Month: May 2013

The Cost of Law School Does NOT Influence the Cost of Legal Services

John O. McGinnis and Russell D. Mangas, “An Undergraduate Option for Legal Education,” courtesy of TaxProf Blog.

I dealt with McGinnis’ and Mangas’ argument way back in January 2012 on the Am Law Daily, back in those halcyon days when it was just a Typepad blog. Now, the authors have sharpened their argument first laid out in The Wall Street Journal many moons ago into a full-fledged journal article.

I don’t want to spill too many more electrons on this because I fully endorse their proposal to make law an undergraduate major. It would certainly save students time and money, and for McGinnis, a law professor, to support that signals his willingness to argue against his own interests. This is good, as is the article by another law professor, Douglas A. Kahn of the University of Michigan, who argued the same thing in The National Law Journal a couple weeks ago. Credit where it’s due.

However, three things annoy me about McGinnis’ and Mangas’ article:

(1)  Unlike professional economists, McGinnis’ and Mangas’ actually discuss the impact of marginal cost theory on wages (instead of comparing lawyers’ earnings to those of people with the same number of years of education), yet they frustratingly veer off into nonsense territory by supporting the “higher education theory of wages,” which basically marries the versatile juris doctor theory to the labor theory of value—both discredited. For example:

With educational debts that they cannot discharge [lawyers] may exit the legal profession for other more lucrative work open to the well-educated if their fees continue to fall beyond that which allow them to comfortably service the heavy debts often necessitated by graduate school education. (14)

But demand for lawyers is not the same thing as demand for JDs. There is no evidence of a causal connection between more education and higher wages, it’s only correlational, and plenty of people who have JDs work in jobs that do not require them, making law school a waste. I covered what happens to doctoral and professional degree holders last year. We don’t know what happens to JDs specifically, but overall, given that the legal profession has been saturated for decades, it’s likely that they are not using their degrees for their jobs unless they obtain further education to become audiologists, for instance.

(2)  McGinnis and Mangas ignore juris doctor oversupply and assume that the marginal cost of hiring a new lawyer must include the cost of sending someone through law school at current prices.

If [the marginal cost of providing legal services] is measured even farther back, when the future attorney has just received his undergraduate degree, it will include the cost of a graduate law degree and the opportunity cost of not working for three years … As this example illustrates, over a long enough time period, marginal cost includes all costs incurred to provide the service. At that point marginal cost equals total cost. (15)

If a law firm that needs a new lawyer, the marginal cost is the time and effort spent finding a licensed attorney. This is not an expensive process as there are many people who are licensed but aren’t practicing or who are practicing but aren’t paid much. Moreover, the marginal cost certainly stops at finding someone who has a JD. Why? Because there are hundreds of thousands of people who already have law degrees (and probably paid less for them). The expanding firm doesn’t need to pay to send someone through law school, college, high school, nursery school, etc. because the eligible workers are already there. Heck, the firm could find someone who’s given up after failing the bar exam and send them to take the test again after doping them with Adderall. You can see how many “Idle Attorneys” there are in each state here.

Consequently, the market value of a JD, independent of other factors like prestige and experience, is nearly zero. This is the reason to reduce the number of years of legal education. The current system places all risk on the would-be lawyer while the schools and the employers bear none of it, even though there’s little demand for new juris doctors.

(3)  Thus, McGinnis and Mangas assume that education costs are passed forward to clients, ignoring all evidence the contrary.

I won’t quote from the section on pages 18-19 which attempts to augment Herwig Schlunk’s calculation of the net present value of legal education with the potential savings of cheaper legal education to clients, but it falsely assumes that student debt logically cannot impoverish debtors, as though wealthy employers are spearheading the student debt movement. If this were true, then an unemployed person could buy real estate in midtown Manhattan and instead of renting it out demand a high-paying job from a grudging employer to pay off the mortgage.

That should sound silly to you, but throughout McGinnis’ and Mangas’ article runs what should be an equally silly incredulity about law school graduates’ long-term outcomes. Like, if you were to present them with the facts, they’d say, “But that would mean law school has been a bad investment for decades, and we all know that law graduates are trained professionals who always have access to good jobs (except during recessions).”

I could say more about this, like why firms aren’t jumping on graduates from the cheap Puerto Rican law schools, or public law school versus elite private law school graduates, or cheaply trained California lawyers, etc., but I think I’ve remade the point: Those who think cheaper lawyer training will lead to cheaper legal services will be disappointed when that doesn’t come about, not that cheaper training is a bad idea.

