How Much Is (Nonfinancial Corporate) Land in the U.S.A. Worth?

You wouldn’t know it from my writing, but I’ve been wading into real-estate mapping and assessment this year. For reasons I’ll discuss in future posts, I’m researching land-residual vs. building-residual assessment methodologies. Naturally, my initial Internet searches into building-residual assessments led to Georgist writings, and with good reason. Land-residual assessment, which subtracts land values from the total price, invariably leads to absurd results.

One source on the topic is Michael Hudson, whom long-time readers will recall as the economist who coined the phrase, “Debts that can’t be repaid won’t be.” Hudson gave a speech about the demerits of land-residual assessment in 2001, which he republished in 2010. He repeated a claim I first read in the superb collection The Losses of Nations: In 1993, the government valued nonfinancial corporate land at -$4 billion, and as a result, it stopped publishing economy-wide real-estate data.

1994 is the last year for which [the Fed] has estimated economy-wide land values. The problem was that the Fed discovered that its methodology produced nonsensical results – a negative value of $4 billion for all land owned by nonfinancial corporations for the year 1993. This number resulted from imputing land values by subtracting the estimated replacement cost of buildings from overall property market prices. This “land residual” method left little room for land value, for replacement values continue their rise even when overall market prices decline, as periodically occurs. In such downturns the replacement value absorbs nearly all the market value of corporately owned real estate.

It’s a damning accusation, but it’s also untrue. The Fed never stopped tracking nonfinancial corporate real-estate data. Perhaps it changed its source, but in the age of FRED, all this information is readily available. In fact, one can find three releases of the supplemental tables to the Fed’s Financial Accounts of the United States between 1997 and 1998 that indicate a residual nonfinancial corporate land value of -$4.6 billion, which appears to be what Hudson discovered. Starting with the June 1998 release, however, the residual land value for 1993 rose to $21.1 billion and ultimately to $25.5 billion when 1993 last appears (June 2000 release).

You can chalk Hudson’s mistake up to the migration of data to the Internet, or any other reason really. I don’t think it’s bad faith on his part, just bad luck. Obviously, though, there isn’t a clear conspiracy by Fed statisticians to cease reporting data that made it look bad.

Indeed, if anything, the reported data vindicate Hudson and make the financial accounts look worse: In 1996 and 2009-2010 the final residual nonfinancial corporate land value fell below zero—far lower than -$4.6 billion. More disturbingly, it’s skyrocketed since 2010.

See for yourself.

(Source: Federal Reserve (NCBEMVQ027S, RCSNNWMVBSNNCB, RCVSRNWMVBSNNCB), BEA fixed-investment price indexes (Table 1.1.9.), my calculations)

(I deflated residential and nonresidential structures by their respective BEA price indexes and then estimated the land value by keeping it in proportion to assessed fair-market real-estate values. It’s crude but “accurate,” I think.)

So at the beginning of 2010, the entire species missed out on the best real-estate deal ever: $566.83 billion (current dollars) to anyone willing to take all nonfinancial corporate land along with it. Just last week the Fed valued it at $4 trillion. And here you thought you missed out on speculating on Bitcoin.

So what should we make of this?

Are the Fed’s estimates merely imprecise or inaccurate? Imprecision just means that the land value is off by about a few trillion dollars one direction or the other. When the land value is negative, that’s just fuzzy math that ought to be improved.

By contrast, inaccuracy suggests government estimates of either the total real-estate values or the structures is systemically flawed. These properties might be worth far more than their assessed values. For instance although it’s a nonprofit, Brooklyn Law School’s 2 Pierrepont Street dormitory was ridiculously under-assessed at $3.88 million when the school sold it for $35 million. Alternatively, as I think Hudson tends to argue, the overall real-estate prices are correct but too much of their price increases are imputed to structures. He comments persuasively that “Building prices seem to be responsible for the rise in real estate prices, while land prices are held responsible for their decline.” The implication is that commercial land owners can depreciate land value.

I tend to think both inaccurate assessments of fair-market and structure values are at work, but the former is the bigger culprit. Regardless, Hudson is correct that encouraging local governments to adopt building-residual assessment methodologies would prevent absurd numbers from appearing in the financial accounts of the United States.

Steel Links

Haven’t done a links post in a while, but there are a few things worth writing about in brief.

Allison Schrager, “Becoming a Doctor or Lawyer Is Still Worth It,” Quartz, July 14, 2015.

Of course, that doesn’t mean going to law school is still worth it because, of course, the article carefully points out that not all law school graduates work in high-paying professional jobs and lawyers have a notably high attrition rate.

Wait, it didn’t point that out? Oops. Then maybe we shouldn’t be saying that the return to law school is so high. (I should add that the underlying paper at least discusses this.)

Molly Hensley-Clancy, “LegalZoom Wants to Be ‘The Good Guys’ in the Shady World of Student Debt Relief,” BuzzFeed, July 6, 2015.

Fun fact: BuzzFeed does investigative reporting. I’m happy to serve it a compliment. What it found is that everyone’s favorite legal disruptive innovator is making money by … charging federal student loan debtors $700 to sign them on to income-sensitive repayment plans. Which they can do for free on their own. LegalZoom swears it’s informing borrowers of that fact, but that’s not what happened when BuzzFeed‘s reporter called in posing as a debtor. (Yes, really. This is what journalists are supposed to do.)

Did I mention that a couple weeks ago New York’s Student Protection Unit shut down a financial services company for charging student debtors money for signing them onto IBR plans without telling them they could do so for free? Did I also mention it paid a $10,000 fine? Does anyone call these companies legal disruptive innovators?

