Commerce Dept.: Legal Services Sector Contracts (Again) in 2013

Earlier this month the Commerce Department’s Bureau of Economic Analysis (BEA) updated its GDP by industry data. The chief finding for law-watchers is that in 2013 the legal services industry shrank by 2.9 percent. Ouch. The legal services industry includes all private law firms, and it employs about half of all lawyers. Meanwhile GDP grew by 2.2 percent, meaning that once again, the shriveling legal sector is being outdone by the rest of the economy.

Percent Change Real Value Added by Industry

(Source: GDP by Industry (xls), author’s calculations)

I’m providing moving averages to illustrate the break between the legal sector and GDP that began in 2005. That’s not to say things were hunky-dory before, just that those data still haven’t been revised yet. Go ahead, look at the old data and show me the situation was better before 1997. I dare you.

To editorialize, yes, the annual updates are horse-race reporting and recent years get revised a little bit each time, but I’m not enjoying reporting on the contracting legal sector nonetheless. I’m genuinely surprised that it’s still doing so badly, and I thought the Great Law Depression would’ve leveled out by now. Maybe future years and revisions will bear that out, but it’d take a sustained period of significant growth for the outlook to improve. Even a single year of 2.9 percent growth wouldn’t persuade me things are getting better, but even a piddly 0.4 percent would be nice to see.

To make things worse, when drilling into the real value added components, “compensation of employees” has been consistently contributing to the decline.

Contributions to Legal Services Real Value Added

(Source: GDP by Industry (xls), author’s calculations)

Only “taxes on production and imports (less subsidies)” has been growing consistently in the last three years.

The legal sector’s productivity measures are similarly unrelentingly bleak. Real value added per person engaged in production has fallen by about $20,000 since 1997 while the same measure has grown steadily throughout the economy and for the legal industry’s sibling in the “Professional, Scientific, and Technical Services” category, “Computer Systems Design and Related Services.”

Real Value Added Per Person Engaged in Production

(Source: Real Value Added by Industry, NIPA Table 6.8, author’s calculations)

If things keep going at this rate, the average legal services worker will be indistinguishable from the average worker overall. I guess it’s a good thing that the mean average worker isn’t anything like the median? It’s clear, though, that computer design is a much better candidate for “golden-ticket industry” than legal services.

Finally, we have the Bureau of Labor Statistics’ output per hour measure of labor productivity, which is a bit sharper than the real value added per person engaged in production estimated above.

Percent Change Output Per Hour

(Source: BLS Nonmanufacturing Multifactor Productivity Tables)

Here too, the long dashed moving average line (legal services) is comfortably below the thick line (nonfarm business), showing that the legal sector is not becoming more productive with the rest of the economy. More alarmingly, it’s lost about 8 percent of its productivity since 2007, and now the amount of private legal services the country is getting per hour worked is about what it was in 1988.

In conclusion, the data again depict a sputtering industry. For all the reporting on the declining supply of future law graduates, little is said about the long-term trends in the sector that’s most likely to drive demand for their services. Increasingly it appears to be dwindling while at the same time better opportunities for workers are forming in other sectors.

How the Transparency Movement Reinflated the Law School Bubble

Of course I’m click-baiting you! But in place of the vicious criticism you were expecting, you shall receive bitter irony instead. Frankly, I think you’re coming out ahead, so be thankful, you ingrate!

So why did I flag you down?

It appears the Bureau of Labor Statistics is changing its employment projections methodology, specifically its measure of how many workers will be replaced in occupations in its 10-year projection periods—as opposed to the number of positions that the economy will create. Apparently this is a project the BLS has been engaged in for a while, and the comment period is over, so why I didn’t know about it before now escapes and saddens me.

The BLS’s employment projections have long been a go-to source for law school critics. The ~24,000 projected annual lawyer job growth rates they showed every two years contrasted excellently with the ~40,000 law graduates each year (and the even greater number of bar admits). No longer.

Background: Developed in the early 1990s, the BLS’s occupational replacement methodology uses a simple age cohort analysis. For instance if there are fewer employed lawyers in the 55-59 cohort today than there were in the 50-54 cohort five years ago, then you have a rough number of how many people in that age group left the occupation. Do that for all the adjacent cohorts and add together all the negative net changes, and you have the replacement rate. The math behind it is a little bit more complicated and there are some exceptions, like if the occupation is projected to decline overall, but that’s the basic concept.

