Minnesota

Let’s Shift St. Paul, Minnesota’s, Property Taxes Onto Land!

At last, I’ve found time to write! This will be the first in a while for a while. A few months back I threatened readers with posts on real-estate mapping and assessment, and I make good on my threats.

Background: When I moved to the Twin Cities, I joined Minnesota’s Common Ground chapter, and this year its intern introduced some of us to the black arts of geographic information system/science (GIS) software. GIS is a discipline full of jargon, like “vectors” and “table joins,” that I find silly, but they’re certainly more sensible than “JD Advantage.”

The purpose of our inculcation is to help Common Ground advocate for land-value tax districts in Minnesota cities as a pilot program toward enabling municipalities to adopt split-rate taxation like Pennsylvania’s. The goal is to observe the effects of removing taxes on improvements and replacing them on locations to encourage development. Connecticut enabled a pilot program like this in 2014 (and it’s being extended), so LVT of a kind is in the policy air. So far, Common Ground’s efforts have successfully resulted in the introduction of a bill in the Minnesota House of Representatives.

Oh, and I claim zero credit for any of this.

But I do have newfound technical skills to unleash on readers (actually, a lot of the work is done in MS Excel, which is old hat around here), so with the open source QGIS and the state’s wonderful MetroGIS’s database in hand, here’s how a property tax shift would affect St. Paul, Minn.—because I was born there, and it’s the city we started our training with.

Boom:

Click to enlarge.

What you’re seeing is the distribution of the percent changes in property taxes for each parcel, divided into negative changes (blue, decreased charges) and positive changes (red, increased charges), and excluding tax-exempt properties. Because more parcels’ property taxes would be cut by the shift (yay!) than raised, the number of blue/red parcels isn’t equal.

Here’s a histogram of the percent changes of property taxes by percentile for single-unit residential lots claimed as homesteads, which dominate the city’s land use by nearly two-thirds of all properties and are probably the most salient politically.

The results for these properties is inauspicious. A bare majority, 52 percent, would get breaks, and the remaining homeowners would pay more by comparison.

I’ve included a macro table for reference below, but generally, the tax shift would move the property tax to residential parcels and off commercial lots. Vacant lots would pay more—as they should—but there aren’t many of them in St. Paul.

One of the biggest conceptual problems with estimating the effects of a land-tax shift is that the current property-tax system discriminates among property classes. Residential lots on average pay less than commercial lots—by design. Single-unit homesteaders pay on average 1.52 percent of their assessed values in property taxes, and commercial owners pay 4.24 percent. Meanwhile, vacant residential lots pay 8.08 percent, illustrating existing progressivity in the property-tax system.

Consequently, much of the effect of a property-tax shift is really just equalizing the tax rate on all parcels, eliminating discrimination among property classes. In fact, a land-value tax shift starting from a hypothetical flat property-tax rate that includes buildings is better for single-unit residential landowners. Unsurprisingly, Common Ground Minnesota explores what happens when residential parcels are treated differently than other types in its advocacy.

Let’s return to the map above. Comparing the top 10 percent of property-tax reductions to the top 10 percent of increases, the property-tax burden is lifted most from the northeast part of St. Paul and downtown, and moved to the southwest part of the city, which is mostly residential.

These results don’t fill me with warm fuzzies, but the underlying issue is not who would pay but who isn’t currently paying, i.e. it’s the land-value assessments. Minnesota requires properties to be assessed at their fair-market values. These estimates are fed into multiple formulae to arrive at properties’ tax capacities, and then tax authorities apportion levies against all properties based on these tax capacities. When properties are under-assessed, they receive a hidden tax break; when they’re over-assessed, they opposite is true. Between commercial landowners and homeowners, guess who gets the hidden breaks?

To illustrate why I think St. Paul’s real estate isn’t properly assessed, here’s a map of St. Paul’s land values per square foot, including only the bottom 10 percent of parcels and top five percent.

Click to enlarge.

I’ve zoomed the map to the southwest part of St. Paul, and while you can see that the downtown cluster includes much real estate in the top 1 percent by value, some of it streaks west along Grand Ave. There are a few other peculiar concentrations of 1 percent real estate: a few blocks south of St. Catherine University (St. Kate’s to the locals), and a few blocks south of the University of St. Thomas’ divinity school (the law school’s campus occupies a surprisingly large chunk of land in nearby downtown Minneapolis). Slightly less valuable real estate lies along University Ave. (where the light rail connects the Twin Cities) and the L-shape along Cretin Ave. and Ford Parkway.

Most of the top .01 percent is downtown (~$56 per square foot), but some of it is still in these areas. Naturally, you may be wondering why property owners with the most valuable land aren’t demanding their properties be rezoned so they can build office towers in western St. Paul. The answer is that much commercial real estate is under-assessed, and many parcels’ values are malapportioned between buildings and land. (I have an acquaintance who recently bought a decades-old house on a plot of land valued at a mere $5,000.)

Although Minnesota’s tax authorities go to great lengths to ensure assessments are fair, notably sales-ratio equalization estimates of numerous parcels, these methods only include properties that were sold in arms-length transactions. One ongoing problem I’ve identified is that commercial real estate transactions differ substantially from those of owner-occupiers. The wealthy simply buy land differently from the rest of the populace.

For example, on November 10, 2015, the First National Bank building sold for $37.25 million but its assessed value as of January was only $25.5 million. Why? Because according to the Ramsey County Assessor’s Office, it was a “Not Typical Market” transaction, so it was disqualified from the sales-ratio equalization analysis.

Here’s another fun one: A Walgreens on Larpenteur Ave. (which might actually be in Roseville) sold for $11.2 million in April 2013, but was excluded from the sales-ratio equalization study because of “unusual financing.” The same goes for the Walgreens on Ford Parkway, which sold for $13.9 million but was assessed at $3.2 million.

Other times sales that qualify for the sales-ratio equalization analysis still result in assessments that are below their sales prices, e.g. the lot on 240 4th St. East, which sold for $800,000 in March 2015 but was assessed at only $286,300 in 2016. The biggest offender I’ve found in my casual search is ten vacant lots along Dunlap St. that sold for $7.5 million and have been assessed at about $3,200 per parcel. You’d think qualified sales of vacant real estate would be assessed at something close to their sale prices, but they’re simply not. This results in large property-tax breaks for wealthy landowners and an increased burden on everyone else.