Research Pages Updated (May 2013)

Easily the most tedious part of this blog is updating the original research pages. It takes time, is very boring, and does not automatically garner new page views. However, when it’s done it’s done, and I can go back to writing or procrastinating. The two big updates are:

LAW GRADUATE OVERPRODUCTION (excludes licensed lawyers, see my Am Law Daily entry for that)

–The previous version has been moved to LAW GRADUATE OVERPRODUCTION (2009)

LAWYERS PER CAPITA BY STATE (by far this site’s biggest contribution to the Internet)

The point of the original research pages is to keep the information in the same place with the same URLs, which I have done. Enjoy, world.

Carmen Sandiego Was Killed in a Drone Strike

…And a generation of Americans lost its innocence.

Procrastination is dangerous, but productive procrastination is deadly. Last week, I started killing time by testing my knowledge of geography because I was embarrassed that I didn’t know all the countries in Europe. Now I do, and so I started working on Africa, something I never thought I’d know.

Naturally I should’ve realized where all this studying would lead me: Throwing the original Where in the World Is Carmen Sandiego? disk images into an Apple II emulator.

I quickly found that the game, published in 1985, is charmingly anachronistic:

01

…So anachronistic, in fact, that it’s been lapped by history, given that the workers recently placed the spire on top of the new World Trade Center.

02

03

Then there are little facts of monetary policy that have changed.

04

…And a bunch of countries that aren’t around anymore for various reasons.

05

So blinded was I by nostalgia that it didn’t occur to me that the game wouldn’t be timeless like other Brøderbund classics like Lode Runner. Ironically, Carmen Sandiego‘s world had been largely unchanged since World War II. More changes occurred in the few decades after the game appeared than before. Perhaps its liberal internationalism captured the tone of the waning years of the Cold War.

In retrospect, Where in the World Is Carmen Sandiego? is not a particularly good pedagogical tool for teaching geography. Testing knowledge, yes; teaching, no. Either you know factoids like like borders, flags, and currencies, or you don’t. A video game like Carmen Sandiego, which is structured as a multiple-choice test, isn’t the most efficient way to transmit that kind of information. Brute-force fill-in-the-blank tests are probably better. Maybe Carmen Sandiego was also a bellwether for the NCLB-style education system that would appear 15 years later: Fill-in-the-blank memorization is sterile and boring, but Carmen Sandiego is not.

All of which is disappointing because it’s a very fun game. The titular character’s Latin name hints at the exotic, like, you hear “Carmen Sandiego” and South America instantly pops into your mind. No one would ever think she was from Utica.

I didn’t play the original that much, but I did have its sequels Where in the U.S.A. and Where in Time. I recall them both being very hard because, as I said, you either know a lot about the 50 states and world history or you don’t, and as a 10-year-old I needed the aid of family members or the massive encyclopedias that weighed down the games’ boxes to make sense of where Narrangasett was. I certainly wouldn’t’ve known that “Henry the Navigator” means 15th century Portugal. History on top of geography is really hard when you haven’t even been through a middle school World Studies course.

The one thing the series did teach me had nothing whatsoever to do with geography or history: due process. If you failed to obtain a warrant before apprehending the criminal, or you obtained one for the wrong person, you lost, leaving me to yell at the screen, But she stole the Grand Canyon! The Grand Canyon!!

Of course, nowadays warrants are anachronistic too, so the next title in the series should be Where in the War on Terror Is Carmen Sandiego? which makes sense given that she and her gang have always been non-state actors (perhaps the original was prescient and not liberal internationalist?). The new version would include the following updates:

  • No warrants
  • Enemy combatants instead of criminals
  • Drone strikes in lieu of arrests
  • Extrajudicial killing of citizens
  • No need for gumshoe investigating (since everyone’s phones are tapped anyway)

The only additional challenge for the player would be the extra long travel times because you’d need to wait in line longer at the airport scanners.

Until then, there’s this:

06

Grad PLUS Loan Disaster Sidelined by Stafford Interest Rate Hikes

If you didn’t know already, the Higher Education Act is up for renewal this year, but you have to dig deeper to get news about anything other than the Stafford loan interest rate hike that will destroy the lives of the undergrads or something. For those curious about law school tuition, here’s what’s been going on.

For one, you have the Bill and Melinda Gates Foundation dropping $3.3 million in grants on 14 organizations to produce policy papers aiming to improve college completion rates by changing the federal loan program. (How about, “Don’t send people to college who are unprepared or can be expected to fail, and create living wage jobs for young people instead”? Now can I get my slice of that $3.3 million?) I don’t know about Melinda’s education (and I don’t care), but I think it’s pretty funny that a wildly successful college dropout is trying to increase completion rates. Those Redmond engineers have to learn coding somewhere.

