Why the Stagnant Labor Productivity in the Legal Sector?

In my last Am Law Daily article, I discovered that contrary to all expectations, the quantity of private legal services provided per hour worked has stagnated for more than two decades. I think this is one of the most important insights I’ve come across, and I think the macroeconomic data on the legal sector is greatly undervalued in commentary on the future of law and law school. The lack of productivity increases certainly deserves a bit more discussion than I gave it in the article.

Legal Sector Labor Productivity

(Sources: BLS multifactor productivity tables, BEA, author’s calculations)

So, were lawyers (okay, legal sector workers, but I may use the term interchangeably) more efficient when they used paper reporters than LexisNexis?

Unlikely. I think there are other things going on here.

One, (private) legal services aren’t homogeneous outputs. An hour spent on a criminal defense matter isn’t the same as an hour spent on a landlord-tenant dispute or a corporate merger. It’s possible that many lawyers (and firms) have become more productive over the years, but the composition of the average hour of legal services Americans are buying has changed.

All this observation does, though, is raise the question of how the average hour has changed, and there isn’t much direct evidence on the subject. There are some indirect data. For example, American Bar Foundation (PDF) statistics show that since 1980, large firms have crowded-out smaller ones, though curiously solo practitioners are about as abundant as they ever were.

Percent Private Practice Lawyers by Firm Size

In 1980, only 7 percent of all private practice lawyers worked in a firm larger than 50 lawyers; in 2005, 20 percent did. But this doesn’t show much because in most circumstances we expect larger firms to be more efficient than smaller ones, so they’d cost less per client. On the other hand, Bill Henderson tells us that the employment composition of biglaw has changed since the 1980s as well, which I think can support the idea that the average hour of legal services has changed.

We also know that in general legal services have become more expensive over the years, even as the number of employed lawyers has grown. Legal services cost twice as much on average in 2011 as they did in 1985 in real terms.

Real Legal Sector Price Index

(Source: BEA, author’s calculations)

So how do you square the circle of more lawyers yet costlier legal services? In two ways: First, you can argue that demand for legal services is wealth and income elastic, i.e. the more money one has, the more they like spending it on lawyers and they buy different kinds of legal services too. And wouldn’t you know it, just this morning The National Law Journal reported that $1,000 per hour billable rates for “in-demand partners at the most prestigious firms” aren’t rare anymore. Second, you can argue that as Americans’ incomes and wealth decline, they’re unable to purchase the legal services that they used to, and the lawyers who formerly served them either move to a higher-priced market or go out of business.

The only alternative you’re left with is that there’s an attorney shortage, and all those “excess” law school graduates are really just lazy, greedy, entitled, and unwilling to make the tough sacrifices like abandoning their current lives and moving to rural America to serve the poor. However, this argument requires throwing out rational behavior assumptions and leads us to wonder why the supposedly efficient large firms won’t serve the poor if the greedy grads will not. The “market failure” line is ever wanting for an explanation.

If the composition of the average hour of legal services hasn’t changed, then the only way I can think of where we get the same (or less) output for the same effort despite technological advances and rising prices is by systemic fraud and cartelized behavior on a spectacular scale. Lawyers lie in lockstep about the cost of their services. Then they work fewer hours a week and take Fridays off. New lawyers attempting to enter the market, work more, and charge lower prices face threats and sabotage.

I’m sure plenty of people believe the above is true, but there’s scant evidence of it.

********************

So we have stagnant legal sector labor productivity. I think it reflects wealth concentration rather than fraud.

Incidentally, clever observers might wonder how much it matters. Maybe increases in overall labor productivity have a long way to go to catch up to the legal sector’s, an observation that didn’t make the cut in my Am Law Daily piece. Indeed, most productivity gains over the last few decades have not gone to workers. Here’s a different measure, output per worker (instead of per hour, which is more precise).

Real Value Added Per Person Engaged in Production

(Source: BEA, author’s calculations)

By this measure, the legal sector has become 13.5 percent less productive between 2009 and 2011. This could mean that either all lawyers who didn’t lose their jobs in the Lesser Depression organized a work slowdown, or the Lesser Depression laid-off the most productive legal sector workers. In a variant of the latter, some practice areas might be more productive than others—especially those benefitting poorer clients and not the wealthy—and once poor people become destitute, an otherwise productive chunk of the legal sector goes out of business. Regardless, there may be significant deadweight workers in the legal sector.

