Month: December 2012

Seton Hall Abandons the ‘Law Is Not for Everyone’ Line

I’m back from my break, and thankfully there was very little law school-related news for me to opine on. The only nugget that deserves a quick post before I get back into gear is Seton Hall’s decision to reduce its tuition for median-LSAT/cum laude-GPA applicants for one year. Third Tier Reality gives the gist of it, but I’ll add that the school’s decision reminds me of Amir Efrati’s 2007 WSJ piece on law schools and the legal sector that interviews Seton Hall’s lawyer of the century, Scott Bullock, d/b/a L4L of the seminal scamblog Big Debt, Small Law.

In the article, Bullock characterized his six-figure Seton Hall JD as a “waste,” which is about as charitable as he ever was. By contrast, the law school’s associate dean condescended “Unfortunately, some find the practice of law is not for them. However, it is our experience that a legal education is a tremendous asset for a variety of professional paths.” The law-is-not-for-everyone mantra surfaced again from a different Seton Hall administrator in a 2010 article in The Star-Ledger.

Now, the law school is promoting its one-year-only tuition reduction program:

“The legal industry is undergoing substantial change,” said Patrick E. Hobbs, Law School Dean, “and for those who choose law, we have a duty to respond in a meaningful way – making legal education more practice oriented and employment focused as well as more affordable. Our Legal Practice Curriculum, numerous clinics, pro bono programs and comprehensive intern and externship programs address the first concerns; this tuition cut will help to answer the next, making Seton Hall Law School more affordable for those who wish to attend.”

Apparently, when criticized about high tuition and poor outcomes, simply shifting the blame onto the students for going to law school for the “wrong reasons” that the law school was powerless to filter for no longer works. Instead, law schools now have a “duty to meaningfully respond to the substantial change the legal industry is undergoing.”

This is the difference five years makes.

How to Misinterpret Data, Grasshopper

I’m on break right now, but I took a peek at the ABA’s “Lawyer Demographics Table” document (PDF), and figured I’d illustrate this for you:

The Amazing, Aging Profession

If you look at this and say, “I know, I’ll wait until I’m in my 50s to go to law school, then I’ll be more likely to get a biglaw job at graduation!” then you have failed to grasp Ti Kwan Leep. Approach that you might see…

In 2005, four percent of all lawyers were under 30, one-third of what it was 25 years earlier. I wouldn’t be surprised if it were higher now after the Great Law Depression began—just by the sheer number of layoffs and closures—but the trend is incontrovertible. The vast majority of law grads are in their 20s, and their number has grown in recent years, yet young lawyers hold a diminishing share of the lawyer-job pie. An aging profession that fails to replenish itself means today’s law students are in no way getting the same deal that their elders did in past decades. Any time-series comparisons based on currently employed lawyers are, therefore, fallacious. Past performance is not an indicator of future success, and past success is no longer an indicator of future performance.

Okay, fine, here’s the damn song.

Quick Digression on Japan’s Upcoming Election

Readers may know that Japan has been my second home in adulthood. It’s holding a general election on Sunday, December 16, which affords me a reasonable excuse to editorialize away from anything education-related.

After running on a platform of fighting consumption tax increases, the Democratic Party of Japan turned around and voted to double the consumption tax to 10 percent by 2015, causing a party split. Of course a consumption tax is a terrible idea and will slow consumer spending.

Japan’s problem is still deflation. Really bad deflation. Not in consumer prices but in the GDP deflator, which I get from the IMF and FRED to extend it from 1991 to now.Japan Deflation (1991=100)

Japan Price Indexes (Year-on-Year Change)

I’m not the first person to notice this (it’d really scary if I were), but starting from when Japan’s infamous real estate bubble popped in 1991 until 2010, its prices dropped nearly 13 percent even though consumer prices rose 2.3 percent. I can’t say whether Japan’s CPI is calculated identically to the U.S.’s, but as Lars Christensen notes, governments gingerly bake consumption tax increases into their CPIs. The CPI also excludes real estate prices, using instead rental equivalence, and it includes imports’ prices (especially energy in Japan’s case). Land prices are included in the deflator, so as the cost of land drops you see general deflation. Why shelter or rent prices don’t detect this I can’t say, but a baby bust bakes in more deflation expectations because buying land is perceived as a losing bet in the long run, particularly in rural areas.

