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Law and Economics

[ 36 ] January 31, 2013 |

The New York Times has a front-page story about the ongoing collapse in the number of people applying to law school (from 100,700 in 2004 down to about 54,000 this cycle, with a 38% total decline over the last three years alone). The story features some nice quotes from Brian Tamanaha and Bill Henderson regarding the dysfunctional economics of law school, which is important, because as any legal philosopher can tell you, in this culture the ontological status of an epistemological insight is greatly enhanced when it appears on the front page of the NYT. (“They wouldn’t print it if it wasn’t true.” F. Nietzsche, trans. J. Jackson.)

Oddly, the story fails to mention the crucial role the law school transparency movement, to which the Times gave such valuable attention in 2011 in a series of prominent stories, has had in all this. It’s hardly a coincidence that most of the collapse of the applicant pool has taken place over the last two years, which happens to be when something resembling accurate employment and salary statistics have been extracted from law schools via political pressure.

The story also features this strange claim:

“We have a significant mismatch between demand and supply,” said Gillian K. Hadfield, professor of law and economics at the University of Southern California. “It’s not a problem of producing too many lawyers. Actually, we have an exploding demand for both ordinary folk lawyers and big corporate ones.”

She said that, given the structure of the legal profession, it was hard to make a living dealing with matters like mortgage and divorce, and that big corporations were dissatisfied with what they see as the overly academic training at elite law schools.

This is a very peculiar use of the word “demand.” Big corporations have put the squeeze on BigLaw, because they’ve decided they will no longer subsidize the training of junior associates to do work people trained to be lawyers should do. Even more problematically for the Cravath model, they’ve also decided they won’t pay BigLaw rates any more for essentially clerical work. So firms can’t bill out a lot of what first and second year associates do, and a lot of other work that such people did is now outsourced to the document review mills and to non-lawyers.

In other words, client demand for various services that used to fatten the bottom lines of the big firms has imploded, not exploded, because it has been shifted to other service providers, or is no longer billable when performed by the firms themselves. This is a structural not a cyclical shift: it’s not as if GCs are going to decide that when and if more deals are being done it’ll be OK for firms to bill out monkey work at $300 an hour again.

The “overly academic training” at law schools has nothing to do with this. That’s an issue about failing to train people to do legal work. The collapse in demand from BigLaw clients is a product of the realization that a large amount of work traditionally done by lawyers can be done by non-lawyers with either no loss of quality, or not enough loss to make it worthwhile to pay the added cost of having lawyers do it.

The claim about “ordinary folk” is even stranger, but it’s one that’s being made a lot these days by legal academics desperately searching for a raison d’ paycheck. The argument goes something like this:

(1) Many people in this country who could benefit from legal services aren’t getting those services because they’re too expensive.

(2) Those services are too expensive because law school costs too much.

(3) If future lawyers could go to law school without incurring so much debt, they could afford to offer legal services at a price that far more people could afford to pay.

(1) is certainly true. (2) and (3) are just wrong, and obviously so.

The cost of legal services has almost nothing to do with the cost of law school. Why would it? No client cares about how much it cost you to get a law degree, which means that no client is willing to pay more for legal services because a lawyer has a lot of educational debt. This theoretical claim is confirmed by empirical observation: there are literally hundreds of thousands of lawyers in America who went to law school when it was radically cheaper than it is today, and it’s not as if they charge lower rates than recent law graduates (if anything they charge on average more more, because clients will to some extent pay for experience as a proxy for competence).

There are also hundreds of thousands of people with law licenses who are barely making a living by practicing law (A 2009 survey of Alabama lawyers found that 23% of the respondents with active law licenses had an income of less than $25,000 in the previous year). Such people are charging the absolute minimum they can charge while still maintaining an ongoing business.

The notion that the hundreds of thousands of lawyers in solo or very small practices in this country could somehow operate by billing out their services at X dollars per hour (with X being a figure that lots of “ordinary folk” currently priced out of the market for legal services could pay) if only law school didn’t cost so much is one of those ideas that sounds intuitively plausible until you actually think about it for three minutes, which is apparently why people in legal academia don’t.