The policy paper that probably carries the most weight is the New America Foundation’s “Rebalancing Resources and Incentives in Federal Student Aid,” which tackles the graduate-level debt disaster with several proposals:

(1)  Terminate the Grad PLUS loan program.

(2)  Restore bankruptcy protections to private student loans.

(3)  Raise graduate and professional students’ annual Stafford Loan limit to $25,500.

(4)  Set all federal loans’ interest rates to the 10-year Treasury rate plus 3.0 percent.

(5)  Encourage debtors with guaranteed loans to switch them to direct loans with a one percent interest rate reduction.

(6)  Make Income-Based Repayment the sole repayment plan, revise it to protect against high debt, high-income debtors making a windfall.

If these six policies were enacted, it’s certain that average private law school tuition would drop, and it’s clear that the New America Foundation now realizes that IBR isn’t so much the problem as Grad PLUS loans. Recall that the foundation expended much effort last year arguing that an undetermined number of high debt, high income graduate and professional students would benefit most from the changes to IBR (an already generous program compared to the debtors with cosigned private loans that have to come up with four-figure monthly payments or else a megabank will foreclose on their parents’ houses) by showcasing a fly-by-night accounting firm’s advertizing that targeted graduates from a law school with awful employment outcomes.

As you can imagine, I still don’t understand the New America Foundation. Not its policy proposals, those are very crisp and largely unobjectionable, but it doesn’t seem to have much of an ideology, i.e. a coherent set of beliefs that explain why the social order should be one way and not another. “Let’s tweak these programs really well” is not an ideology beyond modifying the edges of an existing social order, which is what you’d expect from a paper using “rebalancing resources and incentives” in its title. This surprises me as its co-founder, Michael Lind, regularly writes reliably lucid liberal (anti-neoliberal!) articles for Salon, including not one but two contemplating taxing land values as a response to advancing technology.

Thus, I draw your attention to point (3), raising the annual loan limit to $25,500. It’s utterly inconsistent with the foundation’s goal of reducing graduate-level tuition:

[Unlimited Grad PLUS loans], especially when coupled with loan forgiveness and Income-Based Repayment, can discourage prudent pricing on the part of institutions and prudent borrowing by students.

“Prudent pricing” here is thinktankspeak for a tuition bubble. As for “prudent borrowing,” I don’t know about other programs, but in the law students’ defense there’s been no evidence that Grad PLUS loans plus IBR has led to an increase in law school applicants who are cynically trying to screw over the government.

Applicants, Admitted Applicants, 1Ls (2013)

(Source: LSAC)

That’s not to say that law schools and students don’t depend on Grad PLUS loans, but I think it’s more one-sided than the New America Foundation indicates. There are fewer law students but not fewer law schools. (Yet.)

We continue:

However, policymakers should increase the annual limit on Unsubsidized Stafford loans for graduate students from the current $20,500 to $25,500 to replace some of the borrowing ability graduate students will lose when the Grad PLUS loan program is eliminated. Although [eliminating the Grad PLUS loan program] will likely push some graduate students into the private loan market, this could ultimately be beneficial in addressing the high costs of graduate schools. If institutions can no longer rely on PLUS loans to fund their high-tuition programs and if the private market is responsive to the ability of borrowers to repay (based on changes to bankruptcy law recommended later), then graduate schools may have to set their pricing based, in part, on students’ expected earnings.

If uncapped Grad PLUS loans discourage prudent pricing, why would raising the cap on Stafford loans encourage it? If the private sector is more responsive to borrowers’ ability to pay, which still doesn’t mean they’re more productive thanks to their educations, then why replace the lost borrowing ability with non-underwritten loans? I don’t really expect the New America Foundations of the D.C. think-tank circuit to argue for doing away with the Stafford Loan Program entirely—there’d be less to tweak!—but without a theory of what causes tuition increases and how people can wind up taking on more debt than they can afford to pay, there’s an obvious contradiction.

The only reason I can think of for the $5,000 Stafford loan increase is to ensure that the proposal looks like it’s saving money. Otherwise, it’d much more consistent to leave the Staffords as they are because eventually the $25,500 loan limit will be eaten by inflation anyway, and the paper doesn’t discuss pegging any of the loan limits to inflation. The other problem with Stafford loans is that universities can increase their haul by setting their tuition at the loan limit and enrolling more students.

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

Since the New America Foundation’s proposal is probably the most comprehensive one out there (I didn’t read the others, but I can live with it), then how is it faring against Congress’s dysfunctions?