Now, to editorialize: If you couldn’t tell, I think LegalZoom’s impact is hyped, UPL or not. It’s quite possible that it makes money by (a) offering services lawyers wouldn’t charge for, as in the above case, or (b) serving clients for legal issues they might not bother going to a lawyer for anyway, e.g. a no-income, no-asset, few creditors, chapter 7 bankruptcy filing. Neither of these activities takes business from traditional lawyers.

In fact, in 2014 30 percent of LegalZoom’s revenue came from subscription fees, meaning it wasn’t selling actual legal services. Also, one of its biggest sources of revenue appears to be incorporation documents for California businesses. Perhaps it offers needed services, but consumer regulators need to catch up with it.

Gainful Employment Rule Post

Yeah, this link is for me. Because readers forwarded around my post applying the Gainful Employment rule to all law schools, I went back and updated it so that the table showed only the results from the total income test. I figure in case researchers want to cite it or replicate my results, they’ll have an easier time understanding what I was doing. I realized that the results of both tests produce the equivalent number, so even if a law schools’ graduates’ discretionary incomes are lower, the table now shows the equivalent income graduates would need to be making. I didn’t update the post’s text, so bear that in mind.

Expert Institute’s Best Legal Blog Contest

A generous reader has nominated the LSTB for the Expert Institute’s Best Legal Blog Contest. You can read about it here. As ever, I am grateful to you, my readers, for your support.

Brooklyn Law School Building Might Sell for 7 Times Assessed Value

Readers might recall a year and a half ago the glee with which I reported that Brooklyn Law School sold a number of its buildings for triple their assessed values. It’s unusual that I can discuss legal education and land values at the same time, so when the opportunity presents, I pounce like a lion.

Yesterday, the New York Daily News contributed a sequel to the story: BLS plans to sell a “prime Brooklyn Heights” building, the 39-unit 2 Pierrepont Street. The sale hasn’t occurred yet, but the figure being thrown around behind the scenes, according to the article, is $30 million.

…Which shouldn’t be at all surprising. As former Brooklynite, I can tell you that Brooklyn Heights is absolutely gorgeous. Catastrophically under-built given its proximity to lower Manhattan, but absolutely gorgeous.

As one might expect, the assessed value of the 2 Pierrepont St. parcel is a laughable $3.88 million, even though BLS paid just $2.2 million to acquire it back in the 1980s. Thus, the alleged asking price is nearly 8 times the assessed value, strongly implying that the property is absurdly under-assessed. Given the location’s value, the article suggests the building will either be torn down or transformed into condos. Those BLS students never realized how good they had it, and they’ll probably never live in such an expensive neighborhood again.

As with last year’s post, the joke is on New York City. Because BLS is a nonprofit it can play land speculator while only being asked to pay $10,000 to the city after lopping off its full bill for “faculty and student housing.” Hopefully NYC will get more from 2 Pierrepont Street’s successors. The law school, though, is cashing in.

**********

Appendix: 2 Pierrepont Street’s assessment and tax bill:

Notice of Property Value–2 Pierrepont St

Property Tax Bill Quarterly Statement–2 Pierrepont St

Lowering Law School Tuition Mainly Benefits Students, Taxpayers

Gotta be quick, but Brooklyn Law School dean Nicholas Allard writes in The Chronicle of Higher Education, “Lowering Law-School Tuition Benefits Everyone, Not Just the Students,” which deserves comment.

The fact is that the financial model of law schools is broken. Unless the schools do what they can to make legal education more affordable, they will price themselves out of business, contribute to the high cost of legal services that most people need, and widen the gap in access to justice.

The first sentence is true, but the rest is questionable. Many people will not go to law school at any price, but some schools will survive if they slash tuition. However, tuition has little to do with the cost of legal services and access to justice (not the justice of rents to legal educators).

Allard appears to believe that high tuition leads to high debt, which leads to lawyers not taking public interest jobs that pay less then courtroom janitors. It’s odd because two paragraphs later, he mentions Public Service Loan Forgiveness and Pay-As-You-Earn, which falsify his thesis. If highly indebted graduates want to serve the poor, they should be able to under the current loan-repayment framework. Sure, the proposed caps on PSLF would be bad for debtors and are based on the belief that they over-borrowed rather than the schools over-pricing, the government over-lending, or the jobs-underpaying, but graduates do not often pass up public interest in favor of biglaw. Not everyone gets such a choice.

It is a shameful canard that student loans and indebtedness are the cause of high tuition. They are not; they are the symptom. Tuitions at law schools are soaring … because of the way law schools spend money in pursuit of rankings rather than investing in students, education, professional training, and scholarship.

Not sure what Allard means here, but I think it’s the closest I’ve seen to a law school dean rejecting the Bennett hypothesis. Without excessive federal lending, law schools couldn’t raise their costs. It’s the means of the tuition bubble, not the motive and opportunity—if you fancy looking at this like a murder mystery.

With political currents eroding America’s historic and successful support for higher education, we can’t expect anyone else to help. We must do what we can to break this cycle ourselves. By making law school expensive for motivated, talented women and men, we are shortchanging ourselves. In this country, lawyers have played the central role as guardians of our democratic republic and architects of economic opportunity and prosperity. They will be needed even more in the future.

Political support for legal education has not been a success. It’s created too many law schools, too many law school graduates, and too much unpayable student debt. For example, the NALP just reported that the percent of 2013 graduates employed at all in February 2014 had fallen—negligibly—to 84.5 percent, even though late last year Dean Allard predicted, “[T]he employment rates reported in 2014 will be substantially higher than in 2013.” (More on the NALP report another time.)

Look, good on Brooklyn Law School for unilaterally cutting its tuition next year. It may not be a voluntary rather than demonstrative act like if an elite law school did it to buck the U.S. News rankings, but we can have competent lawyers without student loans and expensive law schools.