What does this mean for the as-yet unmentioned prospective law student? As I wrote in the article, law will only consistently pay off for those who can serve the wealthy, at least in the short term. Also, as the largest purchaser of law graduates’ labor, the legal sector sets their wages. If legal sector productivity has stagnated while other sectors become more productive, there are probably better long-term opportunities than law.

A crucial independent variable here is how long the depression will last. Given the dismal December 2013 Establishment Survey figures (and the Obama administration’s shameful spinning of them), things are bad. Here’s the employment-population ratio for 16 to 54 year-olds and my projection of them based on the positive growth since September 2011.

Civilian Employment-Population Ratio (16-54)

(Source: BLS)

If the legal sector is sensitive to employment levels and wealth concentration, then it’s going to be a long while until law starts paying off consistently from the demand side. From the supply side, obviously, there are far fewer people going to law school, and I’m hopeful (yes!) that the median graduate in a few years will have less law school debt than in previous years. It’s also obvious that the trivial accounting identity holds true: The first person who doesn’t go to law school is the first not to be unemployed after graduating. The real questions are (a) whether the demand-side factors really are as bad as I think they are, and (b) whether some law schools’ reputations are so insubstantial that legal employers would rather hire an unemployed graduate from a better-regarded school.

But the Jobs Weren’t There to Begin With

There’s been a lot of coverage recently on this year’s contribution to the law school applicant nosedive that began in 2011. Even The New York Times has jumped aboard. None of the coverage says a whole lot you don’t already know, but there are moments when I think it’s inaccurate.

The drop in applications is widely viewed as directly linked to perceptions of the declining job market. Many of the reasons that law jobs are disappearing are similar to those for disruptions in other knowledge-based professions, namely the growth of the Internet. Research is faster and easier, requiring fewer lawyers, and is being outsourced to less expensive locales, including West Virginia and overseas.

In addition, legal forms are now available online and require training well below a lawyer’s to fill them out.

In recent years there has also been publicity about the debt load and declining job prospects for law graduates, especially of schools that do not generally provide employees to elite firms in major cities. [Emphasis LSTB]

Okay, we can argue over perceptions, but there’s a distinction between people not applying because the jobs are declining due to productivity and people not applying because the jobs were never there to begin with because of a flawed system. The article implies that all law schools, including those that “do not generally provide employees to elite firms in major cities,” lived in a golden age until only recently, and all their graduates were able to find work at least as solo practitioners hauling in “middle class” incomes until WebPleader 2.0 came along. Perhaps I’m exaggerating the Times‘ perspective, but I doubt this was ever true. More importantly, the Bureau of Labor Statistics doesn’t either.

Even though jobs for lawyers are expected to increase rapidly, competition for job openings should continue to be keen because of the large numbers graduating from law school each year. 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. Although graduates with superior academic records from well-regarded law schools will continue to enjoy good opportunities, most graduates will encounter competition for jobs. As in the past, some graduates may have to accept positions in areas outside their field of interest or for which they feel they are overqualified. They may have to enter jobs for which legal training is an asset but not normally a requirement. For example, banks, insurance firms, real estate companies, government agencies, and other organizations seek law graduates to fill many administrative, managerial, and business positions.

From last year’s Occupational Outlook Handbook? More like 1996-97’s. I don’t claim to read the minds of people who don’t apply to law school (there’s a koan for you), but the link to David Segal’s previous work notwithstanding, the Times appears to believe that no university frivolously expanded by building a law school. In short, it’s avoiding a discussion on the over-expansion of legal education generally by claiming applicants read about legal sector outsoucing on The Wall Street Journal rather than a scamblog or Above the Law.

Instead, “Some argue that the drop is an indictment of the legal training itself — a failure to keep up with the profession’s needs.” I don’t think anyone complained about the substance of legal education when it was cheap and Americans’ incomes were sufficient to afford legal services, so this strikes me as corporate opportunism. No one wants to pay to train their workers, and demanding law schools open expensive clinics to train tens of thousands of people for only thousands of jobs only places an impossible burden on the schools and shifts the training costs onto the students. Although the one-year and two-year specialist training discussed in the article are better than the existing system, supply still does not create demand.

The closest the Times goes to criticizing higher education expansionism is at the very end:

Whether or not such changes occur, for now the decline is creating what many see as a cultural shift.

By “cultural shift,” the Times refers to a statement that Bill Henderson makes about how law school is no longer the last refuge of the liberal arts major. Of course the Times doesn’t ponder why colleges sell degrees that don’t lead to relevant jobs. That’s just a “cultural” given. The fact that the government enthusiastically endorses mass higher education in the face of such poor outcomes doesn’t raise any eyebrows either.