The reason ordinary folk don’t pay for legal services even when in theory they could benefit from them is exactly the same reason they don’t pay for a lot of things they could in theory benefit from: because they don’t have any money for those things after paying for more pressing needs like food, shelter, clothing, medical expenses, transportation to work, etc.

Comments such as Hadfield’s indicate the lengths that legal academics will go to in order to talk themselves into believing that the basic problem isn’t really the basic problem. And that problem is that the economic demand in this country for people with law degrees will employ (at best) half the people who are paying us to grant them law degrees.

Comments (36)

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  1. NonyNony says:

    The notion that the hundreds of thousands of lawyers in solo or very small practices in this country could somehow operate by billing out their services at X dollars per hour … if only law school didn’t cost so much is one of those ideas that sounds intuitively plausible until you actually think about it for three minutes

    I think you actually have to have some understanding about why most students are paying us to teach them stuff in order to get what’s wrong with the logic that they’re using. Because the plausibility comes from the idea that if they didn’t have big student loans to pay off, they could charge less because wouldn’t have to make monthly student loan payments and so the “minimum they can charge while still maintaining an ongoing business” would be lower.

    Except that nobody – and I mean NOBODY – gets a college degree so that they can run a business where they work 80 hours a week to scrape by on $25K a year. If that’s the future you’re offering to your students they’re going to rightly laugh in your face and go off to find something else to do with their life.

    • TribalistMeathead says:

      “Except that nobody – and I mean NOBODY – gets a college degree so that they can run a business where they work 80 hours a week to scrape by on $25K a year.”

      Other than the vast majority of arts majors, sure.

      • NonyNony says:

        I will also guarantee you that if you ask arts majors – not graduates, but majors – if they’re in college to learn skills to “run a business where they can work 80 hours a week to scrape by on $25K a year” they will either look at you like you’ve grown a second head or get angrily defensive. They’re in college for a lot of reasons, but they aren’t there for that.

    • rea says:

      Well, but wait a minute. If you bill 1500 hrs. a year at $50 per hr., that’s $75,000. Now, of course, the trick is to keep your overhead down to where you can pocket most of the $75,000. You have to have a computer rather than a secretary, and practice out of your house rather than rent an office. You have to know how to word process and keep books, and you have to develop a body of model briefs, complaints and forms. It’s not easy. But if you’re working 80 hrs. per week and making $25,000, you’re doing it wrong.

  2. AlexD says:

    This is undoubtedly true. For your average person, $150 an hour is no more affordable than $550 an hour. People don’t have $100,000 or $300,000 to spend on lawyers. Most private persons can only retain a lawyer on a contingency fee basis, with minimal up front costs and the lawyer paid out of any recovery.

    • NonyNony says:

      Most private persons can only retain a lawyer on a contingency fee basis

      Or for things where the cost is negotiated up front and not going to be a surprise – like drafting a will or looking over a typical contract.

      When I read laments about how much legal assistance “ordinary folk” really need that they aren’t getting, I’ve always assumed that they mean stuff like that, as well as having someone to answer questions like “my neighbor is threatening to sue me because I have a six foot inflatable Abe Lincoln on my lawn and he doesn’t like it. Can he really sue me over that?” Day to day stuff that rich people apparently keep lawyers on retainer for, but that a normal person would have to decide whether or not it’s worth the money to do it.

      • Law Spider says:

        “Can he really sue me over that?”

        A: Yes, of course he can sue you, and force you to waste time & money. That’s pretty much always the answer. (Winning is a different story.)

        • Linnaeus says:

          Isn’t that the basic strategy behind a SLAPP?