The consumption tax hike means the deflation will continue, unless the Liberal Democratic Party makes good on its threats to ensure that the Bank of Japan targets a higher inflation rate. As you can see, though, even a two percent target is much too low.

Possible Recovery in the Legal Sector Still Not a Reason to Go to Law School

Philip Schrag writes:

The asserted combination of very high debt repayment obligations and, for most law graduates, salaries that are far below those offered by large corporate law firms, are at the heart of Tamanaha’s warning that “law school is not a secure path to financial security.” The future of the employment market for lawyers is, of course, cloudy, though many experts think that the prospects for the Class of 2011 represented the bottom of the curve and that there will be some recovery in the years to come.

It’s good news if experts are correct that the market is about to recover, but just how is the legal sector doing exactly? In fact, the Bureau of Economic Analysis revised its data on America’s National Income and Product Accounts in November, which is what I prefer over experts, who, honestly, I suspect are only interested in the bond market to large law firms. Not saying they’re wrong, but I trust government data to give the broad picture. Last year, I wrote about the budding recovery in demand for legal services in 2010. Turns out the BEA revised it negative. Very negative.

Real GDP & Legal Sector Value Added (Billions 2005 $)

And as I’ve argued for a while now, the legal sector has not kept up with the U.S. Economy.

Pct Change Real Legal Sector Value Added Minus Pct Change Real GDP

Maybe the BEA will revise 2011 upward next year?

The nagging question is how much of the Great Law Depression is cyclical and how much structural? To the extent it’s cyclical, a lot of people who’ve graduated from law school in recent years would have had jobs but don’t, and to the extent it’s structural, a lot of people never would have had lawyer jobs. Depending on how much the price level of legal services changed over this time period, here are a few projections:

Legal Sector Value Added Projections (Billions 2005 $)

The conservative estimate says it’s down $25 billion in output, but if the recession caused the rise in the legal sector deflator, then it should be 40 percent higher than it really is. Here’s what I mean.

Pct Change Legal Sector Price Index Minus Pct Change GDP Deflator

While it’s tempting to believe the price increases over the inflation rate over the decades is due to greedy lawyers (or student loan debt), it probably has more to do with income elasticity of demand for legal services. Put simply, people spend their last dollars on legal services, not their first. People who are too poor to buy land don’t need wills; people who don’t get married can’t afford a divorce; and people who get arrested and can’t afford a lawyer will use a public defender. Fabulously wealthy corporations, by contrast, can always waste money on lawyers, just not enough to employ everyone who has a JD. This is a minor theme of this blog: Those who want more affordable legal services for the poor are well advised to either pay for it out of their taxes or fight poverty directly. Forcing lawyers to do more pro bono work or shaming them into opening doomed practices simply will not work.

As for the total compensation of jobs in the legal sector, it’s not been very good either:

Pct Change Legal Sector Real Compensation of Employees Minus Percent Change GDP Real Compensation of Employees

Of course, this uses the GDP and legal sector deflators, so the comparison might be inaccurate because the purchasing power of employee compensation should be the same regardless of what sector the employee happens to be in. Just using the GDP deflator, here’s what it looks like going back to the Depression.

Pct Change Legal Sector Compensation of Employees Minus Pct Change U.S. Compensation of Employees

Pct Change Legal Sector Compensation of Employees Minus Pct Change U.S. Compensation of Employees (1988-)

(Table 6.2 A-D)

The legal sector’s total compensation pool has still not been positive in recent years, so I’m incredulous that grads with even higher debt levels will higher incomes than in the past.

Speaking of employment, the BEA tracks that too:

Legal Sector–Ppl Eng'd per 10k, FTE Emps per 10k

Legal Sector–Ppl Eng'd per 10k, FTE Emps per 10k (1998-)

(Table 6.4 A-D (Dip in 2000 due to Census data change))

According to the BEA, “persons engaged in industry” is the sum of full-time and part-time employees and self-employed workers, which indicates that the uptick in 2011 is exclusively in the self-employed. I’m not sure how reliable this estimate is, but it’s not a good sign for future law school graduates.