On a 25-year fixed repayment the average 2013 Brooklyn Law grad would have to cough up over $750 a month to make his or her student loan payments on $110,000 in debt. Even under the old IBR system, that would require an income of $121,600 per year from day one to escape loan cancelation after 25 years. Since many BLS grads don’t make that kind of income, many will undoubtedly take PAYE and the government will have to write-down the losses. Thus, Allard is right: The beneficiaries of lower law school tuition aren’t just law students but everyone else. Although, it is a “shameful canard” to imply that the federal loan program is a blessing for everyone but law schools and a handful of lucky law students.

What’s ‘Bold’ About Nominal Law School Tuition Cuts?

…Is the question readers of The New York Times asked themselves Saturday morning while reading, James B. Stewart’s, “A Bold Bid to Combat a Crisis in Legal Education.”

The article begins by promptly misleading readers into believing there is a “crisis” in legal education because five law schools have closed, even though apparently all five were non-ABA-accredited schools in California, which frequently enroll only a few students. The distinction is important because the article doesn’t investigate why those law schools closed (if they did—I suspect the NYT’s source is the Wikipedia, which isn’t always reliable for information on California law schools) and what commonalities their fiscal situations shared with Brooklyn Law School’s, the central character in the article.

Indeed, the NYT quotes Brooklyn’s dean, Nicholas Allard, saying that high law school debt burdens are a significant problem, yet students at most non-ABA schools are ineligible for the kind of easy federal student loans ABA schools are infamous for. In 2012-13, 49 percent of Brooklyn Law students took out an average $34,800 in Grad PLUS loans, which can cover the $29,500 gap between the annual Stafford Loan limit and full-time tuition—and also living expenses in cheap, cheap Brooklyn Heights.

As for Brooklyn’s “bold” move:

[Brooklyn] announced that it was taking some unusually bold steps to confront the crisis: The school is cutting tuition and abandoning what has become a widespread obsession with climbing the ladder of national law school rankings.

But the real question is, does Brooklyn Law have a choice? For instance, this year it accepted 47 percent of its full-time applicants, up 7 percent from 2012-13 and up 17 percent from 2011-12. In 2012-13, only 16 percent of its full-time students were paying full tuition. Sixty-three percent were paying $35,400 or less, which after cursory investigation makes Brooklyn the most “over-leveraged” law school in the New York City area in terms of merit aid. Even Seton Hall doesn’t subsidize that many full-time students by that much. Clearly, Brooklyn Law School was playing the scholarship game very, very hard.

And it still lost badly, hence the cuts.

Aside from the above criticisms, too much of the article relies on quotations rather than real reporting. Specifically, the last three paragraphs might as well have been written as an editorial by Dean Allard.

Mr. Allard argues passionately that the legal profession isn’t just for Supreme Court clerks and high-paid associates at elite firms. He noted that 94 percent of Brooklyn’s graduates passed the bar exam and 90 percent were currently employed in legal careers. Many meet the legal needs of underserved populations.

To my knowledge, the bar passage rate is right for last July, but the 90 percent employment in “legal careers” would be a miraculous turn of fortune for Brooklyn Law’s graduates. Fewer than half of its 2011 and 2012 grads were employed full-time, long-term in “bar passage required” positions, and less than 10 percent of both classes were in full-time, long-term “JD advantage” jobs. Did I mention that more than a quarter of these grads reported being either unemployed or didn’t respond to the survey?

Allard adds:

“Those who do manage to graduate from law school end up with excruciating debt. They feel compelled to take jobs with the highest paycheck to find some relief. They don’t feel free to work in jobs that fit their interests or that meet a critical demand.”

Tell that to the Brooklyn grads who never have an opportunity for such jobs.

Then he closes with the real howler:

[Allard] said he believed that law schools had an obligation to address the problem. “If we don’t get this right, we’ll create an acute shortage of lawyers, and law schools will price themselves out of business.”

An acute shortage of lawyers? In a state that allows foreign-trained graduates to take the state’s bar exam?

Yes, the nominal tuition cut and reduced merit scholarship gaming is a good thing. However, characterizing it as “bold” instead of “necessary”; comparing Brooklyn to tiny, non-ABA law schools that aren’t eligible for federal loans; and then handing the mic to the dean is not good reporting. The Times takes Allard at his word when he rhetorically asks, “If you increase quality and reduce cost, demand goes up. Why isn’t everybody doing this?” when it should be asking him why schools weren’t doing that before. Why can’t the Times ask what if anything law schools can do to reduce the signaling effect on law school costs?

Real coverage on the story would have involved asking whether the proposed tuition cut would in fact increase demand. Law degrees aren’t perfectly spherical widget cows from an econ textbook; they’re highly subsidized positional goods that have lost their popularity. How will Brooklyn Law communicate to prospective applicants that $45,000 annual tuition as opposed to $53,000 will make their degrees worth the risk of 20 percent unemployment nine months after graduation?

We’ll find out in a few years if the Times and Allard are right. If Brooklyn’s application and matriculant positions stabilize (it lost 700 full-time applicants this year), increase, or drop less than at nearby schools that don’t try cutting tuition, then we’ll know that its target consumers respond to price changes. However, history has shown that law school applicants weren’t sensitive to price increases in the past, so it stands to reason that they won’t be when prices fall.

If this is true, then Brooklyn Law will have to do more than cut nominal tuition.

‘State Bar Proposals Fail to Address Law Students’ Woes’ on The Am Law Daily

“State Bar Proposals Fail to Address Law Students’ Woes“

My favorite part of this article is the delicious line about the Luddites.

Brief correction: In the article I referred to one of the reports as coming from the “California Bar Association,” it’s actually the “State Bar of California.” Two different organizations. My mistake. I apologize.