But the BLS isn’t satisfied with this methodology any more. It suffers from sample bias for occupations with small numbers, and it leans on the assumption that it’s mostly young workers who replace older ones. The bureau is interested in finding the “actual” replacement rate, i.e. one that includes workers transferring to other occupations or leaving the workforce altogether who are concurrently replaced, not just retirees, whom the current methodology tends to capture. This way the projections will include everyone who switches jobs, e.g. fast-food workers for retailer clerks and vice versa, when such changes would otherwise net out under the current methodology. The new methodology is based on Current Population Survey data and regression analysis (which always turns out well) rather than historical trends.

As evidence that the new methodology achieves its purpose of finding more replaced workers where the current one does not, the BLS points to … lawyers because there are external data on employment rates. I’m totally not kidding. It writes (and I editorialize in brackets):

Not all law school graduates become lawyers, but the American Bar Association (ABA) conducts a census of employment outcomes for all law school graduates in order to count the number who find employment in positions that require bar passage (effectively, lawyers). Since ABA began collecting this data in 2011 [Not correct, see below], the number of graduates finding employment in such positions has averaged 29,000 per year. Because some graduates who don’t immediately find such positions may become lawyers later in their career (for example, many graduate become law clerks, a position that does not require bar passage, for a few years before becoming lawyers) [Citation please?], this number [the 29,000 graduates—it's unclear] should be less than the total number of new entrants into the occupation.

Under the current method, BLS projects an average of 19,650 job openings per year, while the new method projects 41,460 openings per year [!!!!]. Again, no direct comparison between the ABA number and the BLS numbers is possible due to conceptual differences [which, of course, does not rule out indirect comparisons], but the results under the current method are significantly below the actual number of new graduates finding work in the occupation [!]. The new method projects a higher number of openings, which allows for additional entrants not immediately after completion of a law degree.

Okay, data on law graduate unemployment has actually been around for many years, e.g. the NALP and the Official Guide, crude though it was. I’ve written about the strong correlation between falling proportions of graduates finding bar-passage-required jobs and graduates taking JD-advantage jobs or not finding any work. This is evidence of a saturated lawyer market, even if it’s caused in part by slack aggregate demand.

Percent Employed by Status (NALP)

The BLS could also look at lawyer-licensing rates courtesy of the National Conference of Bar Examiners, which it probably should be doing instead of law graduates. So when the BLS says the data are only now available, it’s not doing its homework.

However, the irony—and this is really incredible—is that all those demands for transparency in the employment data, after accusations of misrepresentation and deceit, have perversely led the government to (indirectly) compare the number of graduates in bar-passage-required jobs to its current estimates and use it as evidence that those graduates must be finding bar-passage-required jobs long after graduation.

As arguments from incredulity go, this is a pretty good one. As usual, there are other fallacies.

For one, the BLS is assuming that all occupation changes are positive sum. Everyone who leaves law practice is making the best choice among alternatives (ultimately), so too does everyone who chooses to become lawyers. Thus, departing lawyers need to be replaced. The new methodology automatically rejects the possibility that new entrants force out existing ones and that if more people chose better alternative occupations to law, then fewer lawyers would exit, and everyone would benefit. (Except law professors.) Now, whenever someone leaves the law, there is by definition a shortage, a misallocation of human capital that can only be met by sending more people to law school.

…Especially in light of the eye-exploding 41,460 annual job growth rate, courtesy of the BLS’s new, inscrutable regression approach. It’s certain that some number of lawyers enter practice long after graduation, but assuming 29,000 grads get bar-passage-required jobs, that leaves another 12,500 lawyer jobs each year that must go to earlier graduates despite the swelling numbers of JD-advantaged, unemployed, and other grads who aren’t absorbed earlier.

This leads to an unbelievable replacement rate under the new methodology: If 834,700 projected lawyer jobs in 2022 less 759,800 lawyer positions in 2012 yields 74,900 jobs due to growth, then the cumulative replacement rate (74,900 – (41,460*10 years)) is 339,700 lawyer positions that will “need” replacement over the next decade. If the legal profession has been going through a 44 percent 10-year replacement, then there should never have been a backlog to begin with, and it’s something we should have heard about by now. By contrast the current model shows only a 16 percent 10-year replacement rate.