If I were a St. Paul homeowner (and I know a bunch), I would grab my pitchfork and march on the Ramsey County Assessor’s Office and demand the city’s land values, especially its commercial land, be properly assessed according to law. I’m confident that would shift some of the property-tax burden away from homeowners and onto downtown landowners without affecting their property values. Municipalities should also rely more on mass building-residual assessments to arrive at more accurate land (and building) values, echoing the negative corporate land values in 2009 that I wrote about a few months back. I believe better assessments would make land-value-only property taxes more attractive to single-unit homesteaders than the current system illustrates.

Appendix:

Here’s the macro table of what the LVT change would do to the majority of the city’s parcels.

Click to enlarge, if you dare.

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

Yeah, I’d Be Selling My Casebook Division Too

…If I were Thompson Reuters. TaxProf Blog and the WSJ have the story. The great legal publisher sold its law school publishing division (West Academic Publishing, Foundation Press, and Gilbert Imprints) to Eureka Growth Capital (what a name!), a Philadelphia private equity firm.

Although LSP is an outstanding business with a long history of serving law school faculty and students, the company has made the decision to focus on growing from its core of subscription-based research and reference products, workflow solutions, software and services.

…

“[Law school publishing is] a segment of the market that, longer-term, we didn’t see as within the core of our legal research offerings,” said spokesman John Shaughnessy…

Why doesn’t Thompson Reuters see much longer-term growth in casebooks? I doubt it’s so much prescience over the applicant nosedive as the death of print. Seriously, no one likes hauling those tomes around, and if anything we should wonder why they weren’t digitized earlier. All this talk of the “broken business model” of law schools (how is it broken? They make quite a bit of money on student debt) is belied by law professors and publishers scoring huge copyright rents by requiring their students, whose humps now make them look Richard III, to buy their latest editions. At the end of the semester, campus bookstores then buy them back for a song because “We don’t know if that course will be offered next year” and then resell them next year at near-full price.

Read My Essay on The Am Law Daily; I’m Helping Law Schools Avoid Lawsuits

“Dear Prospective Law Students, Do Not ‘Reasonably Rely’ on Cooley’s ‘Report One'”

Also, I’m off to see former Hüsker Dü and Sugar member, Bob Mould, play in Brooklyn. Hüsker Dü was from my home state, Minnesota, so here’s some of his music.

At Least the Strib Didn’t Call It a “Golden Ticket”

“Law school is no longer a sure bet. Would-be students are noticing.” —Jenna Ross, “Slump in law school applicants,” Star Tribune (Minneapolis, MN)

Progress perhaps? *Sigh*

The swell of students applying to law school — despite growing debt and contracting job prospects — has slowed.

?? “Despite” growing debt and contracting job prospects? Not “Because of”? Okay I’m just being a nitpickity editor.

One thing that hasn’t changed in reporting on declining law school applications is the self-congratulatory response from the administrators.

“Frankly, for many years, there were many students who went to law school because they didn’t know what to do,” said Cari Haaland, assistant dean of admissions for the University of St. Thomas School of Law. “Now, prospective students are thinking more critically about the decision.”

The University of Minnesota is similarly sanguine:

“The ones that do apply really want to be there,” said Nick Wallace, the U’s admissions director. “They’re not just applying on a whim or as an escape route from the real world.”

Bear in mind the former statement comes from an official at a law school that’s only existed since 1999, although Haaland may’ve been in the admissions business before St. Thomas reopened its doors after closing in the 1930s. That said, this response isn’t new, and readers may recall Washington University’s Dean Kent Syverud referring to it as “the froth in the applicant pool.” Of course, as with all things prospective law student-related, applicants can be whatever you want them to be, from stupid, self-destructive lemmings to honest, bright, hard-working, lawyers of the future who’ve done the math and know why they want to be there. The same goes for unsurveyable non-applicants, who according to law school administrators are greedy, opportunistic, unsophisticated, and dishonest about their reasons for wanting to practice law. One wonders why law school admissions people haven’t found a way to filter these types out, or why they accept more people when applications increase. If they were so concerned about greedy applicants, why do so many of them claim so many of their graduates make six-figure salaries? I guess law school is where “last clear chance” went to die.

It never occurs to them that perhaps scam bloggers have deterred bright minds who recognized that the legal profession could not guarantee much of a place for them, or that some of the people who go to law school for less-than-noble reasons can still be excellent lawyers under better economic circumstances. It’s black and white to administrators.

New law students say they’re aware of the data, but are sure of their abilities and hopeful the market will have improved by the time they graduate. Several said that their goal has never been to nab a high-paying job at one of the big law firms, which perhaps have been hardest hit by the recession.

Still, “it is discouraging,” said [name omitted], a “1L” at William Mitchell College of Law. “Everything on the Internet is ‘Don’t go to law school.’ But I have to be confident that this is right for me, and that there are lots of people and alumni who want to help.”

I don’t know the extent of Ross’s information; I presume it’s only from interviews, but unlike her interviewee I find it discouraging. One, new law students stubbornly buy into the bottleneck argument and believe the legal profession’s problems are wholly cyclical and not structural. Obviously Minnesota’s law students are not aware of the data as Ross conveys. If they were, they’d look at the Minnesota Department of Employment and Economic Development’s Web site and find that the state government projects 5,893 total lawyer job openings between 2009 and 2019. They could then compare this with the number of graduates from Minnesota’s law schools courtesy of the Official Guide. In 2010, 937 people graduated from Minnesota’s law schools, down from 962 in 2009. With these numbers in mind, we can calculate a 63% surplus of law grads in Minnesota by 2019.

I don’t make this stuff up; I get it from government agencies. It means that no amount of self-confidence and help from alumni can create jobs when there was never any demand for them.

Two, I agree that many if not most law students aren’t interested in Biglaw jobs. The question is, why should we loan them money to spend three years out of the workforce (stagnation aside) in law school if they won’t be more productive than had they not gone or end up unable to use their law degrees at all?

For those who think that Minnestoa’s 63% surplus graduates (on top of those who are underemployed or could relocate there from other states) can be translated into non-lawyer jobs because of the law degree’s versatility, St. Thomas is your new friend.