Enter The Chronicle of Higher Education‘s Kelly Field, “House Panel Approves Market Approach to Student Loan Interest Rates,” May 17, 2013.

Here’s the outline:

  • Obama proposes setting the interest rates on various student loans as follows:
    • Subsidized Staffords: 10-year Treasury note + 0.93 percent, with no cap
    • Unsubsidized Staffords: 10-year Treasury note + 2.0 percent, with no cap
    • Grad PLUS and Parent PLUS: 10-year Treasury note + 3.0 percent, with no cap
  • The Senate is working on the “Student Loan Affordability Act,” which would hold the Stafford loan interest rate at 3.4 percent for two more years.
  • The House will vote on a bill that sets interest rates as follows:
    • Subsidized & Unsubsidized Staffords: 10-year Treasury note + 2.5 percent variable rate, capped at 8.5 percent
    • Grad PLUS and Parent PLUS: 10-year Treasury note + 4.5 percent variable rate, capped at 10.5 percent
  • The alternative Senate bill would set interest rates for all student loans at the “bond equivalent” of the 91-day Treasury note, capped at 8.25 percent. I have no idea what “bond equivalent” means in this context, probably taking the 91-day rate to the 40th power or something like that to align it with a 10-year rate.

In short, expect more Grad PLUS loan carnage and more tuition hikes where they can be had.

‘Liberalism’s Most Challenging Task’ Is Clearer Writing

…Not that conservatives’ is better.

Timothy Noah, “The 1 Percent Are Only Half the Problem,” New York Times Opinionator.

I’d describe Noah’s article in the Opinionator as a muddle. To begin with, I no longer use the term “income inequality” because it’s confusing. More recently, I’ve preferred “income polarization,” which is more descriptive. There’s always going to be income inequality because some people are more productive than others and some people own more assets than others. This is an analytic fact. What’s also an analytic fact is that there will always be a “1 percent,” unless you live in a society of fewer than 100 people and you feel like aggressively rounding numbers. Sure, comparing the one percent’s income to the rest will illuminate polarization, but that already assumes that incomes will be unequal. Thus, to say that the “1 percent” is any portion of the problem is a non sequitur.

Noah’s other “half of the problem” is the “rise of the educated class,” i.e. the polarization of incomes of college-educated workers from high-school-educated workers.

Median Earnings by Education

(Source: Census Bureau)

Okay, there’s some educational polarization here—and Noah says it began in the late ’70s—but I think persistent underemployment and credential inflation have probably been bigger factors since then. For example, if a worker gets a four-year degree, starts a job that’d normally require only a high school degree, and then gets a pay raise, then it appears the benefits are going to college-educated workers when they’re not. This is why I keep saying that the population distribution of education is important. Education categories aren’t static.

Percent Workers With Earnings by Education

(Source: Census Bureau)

Noah then tries (I think, as I said, it’s not a crisply organized article) to explain why conservatives and liberals don’t like talking about education as the cause of “inequality.”

Liberals resist talking about the skills-based gap because they don’t want to tell the working classes that they’re losing ground because they didn’t study hard enough.

Which liberals are these?

One reason the left plays down the growing skills-based gap is that it accepts at face value the conservative claim that educational failure is its root cause.

Didn’t the Obama administration release a glorious paper dually-titled “The Economic Case for Higher Education/The Economics of Higher Education” last winter?

More than two-thirds into his article, Noah gets to his argument:

But the decline of labor unions is just as important. At one time union membership was highly effective at reducing or eliminating the wage gap between college and high school graduates. That’s much less true today … The decline of labor unions is what connects the skills-based gap to the 1 percent-based gap … According to the left-leaning Economic Policy Institute, the G.D.P. shift from labor to capital explains fully one-third of the 1 percent’s run-up in its share of national income. It couldn’t have happened if private-sector unionism had remained strong.

True, provided you also ignore the increase in the share of college-educated Americans, credential inflation, and the proportion of educated Americans who aren’t in the workforce. Degrees don’t have much value for stay-at-home parents, unless you look at them as modern dowries/bride prices, and that’s very problematic for class discussions.

This isn’t to say nationalized and globalized scabbery isn’t a problem, but in Noah’s more lucid final two paragraphs, he admits that labor rights are political non-starters:

[I]f economic growth depends on rewarding effort, we should all worry that the middle classes aren’t getting pay increases commensurate with the wealth they create for their bosses. Bosses aren’t going to fix this problem. That’s the job of unions, and finding ways to rebuild them is liberalism’s most challenging task. A bipartisan effort to revive the labor movement is hardly likely, but halting inequality’s growth will depend, at the very least, on liberals and conservatives better understanding each other’s definition of where the problem lies.