For your edification, here’re the updates to the LSAC’s data over the last few weeks. We are now on week 4 of 2013.

No. Applicants Over App Cycle

No. Applications Over App Cycle

In short, there’s been no real change since I wrote on this three weeks ago.

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!)

WSJ Op-Ed Brings Shock Doctrine to Law Practice

The Wall Street Journal provides space for Brookings Institute fellows Clifford Winston and Robert W. Crandall to publish their op-ed titled, “Time to Deregulate the Practice of Law.” Fuller text available at TaxpProf Blog. The authors use a fictitious attorney shortage and failing legal education system to advance their legal profession deregulation agenda. I’ll limit myself to the second and third paragraphs, and underscore the claims to which I’ll respond.

Is there really an excess supply of lawyers? The Senate Judiciary Committee is investigating the subject while the New York Law School and the Thomas Cooley Law School in Michigan are being hit with class action suits claiming that they fraudulently inflated employment statistics to lure prospective students. But the solution proffered by many in the legal community—to put new limits on entry into the legal profession—is not the answer and will make the problem worse over the long term.

The reality is that many more people could offer various forms of legal services today at far lower prices if the ABA did not artificially restrict the number of lawyers through its accreditation of law schools—most states require individuals to graduate from such a school to take their bar exam—and by inducing states to bar legal services by non-lawyer-owned entities. It would be better to deregulate the provision of legal services. This would lower prices for clients and lead to more jobs.

1). Yes Winston and Crandall, there is an excess supply of lawyers. Winston and Crandall cite no evidence showing this is not the case, just that the ABA accredits law schools and that most licensing authorities grant its system a monopoly; therefore, there must be a shortage. Had they realized that demand for legal education and demand for legal services are entirely separate, they would know that the ABA-accredited law schools have been over-enrolled for decades. There are roughly 1.5 million working-age juris doctor holders in the U.S. and just over half of them were employed as attorneys or judges in 2008. Today, that number is likely lower. This is an important point because if there are more people who could practice than are doing so, the question is why the bottom hasn’t fallen out of the legal sector due to practitioner surplus. In other words, “The reality is that many more people could offer various forms of legal services today at far lower prices,” but they’re choosing not to. Answering why this is the case requires a more nuanced approach than simply calling for deregulation.

2). Almost no one in the legal profession argues for enacting new limits on entry into the profession. I can only think of three people who’ve contemplated artificially limiting the number of lawyers via the law schools. The first is Mark Greenbaum, who suggested in his LA Times editorial that the ABA shut down “unneeded law schools.” To which ABA president Carolyn Lamm shot back that artificial limits would risk “antitrust concerns.” The second is Stephen Bainbridge, who argued for unilaterally shutting down one thirdrevised upward to one half—of the law schools. The third was Bill Henderson’s prediction in the January New York Times article by David Segal, that a public authority will intervene and shut down “a bunch of lower-tier law schools.” Bainbridge conditioned his solution on the existing entry barriers such as law schools and bar exams; Henderson has said elsewhere that he favors deregulation of some legal services. Thus, Winston and Crandall’s “many in the legal community” offering artificial shortages as a solution to the juris doctor surplus are essentially nonexistent.

3). The ABA does not “artificially restrict the number of lawyers through its accreditation of law schools.” First of all, the ABA doesn’t even place informal limits on how many people enter its law schools (such as minimum LSAT requirements and required undergraduate course streams), and no one accuses the ABA of stingily granting accreditation. Second, as fun as it is to bash the ABA Section of Legal Education, it doesn’t create lawyer licensing requirements but merely executes its mandate from the Department of Education that law school curricula be uniform nationally in schools choosing to participate in its system. Whether we like the substance of its regulations is a separate matter (we don’t). State bar authorities can allow other avenues to legal practice, and some do, such as California, where law licenses can be purchased relatively cheaply if not quickly. States can walk away from the ABA whenever they want to, which leads Winston and Crandall to their laughable accusation that the ABA “induces states to bar legal services by non-lawyer-owned entities,”as though the ABA has Nosferatu-like powers over bar authorities and state legislators.