So, if the legal sector is set to rebound as the experts say, it has a very, very long way to go. It’s certainly not a persuasive reason for people to go to law school now at current prices.

Am Law Daily Article: ‘What Do the Terms Used in the ABA’ Graduate Employment Questionnaire Really Mean?’

What Do the Terms Used in the ABA’s Graduate Employment Questionnaire Really Mean?

Since I was thinking about the Chrysler Building last week, here’s the ultimate song dedicated to it (which, coincidentally, I noticed was not on the list of banned songs by Clear Channel Communications after the suicide hijackings at the time. My favorite: “Rage Against the Machine: All songs by Rage Against the Machine”).

*****

Dr. Krugman Visits Solaria

Paul Krugman, “Rise of the Robots

Nick Rowe, “Capital-biased technical change vs. low interest rates?Worthwhile Canadian Initiative.

Also, ozider, “Why Krugman isn’t quite right on Education & the Rise of Robots,” owenzidar.

Noting Economix‘s discussion of reshoring jobs and handing them to robots, Krugman concludes:

[T]he college premium hasn’t risen for a while. What has happened, on the other hand, is a notable shift in income away from labor:

If this is the wave of the future, it makes nonsense of just about all the conventional wisdom on reducing inequality. Better education won’t do much to reduce inequality if the big rewards simply go to those with the most assets.

Compensation Share of GDP

I think our eyes have been averted from the capital/labor dimension of inequality, for several reasons. It didn’t seem crucial back in the 1990s, and not enough people (me included!) have looked up to notice that things have changed. It has echoes of old-fashioned Marxism — which shouldn’t be a reason to ignore facts, but too often is. And it has really uncomfortable implications.

A few months ago, Krugman wrote the introduction to his favorite book series from his adolescence, Isaac Asimov’s Foundation, which is a centuries-long saga of a plan implemented by social scientists to ensure the restoration of a galactic empire after a 1000-year dark age. (So much for Asimov’s commitment to democracy.) It’s based on the fall of the Roman Empire, which in real life didn’t need psychohistorians so much as a better successor to Marcus Aurelius than his son Commodus, who was about as stable as L. Ron Hubbard.

Instead of the Foundation series, the more relevant Asimov book to this discussion is The Naked Sun, which takes place closer to our own times. In this era, humans have colonized other planets and use robots to do their labor, allowing Asimov to toy with his famous “Three Laws of Robotics” as well. The book’s plot is a murder mystery that takes place on the planet Solaria, which depicts robot labor taken to its logical conclusion. Solaria’s population is only 10,000, but everyone lives spaced out on vast robot-serviced latifundia. In fact, people rarely see one another.

What happens as we move towards a Solarian society? Turns out Henry George visited that planet long before Krugman.

[I]f laborsaving inventions went on until perfection was attained, and the necessity of labor in the production of wealth was entirely done away with, then everything that the earth could yield could be obtained without labor, and the margin of cultivation would be extended to zero. Wages would be nothing, and interest would be nothing, while rent would take everything. For the owners of the land, being enabled without labor to obtain all the wealth that could be procured from nature, there would be no use for either labor or capital, and no possible way in which either could compel any share of the wealth produced. And no matter how small population might be, if anybody but the landowners continued to exist, it would be at the whim or by the mercy of the landowners — they would be maintained either for the amusement of the landowners, or, as paupers, by their bounty. (Progress and Poverty, Book IV, Chapter 3)

What George is asking—and what Asimov didn’t as I recall the book from my adolescence—is, what happens if you are a non-landowner on Solaria?

Answer: You are a trespasser, and because your labor is worthless compared to a robot’s you always will be.

George is very bold here because he’s taking on the Luddite fallacy, which states that as productivity increases jobs will still be created, e.g. the robot manufacturers Apple will use require humans to design them. And those humans will need educations at technical colleges. I interpret ozider above as restating this argument. Okay, so what happens when we create robots to create the robots?