There’re a few other reasons why the methodology change isn’t a good idea, like aging lawyers, but this post isn’t about that. Rather, it’s a rebuke to everyone who crusaded for transparent employment data based on the rational, debt-guzzling law student assumption. Thanks to them the law schools will soon be saying that the graduate-to-annual-job ratio is (indirectly) in equilibrium right now. The demand for lawyers is there, they’ll say, just after an undetermined period of crippling malemployment … and at a time in their careers when no one is measuring it … except for those After the JD people who found that 24 percent of bar-passers weren’t practicing after 12 years.

Cheekiness aside, it’s likely the BLS (and state governments) will change their projections methodologies accordingly despite law being an unrepresentative occupation with substantial early-career turnover. Be prepared for the dark age of lawyer employment projections.

States’ Projected Lawyer Surpluses Deteriorate for 2022

…Is up on The American Lawyer.

I’m proud to say that unlike last year, there is no “Mississippi problem,” in which the net lawyer growth rate in any state exceeded its ten-year annual job growth rate, yielding a negative replacement rate, sky high surplus calculations, and a lot of time spent explaining math to the media.

Yes Texas, Take the Scam-Tax Bait. I Dare You.

Or at least, Forbes dares you, but it’s ingested enough of its own product that it actually believes the hype. See “Texas Can Lead the Nation on Property Tax Reform.”

Its arguments for a single tax on sales boil down to:

  • Americans hate property taxes.

So? Americans also love greasy food. That doesn’t make it good. Let’s hear what the experts think.

  • Property taxes “distort the housing market by placing a wedge between buyers and sellers. They force housing prices up, pushing many low- and fixed-income residents out of the market. They create barriers to entry for large capital-intensive industries, reducing the number of high-paying jobs those companies employ.”

As opposed to sales, income, and other deadweight taxes that place wedges between buyers and sellers, push many low- and fixed-income residents out of markets, create barriers to entry for large capital-intensive industries, and reduce high-paying jobs?

As for pushing housing prices up, that’s a laugh. The supply of housing is fairly inelastic. Certainly the location component, but the physical, capital component is as well. Saying that taxing property is regressive is like saying that poor people pass their income taxes on to the rich, which is why corporate America struggles with low profits. Or, as Mason Gaffney wrote decades ago, “To own property is to be rich, in the measure that one owns, and to tax the quality of richness should not be presumed to burden the poor more than the rich.” (“The Property Tax Is a Progressive Tax” (pdf))

  • “Perhaps worst of all, the imposition of property taxes means that people will never truly own their home or business even after it’s paid in full. Property-tax payers live under a system that mandates regular “rent” payments to the government in perpetuity.”

Because confiscating people’s hard-earned incomes is far more just. Won’t someone please think of all those large landowning corporations?

More prosaically, without property taxes, the authors are arguing for feudalism or “royal libertarianism”—the political theory that monopoly power is morally just. In effect, they envision a state in which people receive more in government services thanks to unearned land rent than they pay in taxes.

  • Texans have seen their tax bills soar over the past two decades. According to the Texas Comptroller, property tax revenue exploded by 188 percent from 1992 to 2010, partially as a result of the proliferation of special purpose districts, increasing by 57 percent more than population growth and inflation over this period.

Distribution data please? I’d like to see a Lorenz curve on which percentile households are bearing the bulk of these property taxes. Given that rich people and corporations, which are owned by rich people, own the best real estate, I’m not too concerned that migrant workers are being robbed here. That’s not to say that there probably aren’t flaws in Texas’ property tax system, but this statement stinks of the kind of bait-and-switch rhetoric that regressive taxation advocates depend on.

  • Enter the property tax-sales tax swap. … [based on a study] by President Ronald Reagan’s chief economic advisor Dr. Arthur Laffer and his associates, that offers a sensible path forward.

It takes a brave wonk to use Laffer’s name for the truth of the matter asserted. Supposedly he said that only land taxes aren’t subject to his eponymous curve. In fact, he was last seen shilling Kansas’ failed (and foolishly reelected) experiment in expansionary tax cuts.

  • To achieve revenue neutrality, the study estimates that that the current 8.25 percent total sales tax rate, which includes the sum of state (6.25 percent) and local (max 2 percent) portions, could be modestly adjusted upwards to 11 percent and the base broadened to include property and all goods and services taxed in at least one other state.

Border-town tax evasion, ho!

But let’s also not forget the tried-and-true revenue mechanism for sales-tax paradises: building shopping malls. Dedicating land for housing just means hungry mouths that don’t spend money.