          • Just Dropping By says:

            Yes, but a SLAPP is “a lawsuit that is intended to censor, intimidate, and silence critics by burdening them with the cost of a legal defense until they abandon their criticism or opposition.” (http://en.wikipedia.org/wiki/Slapp) There are plenty of frivolous, groundless, or vexatious lawsuits that have nothing to do with that specific objective. The relevant point is that clients frequently say, “I want to make sure this person never sues me.” It is, however, almost impossible to prevent someone from suing you if they really want to. All you can do is try to make a potential lawsuit sufficiently difficult/costly or unlikely to succeed that the potential plaintiff either can’t find a lawyer willing to take the case or the case will be dismissed relatively early.

  3. MosesZD says:

    I generally don’t buy legal services because they’re ridiculously over-priced. Take getting a will.

    The first ‘professional’ will I got in the 1990s was done on software by an attorney who charged me $400 for a relatively simple, boiler-plate will. (And another $400 for my wife’s will.) Since that will, and the life changes that invalidated it, I’ve had two more wills.

    The second was done by an attorney with whom I had developed a professional referral relationship and got for a ‘mere’ $300 (and another $300 for my wife). It took, from the time I got to his office to the time I (and my wife) left, less than 30 minutes to get both wills. Again, a fairly simple will done by professional software which, in this case, was not even run by the attorney, but his paralegal.

    The third will I had done was quoted at $600 for what I considered a relatively simple will. I said no thank you and got some software from Nolo Press. Software, I might add, which lacks the database management features of the professional packages, but does simple wills, POAs, etc., just as well as the professional wills.

    And when I say “as well,” I mean the boiler-plate wills are all close to verbatim as they all seem to use the exact approved boiler-plate language attorneys have used for decades.

    And I understand that professional software is incredibly expensive so there are some costs associated with it. After all, I am a retired CPA and have spent, over the years, tens of thousands of dollars on professional tax and research software.

    But there comes a point in time when it’s clear the services being provided are massively over-billed because, in the old days, it took hours to manually type a will which then required proof-reading, correction, more-proof-reading, etc.

    And it’s not just attorneys. Accountants are just as bad. It used to take four-hours minimum to do a simple 1120 or 1120S. Now it takes 30 minutes and is done by some staff accountant who is half-trained (at best) and poorly supervised by a CPA who may or may not be adequately trained in the field.

    Yet the prices keep going up and up and up… And for no good reason but CPAs, like attorneys, can over-bill.

    • Most of the estate attorneys I know charge pretty low rates for simple wills– they are loss-leaders. Probating the estate is where the money is for that sort of thing. Of course, the real money is in sophisticated estate planing, but some volume work, largely done by paralegals, helps keep the lights on.

    • mr. anonymous says:

      I would never have tried to handle my bankruptcy without a lawyer. Wills are one thing. That’s something else entirely

      • Snarki, child of Loki says:

        I am absolutely NOT going to be consulting a lawyer when my will is being probated.

        Instead, I’ll represent myself in front of the judge, which will certainly get more attention.

  4. ChrisS says:

    The reason ordinary folk don’t pay for legal services even when in theory they could benefit from them is exactly the same reason they don’t pay for a lot of things they could in theory benefit from: because they don’t have any money for those things after paying for more pressing needs like food, shelter, clothing, medical expenses, transportation to work, etc.

    I would add that some don’t know what legal services they could even benefit from. I certainly didn’t have a lawyer review my lease documents when I was dirt poor. Legal fees are viewed as someone trying to complicate a simple matter and extracting as much money as possible (e.g., simple divorces, wills, mortgages, etc).

  5. John Protevi says:

    raison d’ paycheck

    I like this and will use it in the future.

  6. DanMulligan says:

    Thanks for highlighting the quote from USC — it struck me in the face when I read the article as well.

    Not that this proves anything but I will note that when I opened my own office in the early ’90′s I spent quite a bit of time costing out the office to set my fees, primarily because I really thought that charging $250 an hour was absurd. The cost of my education was not a factor.

    • Murc says:

      Not that this proves anything but I will note that when I opened my own office in the early ’90′s I spent quite a bit of time costing out the office to set my fees, primarily because I really thought that charging $250 an hour was absurd.

      You’d think there’d be alternative models than ‘by the hour’ available for a lawyer in a solo practice or small partnership to price themselves out.