The Census Bureau Strips Speculation From the Housing Vacancy Rate

I went to a lecture at the Henry George School in late June, given by an Episcopalian minister who spearheaded the squatting movement in New York City in the 1970s and 1980s (and, I guess, today). It was really inspirational stuff. He said—and I’m not going to verify this—that there were 120,000 vacant housing units in New York City and 40,000 homeless people in 2012. The reason for the mismatch is exactly what you’d expect: Private landowners are holding their property off the market. Georgist economist Mason Gaffney argues this occurs because landowners behave as a cartel, refusing to supply land to those who need it to increase the price.

If you want to verify whether land speculation causes higher prices throughout the United States, you’ll be disappointed to find that the housing vacancy rate in the U.S. is dropping, though it’s still higher than it was in the late 1990s. In an era of concentrated wealth, one would expect landowners’ land-hoarding to cause the vacancy rate to rise, based on all the foreclosures we hear about.

Yet, Dean Baker tells us that residential construction is depressed because of the high vacancy rate. Who’s right?

Here’s how the Census Bureau calculates the vacancy rate.

If you look for the data in Historical Table 8 that Baker links to, though, you’ll find that the vacancy rate’s denominator is not the entire housing inventory. It excludes “seasonally vacant units” and units that are “held off the market.” In other words, if speculation is going on, the vacancy rate deliberately excludes it.

Here’s the total vacancy rate, the held-off-the-market rate, and the composite vacancy rate (it’s the weighted average vacancy rate for owner-occupied units and rentals because Census doesn’t separate “rented but awaiting occupancy” and “sold but awaiting occupancy).

What’s obvious here is that since about 2010, the Census Bureaus’ vacancy rate has dropped while the held-off-the market rate has not. Meanwhile, total vacancies are down slightly from their peak over 14 percent during the housing bubble, but it’s still well above the 11-12 percent range from the 1990s.

Now, you ask, how is “held off the market” defined? You get three answers:

(1)  Occasional Use

(2)  Usual Residence Elsewhere (URE)

(3)  Other

There is but a slim difference between “occasional use” and URE, if any. “Other,” has a more nuanced *cough* definition:

Other vacant. Included in this category are year-round units which were vacant for reasons other than those mentioned above: For example, held for settlement of an estate, held for personal reasons, or held for repairs. Below are the definitions for the other vacant categories presented in Historical Table 18.

• Foreclosure – [Q1, 2013 = 10.8%]
• Personal/Family Reasons – [19.6%]
• Legal Proceedings – [6.0%]
• Preparing to Rent/Sell – [6.2%]
• Held for Storage of Household Furniture – [7.8%]
• Needs Repairs – [15.3%]
• Currently Being Repaired/Renovated – [8.5%]
• Specific Use Housing – [1.4%]
• Extended Absence – [6.0%]
• Abandoned/Possibly to be Demolished/Possibly Condemned – [5.9%]
• Other Write-in/Don’t Know – [12.5.%]

Table 18 would be enormously useful, except it only goes back to … 2012. Heckuva job Census.

Importantly, though, “Foreclosure” includes units that are “bank owned,” meaning if banks want to hold them off the market, then they’re in “foreclosure,” even if it’s actually for naked real estate speculation.

You might ask “Why is this important?” I’ll tell you: Think about all those times you read about how student loan debt “delays important milestones like marriage, family formation, and home ownership.” If the banks were forced to put their housing inventory up for sale or rent, then there’d be a large wealth transfer from the hyper-wealthy banks to real-life human beings. The long-run problem of student loan debt, even with IBR, is a generation of Americans that will lack the earning power to buy homes from aging boomers.

I was going to stop there, but if you want more evidence, take this super-downer article from The Japan Times, “Pity the Generation That Can’t Retire Before 80,” July 6, 2013. Here’s a taste:

“Mr. B” is a 56-year-old junior high school teacher. His son studied hard, was a good student, got into a good university and graduated with distinction. He sent out 50 job applications and was invited to 30 interviews. But the expected offers didn’t materialize — not a single one. The young man grew seriously depressed. He hinted at suicide. His parents had to watch him constantly. The strain was too much for Mr. B’s wife. It wore her down. Though far from elderly, she showed symptoms of Alzheimer’s. They got worse. She had to be institutionalized. Her son blamed himself. His depression deepened. And so it goes.

At least in Japan, 40 percent of people under 30 don’t have student loan debt. The Japanese government is trying to reflate the economy, and it’s not championing credential inflation. The U.S. isn’t so lucky.

Now you understand why I think young Americans should all be Georgists.

The LSTB’s Unauthorized Guide to State Bar Reports on the Legal Profession’s Problems

…Because really, who would authorize a guide on state bar reports?

As of last week, we now have at least four state bar association task forces/special committees/working groups/whatever offering their opinions on what’s wrong with legal education, law school debt, lawyer licensing, and the legal profession. Here is a list of the reports and links to my posts on them:

• New York State Bar Association: “Report of the Task Force on the Future of the Legal Profession,” April 2, 2011. (PDF)
• Massachusetts Bar Association: “Report of the Task Force on Law, the Economy and Underemployment,” May 17, 2012. (PDF)
• Illinois Bar Association: “Final Report and Recommendations of the Special Committee on the Impact of Law School Debt on the Delivery of Legal Services,” March 8, 2013. (PDF)
• California Bar Association: “Task Force on Admissions Regulation Reform: Phase I Final Report,” June 11, 2013. (PDF)

The two biggest themes, as far as I’m concerned, are what the task forces/committees/working groups/etc. thought about (1) student loan debt, specifically whether it’s passed onto clients and whether it should be dischargeable in bankruptcy, and (2) revising legal education and law licensing requirements to include more skills training over theory-heavy classes and whether that will result in better employment opportunities for new lawyers.