This summer, before first-year classes even began, the University of St. Thomas offered a workshop for admitted students called, “What can I do with a law degree?” Students drew a lesser-known profession or area of law, quickly researched it and presented it to their classmates.

HAHAHAHAHAHA! The law school doesn’t even have to convince students that the juris doctor is versatile in its sales pitch. They’re willing to buy the degree, and the university will then make them sell it to one another. You can’t make this up.

But permit me to quarrel with the Strib instead.

During the recession, more people applied to law school, according to the Law School Admission Council. But then for fall 2011, the number of applications nationwide dropped 9.9 percent, according to the council, to the lowest total number in at least nine years. The number of people taking the LSAT also took a dive. [LSTB: Link here]

Statements such as this, along with the article’s title, “Slump in law school applicants,” don’t really do justice to what’s happened over the decade. More accurately, 2011 has seen a law school applicant nosedive. It looks like this.

If we adjust for population—and I admit that perhaps using a smaller age cohort such as 20-25 year-old college graduates would be better—the number of applicants per 10,000 residents has fallen to 2.53 according to the LSAC’s preliminary data, a record low as far as we know. However, only the preliminary estimates are in (actual applicant numbers are in the charts except for 2011), and they’re usually revised upwards. Notice also that despite the precipitous drop in jobs, the “froth” wasn’t nearly as high as it was after the Dot-com bubble popped. The Strib article understates this.

On the whole, the four Minnesota law schools saw the same surge in applications, then a similar fall. Applications to the University of Minnesota, the best-ranked of the bunch, rose substantially through 2010-11, then dropped by about 8 percent for this fall, compared with last year. Applications to St. Thomas spiked in 2010, then dropped 29 percent for this fall.

This is what the Strib’s surges and spikes look like, according to Official Guide archives and what’s stated in the paragraph above.

Note also that when we began this discussion Cari Haaland stated, “Frankly, for many years, there were many students who went to law school because they didn’t know what to do,” which I guess means that St. Thomas doesn’t have a high opinion of three out of every ten of its applicants. On the bright side, the University of Minnesota’s Nick Wallace apparently thinks that the 800 more applicants than in 2008 are people who “are not just applying on a whim or as an escape route from the real world.” Personally, I think the admissions people are just happy that they don’t have to slog through so many applications.

Despite having way more applicants above the trend, the U of M still enrolled fewer students and touts their high LSAT and GPA scores in the article, which we’d expect. As the number of applicants drops, so too does the number of high-caliber applicants, leaving them to be even more quickly snatched up by prestigious law schools. Retrenching classes helps law schools maintain their positions in the U.S. News rankings while the St. Thomas’s of the system see significant applicant drops. It’ll be interesting to see if the LSAC’s volume data verify this when they become available.

Income Elasticity: Why The ABA is Not an Apolitical Trade Organization

Writing on lawyer oversupply and demand for legal services Andrea Hable concludes:

[M]aybe we’re framing the question wrong. Maybe there are too many lawyers for the legal profession as it stands today. But maybe there aren’t too many lawyers for society. If we all practiced more efficiently, and if we could have our ideal jobs without the burden of student loan debt, we might find there’s enough legal need to keep us employed and fulfilled.

Aside from the impossibility of increased practice efficiency creating more lawyer jobs, my opinion is that it’s still more column A than B, but getting there requires the elites of the profession to address one issue they’re ignoring (attorney overproduction) and another issue they really, really, really do not want to address: income elasticity of demand for legal services.

When it comes to attorney overproduction, the evidence is clear: universities open and maintain law schools without regard to economic demand, and the assembly-line mentality of legal education—that Rosie-the-Riveter law school professors can manufacture practice-ready attorneys like B-24s—is proving flawed. Experience and judgment cannot be taught, specialized work requires specialized training, and no amount of hands-on skill-building/clinical training/mentorship creates jobs.

The second problem, income elasticity, is much subtler. We can look at the BEA data and conclude that real demand for legal services has largely stagnated since 1990, save for the dotcom and housing bubbles. We also know that in the last few decades Americans’ incomes have diverged. Thus, Americans have less money to spend on lawyers. Why? As people’s incomes change, so do their spending habits. For example, when people make more money, they use less public transportation. It could be that when people aren’t making as much money, one of the first things they stop buying are legal services, and the alternative to hiring a lawyer to resolve a legal problem is making do without one or suffering the adverse consequences. I am persuaded this is the case.

Notice that I didn’t bring up student debt as Hable does because (IBR aside) it isn’t relevant to income elasticity: Your student debt isn’t your clients’ problem any more than your office rent is, and clients can demand a discount or shop for someone who isn’t as heavily indebted or who has better office lease terms. Student debt is a problem for lawyers because it makes their labor inelastic: those making good incomes in biglaw don’t have good alternatives to their current positions. (The high cost of legal services could be due to price signaling, as J-Dog illustrates, but again, that has nothing to do with student debt.) Instead, if there are no jobs for lawyers, they’ll work in other fields that pay better or more consistently, which could very well be food service. There’s no shame in seeking subsistence-level non-legal work instead of opening a doomed practice. That’s more the profession’s failure than yours.

Legal profession elites claim that the solution to income elasticity of demand for legal services is a lawyer glut, supply-side economics at its finest. However, if legal services are a necessary good, then we must conclude that they must be paid for collectively, i.e. by the government, in the same manner as fire protection. The ready solution to both oversupply and income elasticity, then, is to redirect existing subsidies from law schools to a public legal aid system and to promote full employment so clients can be wealthy enough to afford legal services.

However, the profession avoids this idea. Why? Because advocating full employment politicizes the profession. Demanding public funding to serve the poor and demanding poverty alleviation are political demands that coincidentally benefit the legal profession, and trade organizations such as the ABA don’t want to appear to favor some broad public policy measures over others because that would entail admitting that the legal profession has a large stake in the U.S. economy. This is something that a “noble profession” wishes to rise above.