4). Deregulation might lower prices but it won’t create jobs. Let’s begin with the questions, “Are legal services too expensive? And if so, why?” We know legal services are a free market and there is no shortage of lawyers. Buyers can shop around and demand discounts. We also know that legal services have become more expensive relative to inflation. Behold:

So the cost of legal services has nearly tripled since 1986 while the CPI hasn’t even doubled, and though the gap between them grew more in the last decade than in the preceding 13 years, it’s starting to narrow, especially in 2011. What caused this increase? It could be regulatory fees like malpractice insurance and CLEs, or legal publishers are gouging law firms, or large law firms may be overcharging their clients with excessive billable rates (the recent revelation of profits-per-partner juking by law firms fighting over their rankings comes to mind). As every legal education reformer worth listening to knows, the entry costs to legal practice are borne by lawyers and taxpayers. Lawyers who include their entry costs/debt as overhead will be outcompeted by those who paid less personally. Your law school debt isn’t your clients’ problem any more than your choice to rent an oversized office or buy a gas-guzzling car is. Lawyers can try to sneak these costs past clients, pad bills, perform and charge for unnecessary tasks, but someone who went to a state school and took on less debt or lived a frugal lifestyle will outcompete the zombie debtor lawyer. In Winston and Crandall’s world, buyers can’t shop around or demand discounts because the sellers operate a cartel that bribes lawmakers into passing laws that invalidate self-drafted wills and criminalize pro se litigants. Yet they provide no evidence of law firm price fixing, which would be illegal nonetheless, and all evidence indicates there’s an excess supply of legal training, not a deficit.

To the authors’ credit, I’m sure a majority of attorneys would like cheaper or non-mandatory malpractice insurance, doing away with trust accounts, and elimination of CLE requirements, and since these costs are borne by all lawyers, they do raise prices. However, they have nothing to do with the legal education system. If Winston and Crandall limited their argument to these regulatory hurdles, they would be technically accurate, unless we thought these regulations prevent client abuse that licensing and unauthorized practice of law rules are meant to prevent.

As it is, the Legal Sector CPI increase can only price consumers out of the market if legal services has a unimodal cost system and that consumers purchase the same types of legal services in the same quantities. Clients can opt against hiring large law firms that exclusively hire Ivy League graduates if they think they’re overpriced. And guess what, they are doing exactly that as indicated by the declining gap between the CPI and Legal Sector CPI.

None of this is to say I’m against deregulating law practice (more like specializing?), but legal education reform won’t provide the kind of savings Winston and Crandall believe it will because the markets are unrelated. I certainly don’t think deregulation will result in net job growth because demand for legal services depends more on the real economy and personal incomes than on an attorney’s CLE fees.

Now you may be thinking, “Why LSTB, if you think restructuring the profession is a good idea, why are you arguing against Winston and Crandall?” Two reasons, dear reader: their opportunism and contempt towards their readers. Winston and Crandall are playing a trick on their readers (to say nothing of the Wall Street Journal’s editorial staff) to advance their agenda. They’re arguing:

Look! Everyone’s attacking the legal education system; ungrateful graduates are even—*gasp!*—SUING THEIR LAW SCHOOLS! even though they’ll all have jobs in the future because the ABA uses powers it doesn’t have to maintain an attorney shortage that doesn’t exist. Therefore, to reduce the cost of legal services, we need to wipe out the ABA system (even though it has little to do with the increase in the cost of legal services, and isn’t even a licensing authority) because we hate regulation.

They are not arguing:

The ABA system is costly to students and taxpayers; law school takes too long, there are way more than the economy needs, they don’t create practice-ready lawyers as its 19th century progenitors promised, and oh my God, have you seen how much debt these students are taking on?? They’re never going to pay that down. Law schools are taking taxpayers for a ride. Therefore, we need to wipe out the ABA system.

Because it doesn’t further their goal of having non-lawyers at life insurance companies drafting wills. Instead, they both deny law school over-enrollment and use a besieged legal academy and the plight of student debtors to their advantage, none of which I can condone.

Indiana Tech’s Proponents Continue to Make Fools of Themselves, Amuse Critics

The Master's "Client Incarnation" CLE is always well attended.

The Fort Wayne Journal Gazette decided to update us on my new least-favorite new law school (Wilkes-Barre, I miss you!), Indiana Tech School of Law. Readers will recall I dipped into the topic after J-Dog did simply because the university’s reasons for establishing another law school were too absurdly self-serving to pass up, particularly in this line:

However, absent dramatic change in the way law is currently practiced and given the dynamics of the national demand for legal education, the United States may need to import foreign lawyers or increase the outsourcing of legal work to foreign lawyers in their home countries to meet this country’s projected demand for legal services. (Page 9, pdf page 17, emphasis LSTB)

After one month that line still makes me both laugh and shake my head in embarrassment for those who published it.

