in contrast to the GDP deflator, which grew a mere 1.15 percent. From 2001 through 2010, the cost of legal services grew 54.7 percent while the GDP deflator only grew 22.3 percent. In real terms, America paid a quarter more than what it paid for legal services in 2001, and it got four percent less for it.

How this can be sustainable and why it occurs remains a mystery to me.

Unlike shares-of-GDP, I have made much of what I refer to as the “bottleneck argument,” which law school administrators deploy to combat claims of systemic law school over-enrollment by responding that the Great Recession is wholly responsible for underemployed law graduates, all of whom will have fruitful legal careers once the economy recovers. I’ve decided to start researching this from the legal sector output perspective. In other words, what should the legal sector’s output be if 1997-2005 growth rates had continued? Projecting it out, we get this:

From 2006 to 2010, the legal sector should have given us $1.036 trillion, but instead we only got $903 billion, which is a $133 billion deficit over those five years, or 12.8 percent of total potential output. In 2010, the legal sector operated about 21 percent below capacity. But now you ask, “But LSTB, surely the 2.34 percent growth this year means we’re on the road to recovery right? Green shoots I say!”

The problem is that in the reference period, 1997-2005, the legal sector grew at an average annualized rate of 2.7 percent. True, we don’t know what happened in 2011—and like you I wish the BEA released these data more quickly—but with painfully slow growth overall, the fade out of the 2009 stimulus, even Howrey’s collapse in the spring, I don’t think 2011 will be better than 2010. In short, the U.S. legal sector is going nowhere. We’ll see if I’m right next year.

Moreover, there’re two pieces of evidence that pretty clearly suggest that those $3.9 billion did not go to fresh law school graduates, which would validate the bottleneck argument. The BEA’s employment data were updated as well, and the numbers of “full-time equivalent,” and “full-time and part-time workers” in the legal sector both dropped. The number of “Persons engaged in industry”? It grew by 1.8 million.

Wait, what???

See for yourself.

I didn’t make that up, but I sure as shit think it’s a typo. For this next chart, I assumed it was 1277, which seems most accurate, and by “seems” I mean “gut-guess” ’cause 1077/1177 sound abysmally low.

In 2010, there was a net loss of 6,000 full-time equivalent jobs in the legal sector. Aside from full-time, non-lawyer support personnel layoffs, that can’t mean many stable long-term positions opened up for neophyte lawyers, self-employed or otherwise. In fact, between 1998 and 2010 there’s only been a net growth of 93,000 full-time equivalent positions against 346,220 ABA law school grads.

Using the same exponential projection methodology, here’re the potential full-time equivalent legal sector jobs versus the actual numbers.

That’s a 174,000 jobs deficit in 2010 (13.9 percent). From 2006-2010, there were 219,288 ABA grads. Obviously the jobs deficit includes non-lawyers, and it’s on top of the juris doctor surplus the Bureau of Labor Statistics has known about since at least the 1990s. Also, don’t forget the lawyer attrition rate must be fairly high, which is good for the short-term employment data but bad for long-term concerns about career satisfaction, debt repayment, and the stability of the profession.

Still it is a fairly large gap, and while I’m skeptical there could be that many lawyer jobs, who knows, maybe the bottleneck really is that large. I admit I’m pretty much acclimated to a world with high unemployment and dim prospects for new lawyers, so maybe 100-150,000 law school graduates over those years could’ve found meaningful work in the profession, at least for a few years. I just don’t think that counterfactual is a plausible alternative outcome given structural factors affecting the legal profession, but let it not be said that I lack imagination.

Back to the topic of where the new $4 billion of legal sector spending went, here’s the BEA’s composition of the legal sector’s “value added.”

I’m fairly sure this is not inflation-adjusted, but it tells a lot about how the sector reacts to growth (pays lots of taxes), recession (stop hiring employees, cut gross operating surplus), and recovery (increase gross operating surplus). While employee compensation and taxes are intuitive, gross operating surplus means everything else, which is unhelpful. The Expert Glossary defines it as, “consumption of fixed capital, net business current transfer payments, corporate profits, and proprietors’ income.” In other words, they’re maintenance costs, firm gifts, payments for personal injuries caused, taxes to foreign governments, and of course, firms’ and partners’ hauls, which I’m guessing are the largest component of the surplus. I don’t know enough about firm tax structure or if firms tend to sit on large profits without distributing them, or even if they’re allowed to, but ultimately firm profits are partner income. This is where the 2.34 percent growth went. Not to law school graduates. The bottleneck is still growing.