Notice that I used the term “appear” politicized, for in fact, the ABA is already politicized, just not for serving the poor. For example since Hable brings up student debt, the ABA spent late 2009 and mid-2010 crafting and adopting Resolution 301, the executive summary of which states:

This resolution addresses the problem by calling upon Congress, the Executive Branch and/or Commercial Lenders to convert private debt into federal loans, which offer more flexible repayment options; and identify federal funding to cover interest payments for graduates who defer loans because of economic hardship. It also calls for more flexible repayment terms for federal law student loans. [Emphasis LSTB]

Converting private debt into federal loans is a discreet way of requesting the same government that issues subprime student loans to law students to bail out banks that also made bad law school loans outside of the federal lending program. Nowhere in Resolution 301 or its supporting documentation did the ABA use the word “bankruptcy.” It didn’t even bother to mention that the undue hardship exception was only completely extended to private student loans in 2005, implying that it didn’t advocate repealing that reform.

Obviously the ABA does not have an economist-in-residence who might point out that advocating full employment and bankruptcy reform would benefit the legal sector, and we shouldn’t expect the ABA House of Delegates to take on the attorney overproduction problem without saying, “Yup, we done messed up big.” However, we are well within our place to question whether the ABA seriously cares about helping the poor, whether as student debtors or as those who need legal services. Or both.

But I Deflated the Economy Right!

Enter the BIDER

Via Nicole Battles in JDs Rising, we have Andrea Hable’s, “Law School Debt Survey Results,” in the Minnesota State Bar Association’s Practice Blawg. Ms. Hable conducted an unofficial and admittedly unrepresentative sample of Minnesota lawyers’ debt situations. Minnesota (my home state) as I frequently point out, is one of the most attorney oversaturated states in the country. Expecting 100 responses, Hable received more than 300, and the survey is still open, so if you’re a Minnesota lawyer (all are welcome actually), fill it out. Interestingly, it separates “new lawyers” (licensed 0-5 years) from all lawyers, with older practitioners experiencing many of the same problems the new lawyers do. We should expect as much since the national legal sector has been in an intra-economic recession since 2005.

Hable’s research verifies the BIDER sentiment out there:

One-third of respondents left comments. The overwhelming sense from the comments is that many new lawyers feel like they are out of options, not just with money but with life. Their language shows frustration, worry, lack of control, and a feeling that the loans will never be paid off. All of this on top of an already stressful profession. With or without regret, new lawyers are scared…

Many felt taken advantage of, either by their law school or the system. People are terrified of losing their jobs. One person moved out of state for better job prospects and was not admitted due to “irresponsible” loans (amounting to about the average student loan debt).

…

There was also a sense of frustration from several people who felt like they “did everything right” and were still falling on hard times (and being unfairly blamed for being irresponsible): top of the class, law review, moot court, working during school, etc.

I don’t know where to begin with this. Like almost everyone else, I’m aghast at the idea of legal educators charging so much tuition that graduates would be unable to obtain a law license due to “irresponsible” debt levels. Beyond that, nothing ruins democracy quite like a government that alienates its own people by delivering them to permanent poverty. As the government loses credibility and inclusiveness, expect willful defaults and tax evasion to increase.

Law School = Disinflation

The survey results don’t bode well for law schools’ contributions to our economy. Without criticizing Hable’s work, allow me to translate some of the terms into pidgin macroeconomicese.

Many commented on the impact of their debt on family. Most of them talked about:

significantly (or indefinitely) pushing back plans to get married, have children, buy a house/condo, or even a car…

Pushing back family planning means these lawyers are spending money on debt service rather than houses, cars, and toys from FAO Schwarz in the Mall of America. That retards any economic recovery and clearly demonstrates a decline in living standards.

moving from government or non-profit to private practice when they started a family

wanting to move to non-profit or pro bono work but can’t afford to

wanting to go solo but can’t afford to leave their jobs

Hmm. I thought public service and nonprofit work was supposed to be a noble endeavor, yet it appears open only to the wealthy few.

The people who are managing thanked income-based repayment programs, LRAP, scholarships, using savings instead of taking out loans, and being “lucky.” I especially liked the commenter who said they were doing relatively well at staying on top of his debt, but that “at the end of the day, that is a lot like being the skinniest kid at a fat camp.”

Ouch.

A few people re-enrolled in school because it was the only option to further defer their loans or stand a chance at getting a better paying job. Others are considering starting nonprofits so they may be eligible for debt forgiveness in the future.

Doubling-down on an LL.M or taking on more student debt in another field to delay loan repayment isn’t good for the economy. It’s the educational equivalent to taking out a second mortgage on your house to maintain your standard of living. Both activities increase the country’s debt-to-GDP ratio rather than actually promote sustainable growth. Choosing more education out of desperation also smacks the people-go-into-law-for-the-wrong-reasons-and-don’t-do-the-math.-Don’t-they-realize-law-is-hard! blamers in the face.

Income-contingent repayment forgives student debt for those in the public or non-profit sector after ten years. I wonder how many people will see their loans forgiven ten years from now.

The actual survey asked:

35.41% of the new lawyers now live more frugally. Translation: people aren’t buying stuff. When stuff doesn’t get bought, businesses lose revenue. When businesses lose revenue, they cut prices, reduce their labor costs, and when those don’t work they then fail. Government loses revenue. Lather, rinse, repeat. Welcome to economic depression. Obviously we’re only talking about a few hundred lawyers, but given the high levels of youth unemployment, I don’t think it’s too far a stretch to assume this is a problem happening economy-wide. Nevertheless, if there’s any lesson we can take from the survey it’s that America’s law schools are hampering economic growth.

The surveys and the analysis are good reads. Check ‘em out.

Postmortem on the 2010 Westlaw Professionalism Panel & Thoughts on Attorney Oversupply

You probably don’t know this, but I sat on a Westlaw Professionalism webcast panel on December 30^th. Towards the end, I laid out what the tuition bubble is and remarked how the ratio of attorneys per capita has dropped from 695:1 in 1951 to 264:1 in 2000, and that one projection sighted it at 100:1 by 2050.

IMPORTANT: The oversupply problem is difficult to disaggregate from the Lesser Depression we’re now in, so unemployed lawyers can’t solely blame “The System” for their hardship, though oversupply must contribute. I’ve written elsewhere on the distribution of lawyers per capita in various states. For more on the issue of professionalism and attorney oversupply, I highly recommend reading Professor Jason Dolin’s article, “Opportunity Lost,” which I cited in the program.