If you read Mason Gaffney’s study guide, (which is an excellent read in itself) he points out that J.S. Mill answers that as land becomes scarcer, land productivity increases, like those conurbations you see from the train in Yokohama. Still, given the decline of labor compensation as a share of GDP, it appears that capital substitution for labor is having an effect. Krugman says that this contributes to job polarization and education won’t help. I agree.

Where I disagree is his assertion that watered-down Marxism is the solution. Marx didn’t separate land from capital, so confiscating or taxing capital fosters contradictory results: less productivity in exchange for labor stability. It’s a false compromise. We can have progress without poverty—or as the terms have been recast today: productivity without polarization—by taxing the land rent and using it to fund government services and to provide a citizens dividend to the trespassers of Solaria.

Pessimists Protest at Cooper Union

Describe the political economy of money coming out of a hole in the ground.

This was a rhetorical point posed by a grad school professor when we were reading about petro-states. It also applies to the student protesters who’ve barricaded themselves in the top floor of NYC’s Cooper Union since Monday.

First, the students have a point. The college’s trustees have mismanaged its finances, and are about to charge the students for tuition at the historically free school. On that level I sympathize.

But only on that level.

I see two problems.

(1)  Higher education is not a “right” as one of the interviewed protesters claimed. There’s a strong claim that its benefits mainly accrue to the students. As such, they should be the ones paying for it.

(2)  The students aren’t protesting mismanagement of their tuition dollars; rather, they’re protesting the mismanagement of the free lunch Cooper Union gets from the people of New York without their consent.

As to (1), the only reason I can imagine the protesters coming to this conclusion is that they’re pessimists who believe that it’s impossible to create living wage jobs for non-college educated people. I’ve brought this up before: It’s endless education as the least-worst solution to job polarization. Allow everyone to go to college for free, and we’ll all found the next Twitter. Ignore the underemployed graduates and the inflated credentials.

People who say that higher education is a “right” would be ideologically consistent if they were advocating a kind of citizen’s dividend for young adults ala Thomas Paine in his lesser-known pamphlet Agrarian Justice. There, he argued for taxing land rents and giving the proceeds to young people as they got their start in life and to the elderly as a pension. It’s one of the earliest polemics for social insurance. Thus, until the protesters demand free money to young people who do not go to college (whether they start working or even join the military), I see this as incoherent anger at losing their unjustified subsidy at the hands of incompetent university officials.

Speaking of which, why has Cooper Union been free for students for so long? Because among other revenue sources, it owns the land under the Chrysler Building tax free. That means every time land values rise, Cooper Union gets a windfall from the building’s capitalist overlord tenants without creating anything new. Consequently, the protests are more a disagreement over how best to distribute money coming out of a hole in the ground (Okay, a building on the ground, same principle). It makes sense to side with the students since the money is supposed to be spent on their behalf, and they are short-term stakeholders who might be poor after the graduate, but you’re still engaging in a debate about who should spend money that should be taxed to fund services for the people of New York City. Cooper Union isn’t the worst party to subsidize, and the city might mismanage the added revenue if given the chance. However, it can’t be that much worse than the city and state charging a combined 8.875% sales tax that crushes commerce, discourages residential construction, and subsidizes needless saving and land ownership.

Those who want to ensure that the students at Cooper Union have real options for how to live their lives would be well-advised to protest these taxes, and advocate shifting taxes onto land values. We can start with Cooper Union’s plot under the Chrysler Building.

IBR We Hardly New Ye?

John Hechinger, “Student-Loan Collection Targeted for Overhaul by Congress,” Bloomberg.

Speaking of the problems with IBR:

The bill would also eliminate income-based programs that forgive loans entirely after 20 or 25 years — and, after 10 years, for those who enter public-service careers, such as teaching or law enforcement. The new system would apply only to new loans.

This is a component nestled in WI Representative Tom Petri’s proposed bill. This isn’t a criticism. The bill itself, as I understand it, incorporates IBRish principles into how it changes how student loan repayment works. Instead of cutting checks or direct deposits to ED, student debtors’ employers would simply withhold 15 percent of their paychecks. Supposedly it avoids debtors defaulting and dealing with debt collection companies that don’t tell them about IBR because it means they don’t get paid.