What to take from this? From 1998 to 2008 employee compensation grew an average 6.2 percent, and in the same period, the gross operating surplus grew an average 7.6 percent per year. The surplus is also much more volatile: mean average deviation of 4.9 percent versus 1.5 percent for employee compensation. Since 2008, employee compensation has halted, and in 2010 it only posted a mere 0.4 percent growth while the surplus grew a whopping 14.1 percent. To put this in perspective, here’s the legal sector’s output per full-time equivalent worker.

I remind readers again that in 2010, FTE workers dropped, so the legal sector essentially distributed the $3.9 billion among existing workers.

This, folks, is why I look at government data instead of NALP’s on graduating classes. Assuming that anyone who starts their own practices will not make more than if they had not gone to law school—which I think is fair—unless employee compensation and FTE workers start making serious upturns, it’s going to be very rough for new lawyers trying to find long-term partner-track work in the private legal sector. With technology, outsourcing, and clients unwilling to pay associates, I predict employee compensation will stagnate indefinitely and gross operating surplus (and taxes) to grow instead. Hopefully the BEA won’t make us wait until next December to test that prediction.

Here’s Hoping Michael Olivas’ Views Are Not Widely Held by the AALS

Not that I care about the AALS, but, ya know, just sayin’.

“‘We have never guaranteed that our graduates will have jobs,’[said Association of American Law Schools President Michael Olivas.] “Olivas, a law professor [and dean] at the University of Houston, makes a persuasive case that letting law school students escape their debts is a bad idea. After all, he notes that people have to pay off their car loans even if they grow tired of their vehicles.”

So editorializes Jonathan Berr, contributor to the “Motley Fool” segment of Daily Finance, in a piece called “Should Law Schools Pay Some Students to Drop Out,” a reference to the recent Slate article by Akhil Reed Amar and Ian Ayres.

I declare this Michael Olivas quote gold.

I do so because it so concisely presents the attitude scam bloggers, student debt activists, mainstream journalists, legislators, and increasingly the public, impute towards legal academics. Before I go further, readers should recall Michael Olivas as the same AALS president who successfully wrote a ten-page argument from incredulity claiming that there can’t possibly be legal education without highly paid, tenure-track faculty because they provide “selfless public service.” The above paragraph implies the following:

(1)  Law schools are run by callous businesspeople. All the blather about the “noble profession,” “public service,” and being a “gateway to the profession” masks the fact that it’s merely an arm’s length transaction between sophisticated parties. Law school overenrollment and tuition increases? The applicants forced them to increase enrollments and tuition because law schools operate in a free market in which they take on no risk. Law schools’ contribution to ballooning student debt is the public’s problem. Isn’t that the same public tenured faculty selflessly serve? Whatever. I’ll spare you the published employment statistics.

(2)  This is my favorite: Underemployed law grads (and drop outs) are just “tired” of their law degrees. It’s not the oversupply, depression, or transformation in the profession but graduates’ fickleness that makes them want to discharge their student loans.

(3)  Speaking of which, Olivas does not make a “persuasive” case comparing student loan debt to auto debt. That’s Berr’s poor editorializing. There are several reasons:

  • Auto debt is secured. Student loan debt is not. The reason unsecured debts are (and should be) dischargeable in bankruptcy is that we don’t want the courts to play Santa, deciding which debtors have been naughty and which creditors are morons for loaning money to people who are clearly credit risks. Thus, the bankruptcy code by default shifts the risk onto the creditor: if someone discharges a $60,000 gambling debt owed to you, that’s your problem. Not because we hate banks but because it’s the best we can do. Since 2005, Chapter 7 is means tested, meaning you can’t make six-figure salaries and discharge your unsecured debt at will. Hogtying the bankruptcy courts into siding with creditors turns debtors into debt peons who default, stop paying income taxes, work in the $1.4 trillion underground economy, flee the country, or kill themselves. So no, neither Berr’s nor Olivas’ attitude is “persuasive.”
  • As a secured debt, debtors can always surrender the car to the bank/repo man and then discharge the deficiency in Chapter 7. There are ways around that, such as locking your car in your garage where the repo man can’t reasonably go without committing burglary and negotiating a refinancing plan in the meantime, but at the same time you won’t be able to drive to work or the cinema without risking your car getting towed.
  • Debtors can redeem their vehicles in Chapter 7. This means they pay the lender the fair market value of the vehicle and keep it. Many people filing Chapter 7 don’t have that kind of cash on them, so they either forgo this option or find a redemption lender (who probably charges high interest).
  • Debtors can also reaffirm their auto debt, which is a slightly more complicated process (lots of signatures), but it allows them to keep their cars.
  • They can also include it in a Chapter 13 repayment plan.
  • Lastly, there’s the cramdown option in Chapter 13. This is similar to redemption in Chapter 7 in that the debtor is paying only the fair market value of the vehicle if it’s more than 910 days old, and the interest rate is judicially adjusted (called the “Till rate,” after the Supreme Court case by that name).