  • The Foundation’s research suggests that, if the tax swap were implemented in full, total personal income could increase by some $23 billion over a five-year period. In addition, the increased economic activity could lead to the creation of at least 200,000 jobs above what the status quo promises.

Notwithstanding that this is Arthur Laffer, who gets the $23 billion over five years?

  • Of course, critics will contend that a tax swap of this nature might disproportionately hurt those on the lower end of the socioeconomic spectrum because sales taxes are regressive.

Uh-huh.

  • But this claim is little more than a red herring. As noted by the Texas Comptroller’s 2013 report Tax Exemptions and Tax Incidence, all taxes in Texas are regressive.

Well that settles it.

  • Since property taxes are based on subjective property valuations determined by a county tax appraiser, there may be an incentive for the appraiser to raise the value to increase local revenues. Too often, these valuations are out of step with the true market value forcing people to lose their homes, struggle to pay bills, or keep people from purchasing their first house.

People are much, much, much more likely to lose their homes, struggle to pay their bills, or not purchase homes due to losses of jobs than property taxes.

Also, which is more transparent, the county tax assessor on a property’s value or the county burgher on his own income?

  • To be fair, a sales tax is not perfect. It distorts your decision to purchase goods and services.

Sales taxes also favor real estate speculators, but they’re job creators, right?

  • But it distorts the economy the least of any tax and, to a large extent, is a voluntary tax. You only pay a sales tax when you decide to purchase goods and services.

Bullshit. Land taxes, congestion taxes, and other taxes on things that are inelastic in supply are all less distortionary than sales taxes.

Sales taxes are only “voluntary” to the extent that one’s income isn’t dedicated to consumption for basic needs. If only those poor people were like the ant and not the grasshopper!

  • No American ought to suffer the slings and arrows of a punishing property tax system to pay for our government.

So on Fortune’s cap Arthur Laffer is not the very button? Nor the soles of her shoe?

To be clear, taxes on buildings are imperfect, assessments could be done more fairly, and endless layers of special assessment districts aren’t a hallmark of good governance, but to say that the solution is to give Texas’ wealthy landowners a break to gamble on land values makes this one of the dumbest ideas I’ve heard in a while. So go ahead, Texas, I dare you to adopt the scam-tax system. I’m sure Arthur Laffer will rescue you when you lose your shirt.

**********

On a positive note, congratulations to Aundré Bumgardner‘s election to the Connecticut House of Representatives. Bumgardner advocates property tax reform by shifting the burden onto land, not improvements—and certainly not sales.

The Legal Recessions That Weren’t

I don’t read The New Yorker regularly, but I’m of the demographic that does, so it pained me to read the first two sentences of its article, “The Legal One Percent.”

After every recession since the Second World War, the legal profession swiftly and robustly recovered. Not this time.

This is not what the data say. The legal sector (which isn’t the same as the legal profession, but given that the article goes on to cite profits-per-partner data I think that’s what The New Yorker means) has done terribly after recessions since the late 1970s. Although the BEA still hasn’t updated its industry data for the period between 1977 and 1997 per its comprehensive revision, the older data show the overall stagnation.

Legal Sector Real Value Added

It took five years for the legal sector to recover to its 1979 high, and then eight years to get back to where it was in 1990. This is supported by data on household consumption expenditures on legal services, as well as the Labor Department’s measure of employees in legal services.

Household Consumption of Legal Services

Per capita spending on legal services probably peaked in 1990, and it’s probably fallen to its 1960s’ level.

The legal sector and the legal profession have been ailing for quite a while. It’s surprising that their stagnation is still misreported.

Good News: The Student Loan Bubble* Has Been Canceled

(* Not to be confused with the student loan crisis being canceled. That was so~ last June.)

The other good news on this election day is that whenever Reuters says it’s conducted an “analysis,” you’re excused from taking it seriously. In “U.S. student debt burden falling more on top earners, easing bubble fears,” the news agency boldly tells us:

[T]he analysis of the Federal Reserve’s Survey of Consumer Finances [SCF], a triennial survey published in September with 2013 data, makes it clear that heavy borrowing is usually rewarded with big salaries.

Clear, eh? The article’s only real evidence that student loan debt leads to higher incomes is the word of higher ed cheerleader Sandy Baum, so that’s just an argument from authority.

The increased concentration of debt among the well-paid should ease concerns that the surge in debt is a wider economic threat.