One of the other panelists, Brian O’Neill, partner at Faegre & Benson in Minneapolis, responded by recommending young attorneys open their own practices, reduce their hourly rates to $100-$150 per hour and serve the middle class, which he described as homeowners with annual incomes of $250,000. This class, he believes, is underserved by BigLaw, which prefers to charge $500-$600 per hour and won’t stoop to handling property boundary disputes. I don’t know if Mr. O’Neill thinks there’s enough work here for all new attorneys, or if he thinks this is just a good way for them to weather the economy.

I pointed out that his response is not unusual and that its complement is the “go rural” directive the ABA espouses. More often though, I run into the bottleneck argument, which claims that there is no oversupply problem and that the tuition bubble is really a faculty bubble. Fire the faculty, and all will be well. I’d like to respond more fully to Mr. O’Neill’s thoughts as I’m a better writer than speaker, though others have addressed this clearer than I have in other contexts.

I should say first that I don’t think Mr. O’Neill is a blamer the way some other experienced attorneys are, and I learned a lot from his description of Twin Cities’ practice 40 years ago. However, I wished he’d commented on the legal education side rather than the oversupply problem, even though I was the one who brought it up. I do think it’s important for me, certainly, to maintain my preparedness should I don my expert hat again. Which I hope to. Here are my thoughts:

(1) $250,000 per year in annual income is not middle class by any definition[i]. 97.13% of American households earn less than that. 30% of American households earn more than $75,000 annually.

(2) That aside, as a practical matter, the BLS says that competition for law jobs (which can be fairly extended to legal work in general) will be “keen” due to the large number of graduates from the law schools. That should be the first response to anyone claiming there’s legal work out there. To get a handle on its credibility, contrast what the BLS says about lawyers to dentists, another graduate-level profession that has only 57 nationally accredited schools and will experience faster-than-average growth due to retiring practitioners, among other factors.

(3) What about theory? In the program, I said that this isn’t an issue of law practice management but one of simple economics: supply & demand. There are only three ways a “middle-income” family (let’s say a suburbanite family earning between $40,000-$250,000 annually, assuming manageable household debt and some savings) can fail to access legal services: (i) there’s an attorney shortage, (ii) there’s an information/marketing gap: lawyers aren’t good at marketing or potential clients aren’t looking very hard for lawyers willing to work for them, or (iii) price-fixing’s afoot. We know there’s no attorney shortage, certainly not in Minnesota; I’m incredulous of an information failure—if you’re earning $250,000/year and can’t find a lawyer, you’re not looking very hard, and I doubt lawyers aren’t doing enough to reach out to markets; I’ve seen zero evidence of price-fixing and have even read bar association discussions of clients demanding lawyers unilaterally reduce their fees.

(4) More broadly, how could this situation happen? On the one hand, if there’s a massively underserved market that can afford to pay for services at reduced rates, why will no one serve it? On the other hand, if this underserved market is small, how can it possibly serve the employment needs of tens of thousands of unemployed, indebted attorneys? I seriously disbelieve there’s a phantom middle here.

In the absence of evidence, we’re making arguments from ignorance. Consequently, I suspect this is turning into a competing presumptions game: do I have to show that there’s insufficient work for attorneys (beyond the BLS or NALP) or does the “underserved market” proponent have to prove the underserved market’s existence?

I believe it’s the latter unless there’s a point in economic theory I’m missing. Where there is demand, someone will supply it, even if it means someone can only be a lawyer part-time while working at the local dry cleaner.

As for the oversupply problem itself, as I’ve said, it’s harder to document and multiple factors affect it.

BEWARE: I’m not a lawyer-hater who believes lawyers deliberately manipulate the law to raise procedural hurdles to make more work for themselves. I bet (and I suspect Brian O’Neill does too) it’s their clients who do that. This is why my blog isn’t ThereAreTooManyGoddamnLawyers.com. The oversupply problem has its own arguments that are harder to deal with than ones on the tuition bubble:

As the law becomes more complex, demand for lawyers increases.

Professor Ilya Somin argued something like this a while back, though he believes that fewer laws means fewer lawyers. I don’t buy it as I’ve stated it because for one it disregards the laws limiting work for lawyers, such as tort reform. A more critical example is bankruptcy: mortgage cramdowns aren’t allowed and student loans are nondischargeable. Finally, much law is preventative: a few corporate counselors will save a business a lot more money and attorney work than litigating will.

As a result, the theory I propose is the “Law of Conservation of Disputes.” Take the classic Law & Economics example of the tannery creating externalities on the nearby community. We have one conflict, but policy gives us multiple responses: public/private nuisance lawsuits, regulation, taxes, or zoning. All require lawyers—some more than others, but there’s still only one dispute to be resolved. We can change how it’s resolved, but that doesn’t suddenly create a need for more lawyers, even if the option we choose is highly adversarial like the nuisance option. To that extent Professor Somin is right, except we should add that fewer laws does not lead to fewer disputes. Instead, it just leads to fewer lawyers resolving disputes, and the work will shift to mediators or thugs, depending on your opinion of human nature. For related discussion, consider this recent Times article on illegal rare earth metal mining in China.

So yes, lawyers are necessary to resolve disputes but more laws won’t create more disputes without draining the economy, and inhibitive laws prevent dispute resolution while creating injustice.

We’re moving to a service economy or a knowledge economy, so we need more lawyers to handle the workload.

Essentially, this is the same argument as the one above. Legal services, as a tertiary good, can easily crowd out economic growth through wasteful procedural requirements. Additionally, there’s an argument that patent and copyright laws actually burden economic growth, especially drug patents that cost American consumers vastly more than generic drugs do. I have my thoughts on IP law, but that’s for a later post.

The lawyer oversupply problem doesn’t just inhibit the economy and misallocate human capital. Worse, it distorts the public’s perception of the profession. The problem isn’t the number of attorneys in practice earning a median salary of $110,590 annually; rather, it’s the growing number of juris doctor holders who will never be able to work in law and earn an income relative to the cost of the degree. This is an externality the legal profession is dumping on society–a dispute that it must resolve.

Happy 2011.

[i] And this comes from someone who prefers terms like “middle-income” or “working class” because they’re more descriptive. If you’re looking for a definition of “middle class,” read The Legal Dollar on the subject.