(Add “middle class” to my list of terms I disfavor. It’s like saying those destitute Americans don’t deserve wage increases either.)

I guess Noah had to save his argument for the end because (a) conservatives would’ve stopped reading it if he’d hastened to his point, and (b) it’s not a very good use of Times real estate to say, “We’re boned.” However, there are a few tactics that might help work around the problem of how to convince the labor-haters to ease poverty.

(1)  Blame the trade deficit: I think Noah’s written in the past that this isn’t as much of a problem as the Dean Baker-types think, but everyone can get behind it except the banks, which aren’t very popular.

(2)  Blame the landowners: The argument against improving states’ labor protections versus federal ones is that they raise labor costs and cause industries to move to the labor-hating South. Land tax shifts break that Gordian knot because labor-hating industries can move but land cannot. Even if landowners sell their land in response, so what? Prices, including taxes on labor, will drop, and living standards will rise for those remaining.

Notice how neither of those suggestions uses the terms “income inequality” or “middle class”? Do you think Noah would’ve been able to confidently open an article with the above two points rather than discussing the half-portion of the one percent and what liberals versus conservatives allegedly think? Liberalism’s most challenging task is adopting a stronger, broader set of policy goals to avoid checkmating itself as Noah does.

Joseph Stiglitz is Still Soft on Higher Education

But unlike last time, he’s clear about it now.

Joseph Stiglitz, “Student Debt and the Crushing of the American Dream,” New York Times Opinionator.

Yesterday, Stiglitz argued that student debt is connected to inequality, and it’s “intertwined” with lack of housing demand. He writes:

It’s a vicious cycle: lack of demand for housing contributes to a lack of jobs, which contributes to weak household formation, which contributes to a lack of demand for housing.

I’m dead certain that student loans crowd out homeownership for individual debtors, but I don’t know to what extent that can be imputed to the whole economy. Stiglitz is arguing that but for student loans, people have the income to afford housing. I don’t think this is true. I think most student loan debtors lack the income period. Thus, the “lack of demand for housing” is caused by untaxed land rents, which isn’t related to student loans.

Stiglitz might be right, but I don’t think every student loan debtor is just a few hundred dollars away from homeownership. I do think, however, that he’s wrong about the value of higher education. Cue the Eloi lawyers and Morlock material movers who have law degrees:

Curbing student debt is tantamount to curbing social and economic opportunity … Our economy is increasingly reliant on knowledge-related industries. No matter what happens with currency wars and trade balances, the United States is not going to return to making textiles. Unemployment rates among college graduates are much lower than among those with only a high school diploma.

I have to credit Stiglitz for actually connecting the trade deficit to jobs to student loan debt. This connection is very real, but it’s not made often because economists know nothing about student loan debt, and student debt advocates know nothing about labor economics. Again, I disagree. If we flip the trade deficit, maybe the textile jobs won’t come back—I don’t see why they wouldn’t, the U.S. is still one of the world’s biggest cotton manufacturers—but the lump of labor fallacy doesn’t apply to individual industries. There’s only so much demand for lawyers, brain surgeons, advertisers, fashion designers, and other knowledge workers. At some point, technology will reduce the labor economy to trading simple services that can’t be automated, like haircuts, waiting tables, etc. These jobs will rarely pay well, which is one argument for taxing the land rent and redistributing it as a citizen’s dividend.

The other big problem with the article is that Stiglitz doesn’t believe that over-generous federal lending enables tuition increases. He makes passing mention to slashed government subsidies to public universities, which is correct, but he thinks the rest of tuition increases are due to “the banks'” and not higher educators trying to sell parents on multi-million dollar athletic facilities. Then, as expected, he attacks the for-profits as though nonprofits and public universities are guileless. He also doesn’t point out that for 85 percent of the debt, “the banks” are the federal government either directly or by guarantee.

As a result, Stiglitz’ policy prescriptions are a muddle. Yes, restoring bankruptcy protections is critical, but thanks to IBR, even for-profits won’t post very high default rates, unless they don’t tell dropouts how to fill out the forms. Consequently, they will likely have access to federal funding indefinitely no matter what federal judges say. Slashing interest rates to the Fed’s discount rate (that’s the rate it quotes for its direct lending to the banks) will reduce debt burdens, but it certainly won’t discourage people from taking out loans they don’t need for degrees that have little value.

Stiglitz supports adopting Australia’s income-contingent repayment system, but I think we should take the government out of higher education finance entirely.