The NYSBA Task Force’s report didn’t say that student loan debt is passed onto clients, and it even chided lawyers who claim they want practice-ready law graduates but hire from elite law schools anyway. Most of the Task Force’s recommendations were tentative, but they did include changing licensing requirements to include assessing professional skills, adding a sequential licensing system, and adopting the Uniform Bar Exam. Instead, they got mandatory pro bono requirements. The quality in reasoning in subsequent state bars’ reports goes downhill from here.

Massachusetts’ Task Force determined—okay that’s being generous, it really assumed the conclusion—that poor training causes new lawyer underemployment because medical and dental schools require a lot of skills training and their graduates aren’t underemployed. Its report neglected to mention that those professions thrive with practitioner shortages or that aging boomers will need regular medical checkups. The Task Force said very little on student loan debt, and it advised transforming the third year of law school into a residency-type experience ala medical and dental school.

The Illinois Special Committee claimed that salaries for new lawyers are too low to support their student debts, public interest employers have difficulty paying new lawyers enough to cover their debts and suffer high turnover, and underpaid lawyers don’t serve the poor or “middle class” in favor of higher-paying lawyer positions or leaving law practice altogether. The Special Committee also believed that lack of practice-readiness also contributed to underemployment. Its recommendations on reforming federal student lending, however, were fairly reasonable.

Finally, California’s Task Force subtly concurred with the Illinois Special Committee’s reasoning on student loan debt, but it leaned more heavily on the practice-readiness problem by claiming that firms unfairly pass their new lawyers’ training costs onto clients. Better training would make new lawyers more productive (raising their incomes to repay their student loans) and simultaneously reduce costs to clients (I’ll discuss this nonsense later). The Task Force recommended requiring more skills courses and pro bono work of law students and new lawyers. This report is easily the most poorly thought-out of the four.

Law School Debt

Contrary to what I may have implied last week, none of the state bars’ reports explicitly say that law school debt is directly passed onto clients. However, the Illinois Special Committee report effectively makes that argument with its gathered testimony as listed in its executive summary (1-2):

• Small Law Firms Face Challenges Hiring and Retaining Competent Attorneys

“Many small law firms are unable to pay the salaries new attorneys need to manage their debt. As a result, turnover at such firms is high, forcing those firms to spend additional time and resources training new attorneys (compounded by the problem of inadequate readiness for practice upon graduation).”

• Fewer Lawyers are Able to Work in Public Interest Positions

“Attorneys with excessive debt are less able to take legal aid or government jobs which, in Illinois, have starting salaries between $40,000 and $50,000 per year. Public interest offices that raise their salaries to accommodate debt and attract talented lawyers are unable to hire as many attorneys, reducing the services these offices can provide.”

• New Attorneys Have Too Much Debt to Provide Affordable Legal Services to Poor and Middle Class Families and Individuals

“Salaries among law firms primarily serving the legal needs of middle class individuals and families are also inadequate to support the debt loads of new attorneys. … Because debt makes it difficult for attorneys to survive at that salary level, young attorneys move quickly to higher paying legal sectors if possible, and, if not, many leave the profession.”

• As Fewer Attorneys Find Sustainable Jobs in the Private Sector, More Attorneys Enter Solo Practice

[Note: This contradicts the first point on small practices being unable to hire lawyers. It’s a lot cheaper to work for a small firm than start a small practice.]

• Attorneys Report that Debt Burdened Lawyers are Less Likely to Engage in Pro Bono Work
• Debt Drives Young Attorneys Away from Rural Areas

“Already, rural areas of Illinois have significantly fewer lawyers per capita than more populated areas, because it is more difficult for lawyers to service significant debt in rural areas.”

[Oh God, don’t abuse attorneys per capita again…]

• Heavy Debt Burdens Decrease the Diversity of the Legal Profession

[Because there’s nothing minorities need more than low-paying legal work.]

• Threats to Professionalism

The quotations dramatize the Special Committee’s arguments effectively, but it applied good facts (I’m assuming) to bad theory. Imagine you’re a public interest firm and you have to raise your salary offers to $50,000 to attract lawyers to help them pay off their debts. This reduces the funds available to hire more attorneys, reducing the total quantity of legal services provided. Thus, it’s an indirect lawyers-pass-their-student-loans-onto-clients argument. It looks like this:

(The crayoned stars are included for illustrative clarity and because they’re cute.)

This is your garden variety price floor, the same kind that haunts minimum wage arguments. The red area that gives state bar associations frowney faces is the legal transactions, and hence, lawyer employment, that would be possible without student loan debt but are lost because of it. Remove the debt, and suddenly lawyers can happily work in low-paying jobs.

But there are at least three problems with this argument as characterized in the public interest example: (1) On page 3, the Special Committee stated that “Funding for public interest jobs is unstable,” indicating that such jobs are neither as plentiful nor as secure as the testimonials claim; (2) there are plenty of underemployed law school graduates who would love to take those kinds of jobs at $40,000 to $50,000 per year, like the solo practitioner on page 22 who made only $15,000, and we’re not told why they’re not; and (3) my criticisms of IBR notwithstanding, the Special Committee basically said that IBR doesn’t work because lawyers are scared to use it, even though for public interest lawyers the loans would be canceled after 10 years without any tax penalty. Indeed, trivializing IBR is really the only way the Special Committee could claim student debt reduces quantity of legal services.

Actually, I put up all those quotes just to show that they’re not so much evidence of student debt’s impact on the profession but are really just evidence of low demand for lawyers and low wages’ impact on the profession. In other words, even without student loan debt, these problems would still exist. No one complains that McDonald’s has low pay and high turnover—if anything, that’s built into its business model—but when lawyers dare to take higher-paying jobs than serving the poor and “middle class,” or worse, abandon their law careers, then it’s an insult to the profession. How dare they rationally choose higher-paying work? Don’t they realize that they’re lawyers?