Nevertheless, there are aspects that might miss the point:

In another boon to borrowers, the plan would cap interest owed at 50 percent of a loan’s face value at the time of graduation, giving a break to lower-income borrowers who take longer than the standard 10 years to repay loans. For a student who took out $27,000 in loans, about the national average for a graduate of a four-year program who borrowed, the interest couldn’t exceed $13,500.

Of course, if the interest isn’t repayable, then there’s a good chance the loan shouldn’t’ve been made in the first place, i.e. a large opportunity cost. It also doesn’t necessarily ensure that people who borrow for higher education in fact become more productive and work in a position that needed more than a high school education (or a legal education). Finally, anyone who borrows too much in principal alone will never pay their debts off.

Along with facing private debt collectors, students may also be sued by the U.S. Justice Department, which hires private attorneys to pursue debtors who default on decades-old loans, Bloomberg News reported in July.

Hey law grads! Here’s a job for you: Hunt down your deadbeat classmates!

Like the debt ceiling bill from last year, student loans weigh heavier on legislators’ minds than the government wants to admit. It’s a revenue stream that the government doesn’t have to call a tax while simultaneously ignoring forgone living standards.

*****

In other news, a couple of important tidbits about yesterday’s post.

(1) The ABA’s median public non-resident tuition isn’t accurate. I think I noted that the first time I used the tuition chart with the annual Stafford Loan limits. Here’s what all this stuff is in current dollars.

Median Law School Tuition (Current $)

I have no idea why the ABA has gotten those numbers so blatantly wrong since 2008, but that’s what it is. Thankfully it’s precise for the other two series.

(2) It occurred to me late yesterday that pre-2005 law students may have had access to Parent PLUS loans, from which Grad PLUS loans were conceived. Indeed, since 1993, the limit on those was cost of attendance minus other aid, so there was a federally guaranteed option available to cover what Staffords could not. I also forgot to consider Perkins Loans, which are a whole ‘nother issue I know little about.

To rephrase the question I was asking, “If the student loan system were unchanged since 2005, would people still be able to finance law school today or would lenders be telling them ‘No.’?” The optimist in me says the former is correct: I don’t think parents would co-sign such huge unlimited loans, and I think private lenders wouldn’t cut loans that would be discharged shortly after graduation (unless they could sell it to some other chump MBS-style). As a result, tuition would have dropped. The key word I used deliberately was “conservatively” because the cynic in me suspects that law schools would’ve engaged in other shenanigans like pushing more people into cheaper part-time programs to squeeze more out of them and things like that. A lot to think about.

How Grad PLUS Loans Saved Law Schools

[Information in this post is supplemented here.]

Georgetown University Law Center professor Philip Schrag’s review of Failing Law Schools is not at all the gyokusai attack on the critics of legal education that Lawrence Mitchell’s op-ed was. I even suspended my contrarian urges long enough to agree with parts of it. You can read Brian Tamanaha’s response, along with LawProf’s. Theirs cover most of the issues, but there are a few remaining that I feel the need to go into.

I’m going to break this process into more than one post. Today’s is a quick counterfactual history of legal education without IBR, Grad PLUS Loans, and nondischargeable private student loans. The world as it was in 2004.

Why do this? Because Schrag believes IBR renders law school cost issues irrelevant (and if you think subsidizing it is unsound, well, we subsidize a lot of things). The bigger problem for Schrag is how we license lawyers, which I think Tamanaha acknowledged on pp. 176-77 of his book.

So what would’ve happened if the student lending laws went unchanged since 2004?

(1)  No Grad PLUS Loans means most private law school students would’ve had to rely on private loans.

(2)  Tuition increases and eroding values of Stafford Loan limits would’ve also necessitated private loans.

(3)  Dischargeable private loans means noticeable waves of law school debtors would’ve defaulted and/or filed bankruptcy due to their student loans.

(4)  Lenders would be more suspicious of legal education, leading to even more forceful demands for transparency on employment outcomes and higher interest rates.

(5)  Certainly middle-range to low-end private law schools’ tuition hikes and expansions (including branch campuses) would have been curtailed.