Dr. Byrds & Mr. Links—Yes, But What Happens if Law School Transparency Succeeds?

The legal web-o-sphere spares me with only four links over the past few weeks.

(1) Betsy Z. Russell, “Labrador Still Saddled with Student Debt,” in The Spokesman-Review

Idaho’s new representatives (the only one, for I think the other’s an incumbent) still has a mountain of law school debt to pay off. Good thing a 2-year gig in Congress pays over $150,000 with cost of living adjustments that aren’t subject to the 27^th amendment. In the article, it’s speculated that Raul Labrador may be the only representative with student loan debt.

More interestingly, for all you Microsoft haters, the Bill and Melinda Gates Foundation is co-funding The Project on Student Debt, a nonprofit group researching the issue. I’ll also point out that Bill Gates can’t’ve had that much student debt since he dropped out of Harvard.

(2) Editorial, “A Dearth of Data about Costly Law Degree,” in the Minneapolis Star Tribune

In a minor blip for law school watchers, the Strib catalogues some of the maddening ways in which law schools juke their employment stats. It then gives a resounding endorsement of Law School Transparency* (it’s an “ahead-of-the-curve organization”), complemented with a rebuke to law schools refusing to reply to LST’s questionnaires because it’s a boat-rocker.

I think I’ve said it elsewhere, but I’ll repeat: transparency is a good thing, but I don’t think LST will get far if law schools believe it’s out to civilly shame them into confessing that they’re nonperforming institutions, especially during a severe contraction in the legal sector. I suspect law schools think along these lines.

As for Minnesota, the dark horse of oversaturated legal markets, William Mitchell responded by stating it’d decline to provide information. Hamline and St. Thomas both ignored LST’s request. My intuition tells me that the legal education establishment is banking on some cosmetic transparency changes until employment picks up. Then it’ll sigh relief without too many schools closing—much less addressing tuition and faculty composition.

Economic ideologies differing, I think the system will run aground before a recovery. As for transparency, I don’t want to say it’s an utterly lost cause, but the question isn’t what happens if LST or a complementary effort fails. We already tasted that when only Ave Maria submitted its outcomes data.

But what happens if it succeeds?

(1) Assuming a high response rate and high law school compliance, the data will show two things:

(a) That many graduates don’t get jobs in the legal sector, and their salaries are significantly lower than their law schools posted on their websites. In other words, entry-level job opportunities for legal professionals decline as the legal profession contracts.

(b) Employers are more willing to hire graduates from some schools rather than others, and employers prefer graduates who get better grades than their peers, regardless of curriculum.

(2) Kyle McEntee and Patrick Lynch obtain valuable skills in running a nonprofit. I include this because it’s true and shouldn’t be belittled. Founding LST will do much for its principals’ careers, and law students might want to ponder the risks these two have taken as graduation approaches.

The point of this brief thought exercise isn’t to make LST appear pointless, though I doubt law schools will seriously comply with it. I should also add that the social scientist in me sees other methodological problems, but that’s not on today’s docket. Instead, I quarrel with those like the Strib’s editors who think LST is “ahead-of-the-curve.” If at best, LST tells us something we already know, albeit far more accurately, how can it really be ahead of Herwig Schlunk or Brian Tamanaha?

(3) Scammed Hard!, “Subsidized student loans in the crosshairs. Is IBR far behind?” in Scammed Hard!

Turns out the Deficit Commission, which violated its charter and bylaws by failing to vote on a final plan by December 1 among other sins, thinks that the government shouldn’t subsidize student loans and repeal income-based repayment. Since a post-2008 law grad could fully fund a law degree with Direct Loans and Grad Plus loans and then go onto IBR (likely, for the legal field is imploding like dying star), repealing the program is a really bad idea. Doing so would gravely impact law students as opposed to taxpayers. We should address flaws in the Higher Education Act instead.

(4) Martha Neil, “As 1L Ponders Cost-Benefit Ratio of Dropping Out Now, ATL Survey Says: Do It,” in ABA Journal

I like how Neil steered clear of the law school ROI problem and tuition bubble by quoting a beautiful blaming blog post criticizing law students for greed. By this point you can probably tell my heart aches whenever law students appear in the legal press. Those poor law students (and 0Ls): slackers to professors, lemmings to scambloggers, sellouts to The Profession, paydirt to collectors. Will they ever get there? Law students are the next generation in a venerable tradition, yet they simultaneously cower behind their laptops, biding their time until their graduation and first fat paychecks. Graduates, for their part, are whiners, victims of a withering economy, lacking in emotional intelligence, insufficiently entrepreneurial, greedy, and ignorant that “Law is a business.”

I can’t put my finger on it, but I suspect somewhere in here lies a lesson about the future of a profession that holds such schizoid views of its young.

* For more on LST, check out the interview Down by Lawcast conducted with Kyle McEntee. LST’s website embeds the condensed interview.

Minnesota Taxpayers to Reduce Subsidies to Law School Tuition Bubble

I'm proud of my home state, foolish though it is.

[Update]: Scammed Hard! reports the University of Minnesota’s instructors’ salaries via the Star Tribune.

This is how Adam Daniels should’ve titled his Minnesota Daily article instead of “After Cuts, Law School Eyes Future: A 50 percent cut in two years translates to increased tuition.”

In two years, the state will cut its payments to the law school by half, from 22% to 11%. Tuition will increase by a whopping 13.5% to the U of M’s hapless students, an increase I’m guessing applies to both in-state ($28,203) and out-state tuition ($37,605). If true, that’s $32,010.41 in-state and $42,681.68 out-state. Also recall that Minnesota already increased tuition for 1Ls by 15.3% in the 2009-2010 school year.

The part that made yours truly squirm?

“The administration is doing a good job given the situation,” University senior attorney Carl Warren said. “Everybody recognizes it’s a difficult time and hard choices are being made … Sacrifices are necessary.”

Wait, who bears the burden? Minnesota will cut faculty salaries by a mere 1.15%. Recall that according to SALT’s 2009 faculty salary survey, U of M law professors make comfortable six-figure salaries, though they were far smaller according to the previous year’s survey.

“Hard choices” and “sacrifices” from students and federal taxpayers, inconvenience for law professors and administrators, relief to state taxpayers.