This month, Devon Haynie sets up the pins yet lacks the will to knock ‘em down. As you can imagine, I felt his article is too neutral rather than unbiased, particularly the heading titled, “Backed by research,” which contained this nugget:

The [feasibility study] also concluded that Indiana had few lawyers compared with other states, which could put the state at an economic development disadvantage. Many Hoosier college graduates would like to go to law school in-state, the report argued, but can’t get into Indiana’s other law schools. As a result, the report found, many Hoosier students attend law schools out of state, never to return.

Last time I checked, demand for lawyers is based on supply and demand for legal services. Unless Indiana tries to limit the practice of law to only those who have degrees from Indiana law schools, the state can easily import lawyers from other states. Neutral indeed. The real “research” that backed this move:

[Indiana Tech President Arthur] Snyder ultimately made the recommendation to move forward with the law school, he said the decision was a result of months of discussion among the board of trustees’ executive committee about how to broaden the school’s academic offerings and strengthen its reputation.

Why are broader academic offerings and a stronger reputation necessary? No answers. Fortunately, after carefully considering all the arguments thrown at them, President Snyder and Chairman Robert Wagner developed strong rebuttals:

The economy may look bleak today, they say, but that won’t last forever. And not every graduate will be clamoring for the kind of legal jobs that are in short supply today. Increasingly, Wagner notes, law school graduates are taking jobs in business and other fields where law degrees are considered an asset.

The Bottleneck Argument and the Versatile JD? That’s all they could come up with? No LSTB, they do try harder:

The school, Snyder said, will pair students with attorney mentors, place them in internships at local law firms, and draw on other local resources to ensure students are prepared to practice as attorneys immediately after graduation.

This is a non sequitur. Practice-ready attorneys are nice, but no amount of training wills clients into being. Stagnant demand for legal services is the issue.

Once Snyder appoints a dean, which he hopes to do by September, he said he will have a better idea of how the school will distinguish itself. For now, he plans for the school to concentrate on leadership, with a chance for students to earn a dual degree in law and organizational leadership.

Organizational Leadership? This is new to me, but here’s a link to Indiana Tech’s undergraduate OL degree. It’s a business degree with added courses like “Employee Development,” and, “Managing Organizational Change.” Interesting stuff but it still doesn’t create jobs. Bill Henderson comments:

“I don’t think it’s fair to heap scorn on the people starting this thing at Indiana Tech,” he said. “It creates problems for the legal profession when you have too many law schools cranking out lawyers – that’s something we’re going to have to deal with. But there’s room for improvement in legal education … It is possible to create a really terrific law school that does a better job than others.”

Yet this is not what Indiana Tech’s proponents argue. The university isn’t claiming that it’s trying to butt-out other law schools at a shrinking trough; rather, it’s claiming the trough is big enough for everyone, or that it will be when the economy recovers, or that demand for legal services doesn’t affect national lawyer mobility, or that we’ll need to import foreign lawyers in the coming decades, or that it doesn’t matter because Indiana Tech’s specialized professional degree is a Swiss army knife, and that the university needs to expand its graduate school and gain prestige without any explanation. Such is the extent of Indiana Tech’s overreach. I would not heap such scorn on Arthur Snyder’s plan if he argued that Indiana Tech was going to employ a superior curriculum to crowd out the Notre Dame 2Ls in OCI. He would be reckless and unprincipled if he planned that, given how legal education works, but we could not call him absurdly unrealistic.

However, there is no superior curriculum. No new law school can crowd out Notre Dame, law schools cannot create demand for legal services no matter what supplemental knowledge graduates receive, and no one can create financial aid ex nihilo. Consequently, it is very fair to heap scorn on Indiana Tech.

"Financial Aid ex nihilo," another of the Master's popular lectures

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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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.

No Bubble, Just ROCK!!! Vol. 5

I’m dashing off to Wisconsin later this week, so I’ll miss the first-of-its-kind panel discussion b’ween deans Ackerman (Wayne State) and Closius (Baltimore), professors Henderson (Indiana-Bloomington) and Tamanaha (Wash U), and Third Tier Reality’s Nando. Moderation provided by All Education Matter’s Cryn Johannsen. If you’re interested in legal education all five of the participants have contributed to the issue.

I’ve also found a ringer to cover for me with some guest posts while I’m out.

So, here’s some of Wisconsin’s contributions to American culture:

Boris the Sprinkler (they’re from Green Bay, not Green Day!)

Pale Young Gentlemen, a Madison band led by folks a grad school classmate grew up with (and who allegedly opened for the Clientele, which neither of us believed)

Finally, the Milwaukee-based Charles Walker Band, with a guitarist I grew up with (on the left)

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