Point is, even if you get sick of your car, you can get out of the debt. More importantly, without unlimited loans and state subsidies, Michael Olivas would not be making $183,240 per year. (For all you OWSers, that’s between the top 1.5 and 5 percents and probably higher in Texas.)

“Though there may be surpluses of lawyers in parts of the country, some areas don’t have enough of them. ‘There are counties in the state of Texas that have fewer than a dozen lawyers in them,’ Olivas said.”

(4)  Those counties probably don’t have many people at all, and they’re likely much too poor to afford substantial legal services. And medical services. And everything else. Like many of his peers, Dean Olivas believes that there are Shangri-La legal markets in the U.S. that will pay lawyers a living wage if only they’d overcome their laziness to uproot themselves and move there. No such place exists in the U.S., and the reason new lawyers in particular are unwilling to take the risk is that a subsistence income outside the legal profession (even if it’s an imputed income from living with family unemployed) is still higher than moving to rural Texas to practice cactus law. There is no such thing as “voluntary unemployment” in the legal profession. Nor any other economic sector for that matter.

I’m of the opinion that people like Michael Olivas are going to stand at the front line when Congress decides to open hearings on law schools. That’s unfortunate for organizations like the AALS because there’s been every indication of rare bipartisan consensus about law schools’ problems. That’s not to say I have a high opinion of the AALS. Honestly, I couldn’t care less, but advocates such as Dean Olivas will have few allies and will not foster a positive view of the AALS in legislators’ hearts so long as they believe they are entitled to receive high incomes as “selfless public servants” while actually impoverishing their students at taxpayer expense.

Discredited Cooley Arguments Just … Won’t … DIE!

Today’s installment of law school zombie arguments comes from none other than Nelson Miller, dean of Cooley’s branch campus in Grand Rapids, who asked for an editorial slot on The Careerist, operated by Vivia Chen, who writes, “[H]e wanted to present a view that’s ‘data-based.’” Miller then presents data that are wholly irrelevant.

Data shows that the recession affected lawyers less than others, and that lawyer employment prospects remain strong. According to the U.S. Bureau of Labor Statistics, lawyer unemployment rose from 1.1 percent in 2007 to 1.9 percent in 2008 and 2.3 percent in 2009 but fell to 1.5 percent in 2010.

Now, my ego isn’t bruised if people decline to read my refutations of Cooleyist arguments here on the LSTB, but, well, I mean. Dude. The Careerist is owned by American Lawyer Media, which not two months ago published a very direct refutation of Dean Miller’s same arguments that lawyer unemployment data are useful to tell us anything about law school’s value. *sigh*

One the bright side, Dean Miller drums up a few new claims to refute, so don’t call Bruce Campbell just yet.

From 2000 to 2010, the economy created another 123,000 lawyer jobs while adding only 7,000 unemployed lawyers. Employed lawyers grew by 39,000 from 2007 to 2010 across the recession.

These numbers should immediately raise alarms. One sentence earlier, Dean Miller states that 1,040,000 lawyers worked in the U.S. According to ABA data, between 2000 and 2010 (11 years), 455,529 people graduated from an ABA law school. That means 332,529 lawyers would’ve had to’ve left the field in the previous decade, or 32 percent turnover. I’m no labor expert, but that sounds high for an industry that requires entry costs of three or more years of formal education and much debt.

But my favorite part is when Dean Miller says:

Negative media has discouraged applicants from pursuing a law career path that holds good employment prospects. Law school applications usually increase during economic downturns and decrease in periods of economic growth. Indeed, during the recession, applications rose 3.8 percent for the fall of 2009 and 1.5 percent for the fall of 2010. However, with a recent onslaught of negative publicity, national applications for the fall of 2011 nosedived. The preliminary figure is down 9.9 percent.