Yes, they do realize it, but they also realize that working in law doesn’t pay very well, and they’re better off doing something else that pays more. I might be overselling this since I’m not the one gathering testimony (the new lawyers I’ve talked to have all said they’re on IBR—without reservations), but it’s unlikely that student debt is the substantial factor in lawyer underemployment here. I certainly concede that it doesn’t help.

Skills Training

I don’t want to spend too much time rehashing the argument from last week, but training costs are baked into all prices for final goods and services (i.e. not second-hand stuff). Normally, if you make the workers pay for the training—even if it’s good training—in theory they won’t pay for it if it won’t raise their incomes. The fact that lawyers’ incomes aren’t high is due to lack of demand for lawyers and the fact that some occupations might be more productive than law, not want of skills training. The theory the state bars (save New York) rely on here is identical to the one they use for student loan debt, except they’re substituting training costs with debt.

For example, returning to the California bar’s task force report:

We emphasize, above all, that we expect future improvement in practice-readiness will prepare new lawyers for the changing legal job market far better than they are today, which will help them become productive lawyers with the capacity to begin repaying educational debt at the earliest opportunity, and ultimately will lower costs to clients, who, in today’s legal market, are too often forced to bear the costs of training young lawyers, either in the form of increased fees or ineffective lawyering. (17)

Let’s think this through: If lawyers are trained well, they will be more productive, so they will serve more clients effectively than poorly trained lawyers. So far so good. It won’t necessarily reduce costs to clients, both because they’re already “forced to bear the costs of training young lawyers” and because they’d be charging market-rate prices. However, if lawyers are selling their services at the market rate, then skills training won’t raise their wages much to help them to pay off their loans, and it certainly won’t result in all law school graduates being employed as lawyers. J.D. overproduction and all that.

I add again that better training is good, but it won’t create jobs as the California, Illinois, and Massachusetts bars believe.

Poverty

I think I’ve discredited the theories the state bars are working under. Here’s mine: Demand for legal services is low during a depression and is also income elastic, meaning rich people lavish money on lawyers for the same reason that they lavish money on shiny rocks and pieces of canvas that some European splattered paint all over hundreds of years ago. Similarly, poor people spend less on lawyers because they need shelter, food, clothing, medical care, etc. more urgently. Yes, America is in fact a very poor country.

Here’s what I mean:

(Again, illustrations included for clarity.)

The red portion that gives the LSTB a frowney face is due to poor people being poor. That’s bad, and it also means they won’t hire lawyers. Note also that the slope of the line is greater than 1, which is to show that I’m theorizing that legal services are a “superior good,” which means that when income increases the quantity purchased increase more quickly. If we want poor people to afford legal services, then the state must pay for it.

Thus, in the real world, when people lose their jobs or their incomes fall due to our leave-no-rentier-behind policies, they do not hire lawyers. State bars should stop internalizing external causes of lawyer unemployment, and should admit that there are too many law schools. And if you think I’m a pessimist, then what does that make the authors of these bar reports that treat poverty as a permanent, unsolvable blight on humanity?

NYT Op-Ed Provides Mostly Irrelevant, Unsubstantiated Reasons for Two-Year Legal Education

Daniel B. Rodriguez and Samuel Estreicher, “Make Law Schools Earn a Third Year,” New York Times, January 17, 2013.

Right off the bat, Rodriguez and Estreicher mean well when praising New York’s discussion about reducing its legal education requirement from three years to two. Unlike others who’ve written op-eds for the Grey Lady in the past, I believe they are working in good faith, and make no mistake I’m fine with reducing the number of credits people need for law school.

…But I’m not fine with doing it for irrelevant or incorrect reasons because it doesn’t solve the underlying problems. For instance, the op-ed’s banner (the text in the tab at the top of your browser) reads:

Practicing Law Should Not Mean Living in Bankruptcy

Clearly the authors have never heard of Income-Based Repayment or Income-Contingent Repayment. These policies make it quite easy to practice law (or do anything else for that matter) if one has excessive student loan debt.

The piece, unfortunately, sprawls around, but here’s a list of claims as they appear:

(1)  Law school will be more accessible to low-income students

Law school is already over-accessible. People can finance their degrees plus living expenses with unlimited federal loan dollars. The problem is their low-incomes after they graduate (to the extent they’re not caused by the depression), their non-lawyer jobs (ditto), and the law school debt the government will write-off in twenty years.

(2)  Two-year legal ed. will help the next generation of law students avoid a heavy debt burden.

The solution to the problem must address the paramaters of the problem. Between 1999 and 2011, four of New York’s 13 private law schools joined the buy-two-get-one-free club because their tuitions grew by fifty percent in constant dollars. Another two probably crested the line this year, but I ain’t checking. Hacking off a year of law school (scholarship redistribution aside) only sets most of them back to the late 1990s. There’s no reason to believe it’ll halt future tuition increases because it doesn’t address their cause.

(3)  Legal education in the United States will improve.

Yay! I get to agree with someone! Y-A-Y!

Students would have the option to forgo that third year, save the high cost of tuition and, ideally, find a job right away that puts their legal training to work.

Yes, but less time in law school does not create jobs.

Myriad services are now being outsourced (often abroad) to nonlawyers, and the number of positions with large firms is dwindling, making it harder for graduating students — many of whom are saddled with six-figure student-loan debts — to find work at the outset of their careers that can even begin to pay off their obligations.

Such prospects are discouraging many young people from pursuing law degrees, and pushing away lower-income students the most.

I’ve never seen any evidence whatsoever that poor people are being “discouraged” from law school due to the fear of outsourcing and low pay. I suspect that it’s mostly wealthier people who have gotten the message and that the people enrolling today aren’t from the class that reads The New York Times.

Then again, I barely read The New York Times, except the international section, the addictive obits, and Krugman’s blog.