The other potential losers? Alumni donors, especially former Vice President and noteworthy Minnesotan, Walter Mondale, who flushed $10 million of his own dollars into the tuition bubble.

After commenting on the law school’s hope to become financially self-sufficient, Daniels writes:

[Dean] Wippman said there are still uncertainties and tough decisions to come. Still, students walked away feeling satisfied.

“I think it’s a pretty realistic perspective of how it’s going,” said first-year law student Elizabeth Graber. “It’s not great, but it’s not terrible either. I think, looking forward, he’s hopeful, and I think [students are] hopeful.”

Ms. Graber and her classmates shouldn’t be so hopeful. True, if they fund their law degrees exclusively by federal loans and intend to use income-based repayment, then federal taxpayers take a hit. Ms. Graber and her peers will then have to pay a monumental amount in income taxes on the forgiven loan balance in 25 years. If they don’t elect IBR, or if they’ve taken private loans, they’ll be zombie debtors in an economy that doesn’t need more juris doctors.

Like Arizona State University, as public law schools are privatized or decoupled from state funding, expect them to raise tuition dramatically and to suffer the bubble’s wrath when it pops.

Dear ABA Committee Chair, No, It’s Not That Complicated. Signed, The Legal Profession

"Even if the ABA’s hands are tied behind its back, its statements on tuition (and silence on lawyer labor supply and bankruptcy reform) suggest it suffers from Stockholm Syndrome."

Heather Diersen follows up her JDs Rising piece, “Dear Law School, It’s All Your Fault. Signed, Recent Grad,” with, “Dear Recent Grads, It’s More Complicated Than That. Signed, The ABA,” in which she parses an interview she conducted with ABA Accreditation Committee chair, Jay Conison, also dean of Valparaiso University School of Law. Dean Conison made it clear he did not speak on the ABA’s behalf. Frank the Underemployed Professional (Frank), operator of Fluster Cucked, draws first blood by attacking Conison’s credibility: US News & World Report ranks Valparaiso in its fourth tier, implying a severe conflict of interest for the dean.

Diersen organizes Conison’s responses according to three ABA committees (Accreditation, Standards Review, and Questionnaire). I’ll summarize the arguments and accompany them with my numbered responses:

Accreditation: Echoing former ABA President Carolyn Lamm, the ABA’s hands are tied. If a university wants to open a law school, it is free to do so. If it wants Title IV funding, it is free to meet the Department of Education’s requirements. If it wishes to obtain ABA accreditation (as opposed to state, regional, or none), it must merely meet the ABA’s standards. It’s not the ABA’s job to prevent attorney oversupply.

1). Great! The ABA’s hands may be tied, but its mouth isn’t gagged.[i] The ABA, representing the legal profession, is free to inform prospective law students and the general public that given the job market and the excessive tuition at nearly every private and many public law schools, legal education is not a worthwhile investment.

2). So it’s mouth isn’t gagged; what is it saying then? As of now the ABA has only acknowledged the tuition/debt issue with a bottlenecky chunk on its website wishfully titled, “ABA Economic Recovery Resources.”

A). Inside, we find its document, “The Value Proposition of Attending Law School,” which uses David Van Zandt’s low-balled ROI starting salary: $65,315.

B). It also contains Resolution 301, a futile (but thanks for trying) request to Congress asking it to convert private student loans to public loans, increased access to loan consolidation and income-based repayment plans, and amusingly, TARP funds.

C). An article by former ABA President Carolyn Lamm,[ii] “Law School Education Debt Has a Manageable Solution,” with the following two quotes:

The ABA has for many years — regardless of economic climate — advocated for federal laws that would ease the repayment burden on law students who found public service jobs. It’s time to explore creating additional methods to relieve repayment burdens for new graduates or new lawyers who have either been unable to find employment, have had their jobs deferred or have lost their jobs.

Now is the time for modest changes in current federal student loan programs to increase the amount that law students may borrow, and to bring existing private loans into the federal student loan system. [My emphasis]

In other words, President Lamm: (i) didn’t care if private sector lawyers were underpaid for their degrees or were drowning in debt, (ii) approved of financing the tuition bubble with taxpayer dollars, and (iii) advocated “modestly” increasing the tuition bubble with more federally guaranteed loans. At no time did she criticize law schools for hiring superfluous faculty, raising salaries, and then raising tuition. Bankruptcy reform was not up for discussion.

D). And a Statement by Lamm, “ABA President Carolyn B. Lamm on GAO Law School Cost and Access Report,” addressing debt and diversity.

The ABA is committed to ensuring that the cost of attending law school does not become an increasingly insurmountable barrier for many individuals…The ABA urges Congress and the Administration to lift the cap on federal loans to finance law and other professional schools so that all students with talent and desire can attend law school—not only those of economic means. [My emphasis]

If the ABA is so concerned with diversity, accessibility, and debt, it should tell law schools to slash tuition, not ask for more free money from Uncle Sam to feed the tuition bubble.

But the GAO rightly recognizes that American Bar Association Standards for Approval of Law Schools play only a limited role in increasing cost and are not barriers to diversity.

Much more significant in terms of cost, according to GAO, have been the move toward a more hands on, resource intensive approach to legal education, and the competition among law schools for higher slots in published rankings that purport to distinguish between the 200 ABA approved law schools across the nation.

Lamm recognized that rankings dog-piling causes tuition increases, but she not only failed to connect that to ABA accreditation standards (next section, bear with me), but she also didn’t think the situation required warning potential applicants or the general public that law schools valued their reputations over their graduates’ debt loads. Her solution was more Title IV debt-financing because in her mind law schools are entitled to incrementally raise their tuition indefinitely with no regard to graduate outcomes.

In conclusion, even if the ABA’s hands are tied behind its back, its statements on tuition (and silence on lawyer labor supply and bankruptcy reform) suggest it suffers from Stockholm Syndrome.

Standards Review: This Committee reviews the ABA’s accreditation requirements. Conison touts the proposed changes to Standards 302 and 303 (current standards here, redline to current standards here) to Diersen as the solution to the unskilled lawyer oversupply problem.

1). Standard 302 replaces “Curriculum” with, “Learning Outcomes,” but the substance of the proposed rule merely tells law schools that they may change their curricula to meet their own standards. Nothing in section 302 requires law schools to mark their degrees to the market.