In our universe, the real breakpoint period is in the 1990s, when private law school tuition began to permanently exceed Stafford Loan limits after their 1994 increase.

Median Law School Tuition and Annual Stafford Loan Limits

(Source: ABA, FinAid.org)

By 2004, there was a $10,000 gap (in 2011 dollars) between the annual Stafford limit and median private law school tuition. Seven years later, that gap grew to about $19,000 per year, despite a small boost to the annual loan limits in 2007.

Furthermore, in 1999, 28 private law schools’ tuitions were below the annual limit, by 2010, that number had dropped to two: the two private law schools in Puerto Rico. Even Brigham Young’s tuition can no longer be covered by Stafford Loans alone, but 42 public law schools’ tuitions still can.

No. Law Schools With Tuition Exceeding Annual Stafford Loan Limits + $10,000 (2011 $)

God only knows how these people paid for their living expenses (I lived on savings). Also, to answer your question: Yes, I’m psychotic enough that I ordered back-copies of the Official Guide going back to the 20th century. What’s really surprising is that I’ve managed to find such an interesting use for them so quickly.

What’s strikes me is how rapidly the law school unaffordability problem grew. In six years, nine law schools that required significant supplemental financing grew to 70 by 2005, and as a result, I’m not sure I believe the counterfactual history myself. Maybe law school tuition would’ve kept going up everywhere no matter what? Would private lenders have realized that their loans wouldn’t be repaid? Would they have cared? How many law school debtors would’ve filed bankruptcy if they could have? I regularly criticize arguments from incredulity, so maybe things could’ve really turned out better, just not for law schools.

This is why I’m not persuaded by Schrag’s argument. Conservatively, I think if we went back to the 2004 system, private lenders’ reluctance would cut away needless waste on law schools without any loss to students, taxpayers, the profession, or the economy.

BLS’ Inflation Measures Take With One Hand…

Not What It Used to Be: American Universities Represent Declining Value for Money to Their Students,” The Economist.

Consider this:

The cost of university per student has risen by almost five times the rate of inflation since 1983 (see chart 1), making it less affordable and increasing the amount of debt a student must take on … Universities cannot look to government to come to the rescue. States have already cut back dramatically on the amount of financial aid they give universities. Barack Obama has made it clear that he is unhappy about rising tuition fees, and threatens universities with aid cuts if they rise any further.

Figure 1

So which one is it, Economist? Are the fees going up or are state governments cutting spending? The causes of inflation are important if you want to argue it’s a problem.

Here’s my variation on the Economist‘s chart; you may’ve seen similar displays elsewhere:

CPI & Median Family Income

You’ll have to dumpster-dive into the BLS’ inflation tables to get these data, and the Census Bureau has median family income tables.

The real increases look something like this:

CPI & Median Family Income Growth Rates

Real College Tuition Growth Rates

Notice how the last two humps coincide with recessions? That’s because the BLS combines public university tuition increases (due to lost state funding) with private university tuition increases (more spending), which dilutes the utility of the BLS’ inflation measurement.

Now for the killing blows.

CPI Growth RatesMedian Family Income & College Tuition

(Digest of Education Statistics)

This isn’t to say that everything else in the Economist‘s article is wrong or that all public universities are model state apparati, especially when these numbers include the notorious California systems. It does, however, suggest that private university education is significantly less affordable than in the past but public education isn’t so savagely overpriced. The problem is whether the time spent in higher education improves people’s productivity for jobs that need it or if it’s just “middle class” ticket-punching.

Fortunately, the enrollment ratio is in public universities’ favor, in 2009 there were about 7.7 million fall enrollments at 4-year public institutions while there were 5.2 million at 4-year private institutions. There were another 7.1 million people in public 2-year institutions versus 420,000 in private 2-year programs.

I point these things out because they reminds us that context matters when discussing inflation indexes. Even if they’re accurate, they might not measure what you think they’re measuring, and they might fail to separate the costs of different tiers of goods, like public vs. private higher education.

Thus, my fear isn’t a mass of over-indebted college students getting hosed out of their futures; rather, it’s a minority of over-indebted college students (like private law school grads) whose concerns are easily ignored by the government.