Law schools must do a better job of containing these costs. We also need more financial aid for students.

But the financial aid is already over-generous. That’s why law schools don’t feel the need to contain costs: So long as there’s a core of people willing to pay whatever absurd amount of money the marginal law school is willing to charge, nominal tuition will continue to increase.

As of today, there is no marginal law school because they’re still viable despite the applicant nosedive. That may change, but even if law schools close the first one left standing won’t slash its tuition, move into a smaller building, cancel its profs’ tenure, or force academics to teach full course loads.

While this wouldn’t increase the number of available jobs…

Yes, because less time in law school does not create jobs.

…A two-year option would allow many newly minted lawyers to pursue careers in the public interest or to work at smaller firms that serve lower- or average-income Americans, thereby fulfilling a largely unmet need. As it is now, many young lawyers say they would love to follow this path but cannot afford to because of their onerous debts.

But new grads have IBR and ICR. Their debts are not an issue (for the majority). The problem is that poor people are poor, not that lawyers’ debts are preventing them from charging $1.77 per hour.

Many law students can, with the appropriate course work, learn in the first two years of law school what they need to get started in their legal careers.

Most people who attend elite law schools can probably pass a bar exam with one year of self-study.

With this reform, law schools would have an obvious financial incentive to design creative curriculums that law students would want to pursue — a third-year program of advanced training that would allow those who wished it to become more effective litigators, specialize or better prepare for the real-world legal challenges that lie ahead.

Maybe, but creative curricula do not create jobs.

Those who graduate from rigorous three-year programs will not only emerge with sharper legal skills, but also be more essential to employers, raising the rate of job placement out of law school.

Sharper education will not create jobs. (Come on guys, you’re making me lose readers!)

A handful of states, including New York, allow individuals to take the bar after working for a law office for a number of years, in lieu of going to law school, though this approach is seldom used.

I’m glad Rodriguez and Estreicher brought this up because it raises a very important question: Why is this route seldom used? What does law school offer that law office preparation does not? What are the law students paying for? In theory (there is a theory behind mandatory legal education, right?), law school improves the likelihood of bar passage for those who might otherwise fail, but given the LSAT-bar passage correlation, it probably doesn’t. If people need some formal education to pass a bar exam, why not let the evil grubby free market provide it (without unlimited student loans)? Maybe people go to law school because they (rightly) think no decent-paying legal employer will hire them if they don’t buy the degree from a prestigious institution. If signaling value is all that law schools sell, then why do we need the ABA to regulate them, lend their students unlimited sums, and let them operate tax free?

Some will argue that the two-year option would only create unequal classes of lawyers and glut the marketplace with attorneys who don’t have the skills and training that generations of law school graduates before them have had.

We doubt this will occur. And in any case, the risk ought to be balanced with the varied needs of the American people for legal services.

Count me out of this “some,” for as I said at the beginning, a two-year law school is better than a three-year because it saves law students’ time and money, though it will throw recent grads under the bus by glutting the market even more (bet they can’t wait to send those employment data to U.S. News). I just think that legal educators need to come up with better reasons for why people should have to attend law school before becoming lawyers. I certainly don’t see how a two-year lawyer balances the needs of the American people. The beneficiaries are the students and taxpayers, but comprehensive reform would serve them better.

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Wait, I take it all back. These are flawless arguments. I’m willing to sell out for these irrelevant justifications for shortening law school because maybe in another 15 years when tuition grows by another fifty percent, some law professors will write another op-ed for the Times rationalizing one-year law schools.

NYT Obituaries Are a Time-Suck

Stay clear, whatever you do. While searching for Japanese filmmaker Nagisa Oshima’s obit, I ran into this one today, “Jeffrey O’Connell, Legal Scholar of No-Fault Coverage, Dies at 84“:

In 1965 Mr. O’Connell joined with Robert E. Keeton, another law professor, to write “Basic Protection for the Traffic Victim: A Blueprint for Reforming Automobile Insurance,” a book in which they proposed to do away with a system in which an accident victim had to sue another driver to collect damages, in most cases from the second driver’s insurer.

The authors proposed that the victim’s own insurance company would pay the damages instead, regardless of who was at fault. The other driver would recover damages from his own insurance company.

Except for cases of extreme loss, in which lawsuits would be permitted, suits to get greater sums would be prohibited, depriving personal-injury lawyers of a ready supply of clients.

As a result, the authors contended, everyone could be quickly compensated, and administrative costs, particularly legal ones, would be curbed. Logically, insurance payouts would drop, meaning car owners’ premiums could be reduced.

Everyone who’s taken the New York bar knows about the no-fault system, which at least was simpler to understand than the elective share statute. If I recall, accident victims can only sue other drivers if their injuries are over $50,000 and they are “catastrophic” in character, or something like that.

Does the system work? Legendary scamblogger L4L of Big Debt, Small Law says “No.”

Okay, he didn’t just say no, he wrote a delightfully satirical post in March of 2010 on the subject that I will reprint. I cannot vouch for the veracity of any of L4L’s claims, but his point that no-fault can be easily defrauded is plausible.

If anything, the insurance defense sweatshops were latecomers to outsourcing’s bandwagon. We speak from experience here, having launched our legal “career” from a $40 K a year downtown no-fault mill (no kids, that number’s not missing a digit) back in 2006. Sweet Jesus, the memories. King’s Civil Court, 141 Livingston Street, Brooklyn. The infamous 9th floor “no-fault” part.

How fondly we recall the motions being wheeled into chambers via a rusted Pathmark shopping cart, its wheels buckling under the weight of so much legal toilet paper. John, the grouchy but loveable court clerk, had Stage IV throat cancer and would hack blood while rasping at us losers to “shut the Fuck up and listen for your case” during calendar call.