2). Section 303 serves as the new “Curriculum” section, and aside from retaining the ethics and writing requirements, it would require law schools to provide, as Diersen succinctly summarizes:

(i) a simulation course, (ii) a live client clinic, or (iii) a field placement. The theory behind this is that the students will be better equipped to practice law or seek non-legal careers upon graduation.

Again, the problem isn’t just that law schools are graduating students without marketable skills (so much for the GAO’s more expensive “hands on, resource intensive approach” to legal education); rather, they’re graduating students who have few job opportunities remunerated to make their ever more costly juris doctors worthwhile. The proposed rule changes do not prevent rankings dog-piling, nor do they encourage smaller market schools to teach to their markets. Even so, Standard 302 is so permissive that it’s hard for the ABA to deny accreditation to any law school.[iii]

3). Okay. Above, I quoted Carolyn Lamm stating, “But the GAO rightly recognizes that American Bar Association Standards for Approval of Law Schools play only a limited role in increasing cost and are not barriers to diversity.” FALSE. Former President Lamm, Dean Conison, GAO, and Ms. Diersen, please allow me to introduce you to Chapter 4 of the ABA’s Accreditation Standards: Faculty, which incidentally, is not under review. Standard 402(a) states:

The number of full-time faculty necessary depends on:…(3) the opportunities for the faculty adequately to fulfill teaching obligations, conduct scholarly research, and participate effectively in the governance of the law school and in service to the legal profession and the public.

Because we know the tuition bubble functions by expanding faculty and their salaries for prestige, obvious ways to reduce the bubble include: (i) reducing the faculty by allowing higher faculty/student ratios (>30:1), (ii) relaxing the emphases on scholarship and full-time instructors, or (iii) shortening the duration of legal education since so many employers find three years wasteful. Thus, the GAO is wrong: ABA Standards play a direct role in high education costs and consequently are barriers to diversity.

4). Similarly, another way to save costs, reduce the Standards Chapter 6 “Library and Information Resources” requirement. My favorite part of this section is the Interpretation 606-5:

A law library core collection shall [!] include the following:

(1) all reported federal court decisions and reported decisions of the highest appellate court of each state;

(2) all federal codes and session laws, and at least one current annotated code for each state;

Most of these materials are easily Googleable, and law students (and faculty) don’t need access to every single appellate decision across the country. No need for tuition dollars to maintain these collections. Remember how Minnesota’s four law schools are trying to amalgamate their libraries to cut costs? See? One more way ABA accreditation standards make law school more expensive.

To be clear: I don't argue that MSL's business model is perfect. I do appreciate the contributions of Minnesotan Kevin Sorbo though.

5). Still don’t believe me? “ABA’s Bane” Massachusetts School of Law eschews cadres of full-time faculty, keeps salaries down, charges its full-time students $14,989.80 per year, and argues the ABA’s accreditation standards cause exorbitant law school tuition and inaccessibility. Given its frequent law suits against the ABA, it’s no surprise Dean Conison doesn’t mention MSL’s business model.[iv]

Questionnaire: The ABA requires every law school to report whether it’s fulfilling the accreditation requirements. Diersen writes:

When I asked Dean Conison about the allegations of misleading and fraudulent reporting of employment statistics, he believes the Questionnaire Committee is significantly concerned. During the next year, the committee is considering recommending changes in the law school reporting requirements, particularly in the type of information given with employment statistics…This seems to be what lawyers, students, and the public want most: don’t tell us you have a very high employment rating when a substantial number are not employed in legal-related work but are searching for such work.

Diersen is right that reformers should hope the ABA will significantly improve the questionnaire. There are three problems with it currently.

1). First, it only asks law schools to provide employment information that they already provide NALP, even though we know NALP has no authority over law schools.

2). Second, the ABA doesn’t collect salary information from the law schools. That again tells us the ABA is unconcerned with the juris doctor’s market value.

3). Finally, and most importantly, this is all self-reported, meaning law schools can game the questionnaire just like they game US News’s rankings. Worse, they can outright defraud the ABA, so long as their responses sound plausible. The Questionnaire will have limited reliability until law schools are subjected to independent audits.

Diersen closes with a fear that Frank also laments in his depressing piece, “Why Prospective Law Students Will Never Get the Message”: that the legal profession is broken, and the tuition bubble will not burst. The tides of law students can never be turned away, and law graduates will end up in other fields for want of access to the profession; their law schools will then claim the juris doctor’s flexibility got them there. Diersen writes:

The ABA’s attempts to improve our law schools’ transparency and curriculum may not decrease the number of lawyers fighting to practice. What we can hope, is that those choosing to run in this rat race will do so with more knowledge…I wonder if there are really many people that go to law school without intending to have a legal-related career. It seems more likely that people go into non-legal careers due to economics and opportunities.

When faced with the truth, that the ABA denies its accreditation authority confers to it any real power, and that it mutinies against telling the public the legal profession suffers from structural oversupply, then until Everitt Henry’s lawpocalypse we’re left with the democratic tools Nando of Third Tier Reality advocates:

This is why my goal is modest, i.e. inform people and hopefully we can prevent at least some people from committing financial suicide.

[i] I swear this was Elie Mystal’s metaphor, but I can’t seem to prove it. I know I didn’t come up with it.

[ii] I’ve yet to hear any comment on the issue by the ABA’s new President, Stephen Zack.

[iii] As an aside, the current Standard 303(c) states:

A law school shall not continue the enrollment of a student whose inability to do satisfactory work is sufficiently manifest so that the student’s continuation in school would inculcate false hopes, constitute economic exploitation, or detrimentally affect the education of other students.

The proposed Chapter 3 includes no such requirement, freeing law schools to exploit their students? Oops.

[iv] Incidentally, MSL has opened its own “feeder college,” American College of History and Legal Studies, in Salem, NH. Its undergraduates can apply to MSL as 2Ls, saving them a year of law school—something that no law school has tried because, “Most strong law schools that are well established would be disinclined to try to create such a system because they recognize that their applicant pools are already very strong.” The article fairly notes that the college is still unaccredited, and that MSL’s bar passage rate is 69% for first-time takers, which is below the state average.