I’ve only seen one other law school dean say something like this: Larry Kramer of Stanford University in an alumni letter posted on Inside the Law School Scam. The argument is a dizzying shift from law school faculty and admissions personnel saying that the recent drop in applicants signifies that all the greedy Millenials who apply for the “wrong reasons” and would be awful lawyers no matter what the circumstances are now deciding against going to law school, and that now only those who are pure of heart (and are therefore destined for greatness) are applying. Nevertheless, I’m surprised when the dean of Stanford essentially says scam bloggers and journalists who see blood in the water are depriving America of its vitally necessary legally educated workers. When the Dean of a Cooley branch campus says the same thing? Not surprised.

Yet the core question is not what is good for lawyers or new law graduates … lawyers and their firms contribute substantially on their own to the national and global economies … I strongly suspect that we will continue to need them in a world that every day grows more complex, sophisticated, challenging, and uncertain.

No, the core question is what’s good for student debtors and taxpayers. Law schools create debt that taxpayers will be forced to cover, and law schools cost the economy in terms of labor output. We will not need new layers to handle the more complex world because contrary to popular perceptions the world is not becoming more complex. The vast majority of the U.S.’s GDP is and ever will be domestic consumption. The volume of international trade we have today is due to China undervaluing its currency and the U.S. borrowing money to overpay its own healthcare system, cut taxes on rich people, and spread democracy by invading other countries. Will we need more specialized lawyers? Very likely, but not even close to 45,000+ per year.

I used some strong language when discussing Cooley’s “Report One,” but I stand by it: Dean Miller is either “willfully misleading readers into believing the legal profession will provide jobs for law students,” or he is “irresponsibly ignorant.” Today, I’m guessing it’s the latter.

‘Law School Debt Bubble, Part II: Data Show Feds Will Lend $54.3 Billion to U.S. Law Schools by 2020′

‘Law School Debt Bubble, Part II: Data Show Feds Will Lend $54.3 Billion to U.S. Law Schools by 2020′

My fourth article is up on the Am Law Daily’s Web site. I redid the math and found that I low-balled it by a couple billion dollars.

To make up for it, here’s some 60s garage rock.

Student Loan Bailout with a Whimper?

I listened to Cryn Johannsen and Robert Applebaum discuss loan forgiveness and a debtors strike on the Brian Lehrer show.

I’m not sure how loan forgiveness would be operationalized, but the easiest way would be for the government to pass legislation authorizing the Fed to buy student loans off the market and then cancel them. Essentially, the government would be buying SLM’s entire portfolio and saying to the debtors, “Think of it as a grant,” like a doting grandparent. SLM might not be too happy about this, but I doubt more diverse banks, like Citigroup, would lose sleep themselves. The Fed would either print the money or the Treasury would borrow it—much to the joy of America’s Treasury-hungry financial sector—and the government would take a large loss canceling the net present value of the loans.

Yet if you turn to ED’s FY 2012 proposed budget on the Office of Management and Budget Web site, you’ll find that ED intends to spend $37.704 billion in student loan acquisitions.

If you’re wondering whether ED is bailing out lenders, you’re essentially right, as evidenced in ED’s FY 2012 Budget Request (separate document on ED’s site). The acquisitions are a request by ED to allow people to convert guaranteed loans and Direct Loans into a single Direct Loan, the idea being that doing so would reduce defaults on the parts of people who pay to multiple lenders. It’s similar to the Ensuring Continued Access to Student Loans Act of 2008, which allowed ED to purchase guaranteed loans to ensure banks had the capital to make new ones. Instead of waiting for Congress to pass the budget, President Obama authorized ED to do this anyway, and it’ll knock off half a percentage point of interest to boot.

How is ED paying for this? Probably with the magical, mythical proceeds from its existing Direct Loans. Like any other creditor, when ED originates a Direct Loan, it can claim the net present value of the loan up front and use that interest to pay for other things. The problem is that the accrual accounting system ED uses is broken, underestimating the number of defaults and losses due to long-term IBR forgiveness.

Yes, ED is again bailing banks out of a few loans, but it ends before October 2012. Don’t be surprised if Congress quietly does something like this a third time.

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