He wasn’t kidding. John kept a .38 special, sans holster, tucked in the waistband of his trousers. Sometimes he’d hammer a stapler inside a steel wastebasket to get the attention of us barristers when the din of no-fault bickering crossed a certain decibel level. Hell, even a chainsaw operator would cringe at how loud that place could get. We still awake at night with ears ringing, recalling the nightmare of $347 neck-brace negotiations. Those old “dollar collars.”

That said, John was one of the few good guys you’ll meet in the miserable sewer of ShitLaw practice. He realized full well what a pathetic waste of time the entire charade was, and how poorly paid we were paid to boot. Your humble narrator’s constant complaining once led him to announce: “if you monkeys ever form a union, you’ve found your shop steward.” They just don’t make ‘em like John anymore. Blue-collar Brooklyn all the way. A Mets fan. God bless the old bastard. Cancer long since carried him away to that big courtroom in the sky.

For those unfamiliar with no-fault practice, a brief primer: It’s the legal equivalent of stamping license plates in a prison metalshop, only at lower wages and more authoritarian working conditions. In NY State, a driver’s own insurance company pays medical expenses and lost wages regardless of accident fault. This moronic idea, hatched by “policy” wonks in the NY legislature, naturally resulted in systemic and wholesale disaster. To wit:

Mobsters get two junkyard cars, register & insure them, and then recruit homeless dudes and illegal immigrants to stage minor accidents. The police are summoned, an accident report prepared, and the scammers then begin “treating” at bogus outer-borough medical mills operated by the crime syndicate. The insurance carrier is then billed for the phony “treatments” plus a truckload of phantom medical supplies like canes, neck braces, massage units, and so on. NY even allows billing for quack “medicine” like aromatherapy, acupuncture and other witch-doctor nonsense.

Like the Lilliputians in Gulliver’s Travels, these parasites teamed up to hamstring the insurance carriers. Remember kids: a cloud of mosquitoes tops a tiger’s death toll any day. The rules & caselaw all favor this infectious swamp of scammers, and billions have been stolen from NY drivers as a result of this ongoing heist. Shady collections law firms “buy” collections files from the clinics at 50 cents on the dollar, file Summary Judgment motions, and then just wait for the case to come up on calendar. For every victory, the medical mill gets an additional cash kickback. The byzantine rules and massive deluge of cases (150+ a day in Brooklyn alone) make it death by a thousand cuts for the carriers, who simply raise rates rather than pay a living wage for the cases to be properly litigated.

That doesn’t stop the occasional IDH (Insurance Defense Hero) from slipping thru now and then. All veterans of ShitLaw know the type. These barristers make up for their abysmal salaries in bare-knuckle belligerence and “fighting the good fight.” Unlike the usual hung-over, half-asleep J.C. Penney clad schlubs of ShitLaw, the IDH struts into court like Clint Eastwood entering a saloon. For their 40 K a year they’d take a bullet for Geico or Allstate, and take it with pride. Every case is like “High Noon.” One almost expects an IDH to come flying into depositions wearing tights and a Superman cape. We’ve often thought of pitching this character as an action-hero cartoon. Just imagine:

“Slower on the LSAT than a lobotomy victim, more powerless than a day-old fart, able to cut n’ paste huge motions with a single click- what’s that flying into court?

It’s a BIRD-it’s a PLANE- no, it’s the INSURANCE DEFENDER !”

Hell, we’d watch it. So would you.

Today it’s not uncommon for no-fault associates (or what’s left of them) to earn as little as 25 K a year,with turnover measured in hours opposed to months. After just 6 weeks at my first no-fault gig, I’d already risen 7 seniority notches on the letterhead. But wait: this “firm” gets even funnier:

Too stingy to buy motion-exhibit tabs, they’d instead have us cannibalize incoming papers for their office-supply content.

“Just pry apart the Velotex binding and yank the fuckers out”, said the partner. He even had a custom-bent screwdriver designed just for that purpose. We associates swapped these exhibit tabs like inmates trade smokes. An “Exhibit A” and other high-alphabet letters were always in short supply, whereas a “Q” was common as cabbage. Whenever someone quit we’d quickly plunder his desk to “stock up” on these much-needed supplies. One nasty, rodent-like guy who’d lasted 10 months had a real motherlode: eight “A’s” and eleven “B’s” stashed in his drawer. Or should I say “under his drawer.” Well hidden-the prick. For what motion he was saving them I have no idea. We called him “the squirrel.”

This dump also printed us our own cheesy business cards on that perforated cardstock you can buy at Staples. For laughs I’d bring the whole sheet into court and just rip them off as needed, like a dispenser. Once I gave this hot Wilson Elser chick a whole uncut page of them, but she never called me.

Sadly, my once-rising star was an elevator to nowhere. Insurance defense work is so boilerplate and mindless that many firms “dump” experienced associates once a certain salary threshold is reached (roughly 60-65 K). Five year’s experience isn’t worth much more than five minutes, and it’s simply more cost effective to “keep the line moving” with freshly minted suckers from Car’Bozo, Brooklyn, NYLS and other gutter schools than pay experienced associates a living wage. Now that Bangalore &Co. are handling all the paper-churning, these insurance “firms” can simply troll craigslist for per-diem clowns to show up in court and bicker over the cases for as little as $25 a file. Like the Joads in The Grapes of Wrath, these migrant barristers wander the court system like fruit pickers.

The work was beyond mindless. Like the A-Team, if you’ve seen one episode, you’ve seen ‘em all. The characters changed while the script stayed the same. Day after day, year after year, squads of TTT grads trekked off to court, got yelled at/berated by court personnel, and limped back to the office to cut n’ paste the next day’s sad mountain of paperwork together. “Lateral” options from this practice area included can & bottle scrounging, panhandling on the 7 train, or becoming assistant fry cook at Burger King.

You can read the rest here (17-20).