This is a normative statement that doesn’t cite anyone who says that student debt is a “wider economic threat,” much less what that means. It’s also misleading to say that the debt is increasingly concentrated among the well paid. Although the article states that “over the past two decades the young with higher incomes have gone from owing less of the debt than the average household to owing considerably more,” over the past decade things aren’t really that different. The proportion of young households (those headed by someone between the ages of 20 and 40) earning more than $60,000 doesn’t hold any more of their age group’s student loan debt than before.

Reuters could have found that out by discussing the Fed’s write-up of its own findings. The word for this is “reporting.” Behold, Box 10 on page 27 of the Fed’s “Changes in U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances” (pdf).

Young Families' Education Debt by Income Group (SCF)

Notice that in 2013 more than twenty percent of student debt held by young households fell into the less-than-$30,000 bracket, about twice as much as twelve years earlier. This doesn’t ease my concerns that the surge in debt is a wider economic threat, but if Reuters doesn’t have to define that, I don’t have to either. Nevertheless, you can imagine why I think it’s probably not a good thing that a growing slice of an expanding debt pie is falling on people with less than $30,000 in income.

And for those of you who think I overindulge on MS Excel graphs, gaze upon the Fed’s “SCF Chartbook,” and weep for your wretched souls while scrolling through all 1,260 browser-crashing charts therein (pdf—if you dare: Education installment loans are from pages 1083-1118).

Here are two that are relevant to Reuters‘ general argument that student loan debt isn’t a problem because most of it is held by high-income households:

Percent of Families With Education Installment Loans (SCF)

Median Value of Education Installment Loans (SCF)

These aren’t young households—you can find them on pages 1089 and 1090—but I think these charts make it clear (in the way that quoting Sandy Baum does not) that student debt is a problem for low-income households: A fraction of the student loan mountain can still be an unscalable crag.

For example, the median household in the 20th income percentile (from page 7) has made about $11,000-$13,000 over the last twenty-five years, but the percentage of such households holding student loan debt has doubled while their median debt has nearly tripled. The median middle-income household (40th to 59.9th percentiles) made less than $47,000 in 1989 and 2013. (Ouch.) That household in that income bracket saw its student loans grow by more than $10,000, and the percentage of student-debt-holding middle-incomes households nearly tripled. I don’t know what the income numbers are when you exclude non-student-loan debtor-households, but it’s unlikely to be much higher.

Back to our young earners, in 1989 17.1 percent of households headed by people under 35 had a median $5,400 in student loan debt. In 2013, the median balance for 41.7 percent of those households owed $17,200. Their median incomes have declined (page 10).

Undaunted, the article throws out just about every other argument for student loan debt that I’ve seen: the college premium, the economists who believe the supply of college graduates isn’t keeping up with demand for high tech jobs, and the claim that amputating graduate borrowing from the total makes the problem “almost” go away. Ooh, those irresponsible grad students! The only things Reuters didn’t do was find someone to tell us that all we need to do is “fix” IBR or that it’s all the for-profits’ fault.

Although the article finds the column inches for the high student loan delinquency rate, it neglects to cite the Education Department’s Federal Student Loan Portfolio (portfolio by loan status) data showing that barely half of the $1.1 trillion of federal student loan debt is in active repayment while 17 percent is categorized as in-school or in grace period. As the Fed’s report says of debts in deferments due to tough economic times, “[T]hese debts will eventually have to be repaid.”

Right. Just don’t tell that to last June’s student debt crisis slayer, Beth Akers, whom Reuters quotes:

“Debt is a tool. If anything, I’d want to encourage lower income people to take more advantage of it.”

Yeah, and look where it’s getting them.

Too Bad TJSL’s Grads Can’t Get a 2/3ds Write-Off

Oh, I’m sorry, “restructuring.”

That’s all that really needs to be said about Thomas Jefferson School of Law’s “Restructuring Support Agreement” with 90 percent of its bondholders. I’ve refrained from editorializing on the most of troubled law schools, but an $87 million write-off for its Xanadu-esque building sounds high. I suppose it beats a chapter 7 corporate dissolution; there is still plenty of unsubsidized Stafford loan margin to be captured, after all.

TJSL’s students on the other hand at least get PAYE, which they’ll need because last year they left with an average disbursed debt of $180,665. In order to avoid loan cancellation, even without accrued interest, graduates would need to make $182,000 from their very first repayment. After that, it’s twenty years until the government forgives their balances and sends them a tax bill for it.

But I’m sure employers are committed to ensuring that TJSL grads receive more than triple median household income the day they walk through the door.

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