      I can’t speak for everyone, but when I hear things like that I immediately get scared, because it means I might be walking into a situation where I end up on the hook for many hours of expensive work and end up with nothing because I run out of money before it is finished.

      • DanMulligan says:

        Just did litigation. Highly different animal.

      • Just Dropping By says:

        You’d think there’d be alternative models than ‘by the hour’ available for a lawyer in a solo practice or small partnership to price themselves out.

        There are plenty of solo and small firm practitioners who use fixed fee arrangements, contingency fees, etc. for their cases. However, in my experience, they still all mentally assign themselves an hourly rate because there are a finite number of hours in the day to work and they have to cover overhead costs of X dollars a day.

        • L2P says:

          Yes, that’s true.

          Firms are totally happy to give a “fixed price” for services, but their fixed price is going to be very close to what they think they could bill out hourly. Their costs are the same, and they want to make the same money, so the cost isn’t terribly different. The certainty for the client can sometimes by a plus, but that’s often matched by not knowing exactly how the attorney is fixing the bill amount.

          • DN says:

            This is very much what I experienced. I hired a lawyer for legal action against a former employer a couple years back. It really turned out there was a lot of work to be done. I got a bit over 100k and paid about 25k. His time biling was very reasonable, didn’t include secretarial work at outrageous rates, etc. it just took a lot more time than I expected. It would have worked out te same without the angst if I had taken the contingency approach.
            DN

  7. Murc says:

    Is there a possibility we’re requiring lawyerly assistance for things we really shouldn’t be?

    I don’t want to get all “Matt Yglesias on dental hygienists” here, but it seems like a lot of basic legal work people need could and should be done by paralegals.

    I know, I know; if we open the door to paralegals doing work that’s open to lawyers, that’ll make the crisis in legal education worse, not better. But hear me out.

    Lawyering is a profession that requires a substantial investment of time and money, and is also considered a profession of high social prestige, up there with doctors. This is true at the same time that many people go underserved re: legal services.

    But as long as people expect that being a full-fledged lawyer is going to be a gateway to a six-figure income, that’s always going to be true, isn’t it? Even if law school were priced reasonably, if you expect to be making huge bank, you’re always going to try and price yourself accordingly. This is going to end up pricing the people who most need your services out of the market, isn’t it?

    It isn’t necessarily the case that people who get a lot of education expect to make a lot of money. From upthread:

    nobody – and I mean NOBODY – gets a college degree so that they can run a business where they work 80 hours a week to scrape by on $25K a year.

    Teachers do this. Teachers receive a level of education similar to lawyers (masters degree, professional certification process) and can expect to start out… well, not at 25k, but between thirty and forty in many places. And if you think there aren’t teachers out there busting their asses 80 hours a week for that 35k, well, you’re just wrong.

    But they expect to do this. They go into college knowing that’s going to happen.

    It seems to me that if we’re concerned with working class and lower middle class people getting access to quality legal services that are relevant to their lives, we’d need to either change the nature of lawyering as a profession, or let paralegals or other semi-lawyerly equivalents take on the load

    • TribalistMeathead says:

      Actually, it’s already happening with solo practitioners and boutique firms – I remember interviewing at one firm that said they don’t hire first-year attorneys because their paralegals do the work that first-years would do at other firms. And it’s only going to become more prevalent as fewer and fewer clients want to effectively be on the financial hook for training first-years.

      But by the time I left the paralegal field, I was being billed out at almost $250 an hour, because it turns out senior paralegals aren’t cheap either.

      • Murc says:

        But by the time I left the paralegal field, I was being billed out at almost $250 an hour, because it turns out senior paralegals aren’t cheap either.

        My understanding is that it’s a longrunning… joke, I suppose?… in the legal profession that if you’re a first-year associate at any given firm, the experienced paralegals are not only being paid more than you, they are far, far more important than you, and the senior partners, if forced to chose between you and them, will chose them in a second.

        • TribalistMeathead says:

          I was never paid more than a first-year at any point, but I only had 8 or 9 years’ experience when I left – someone with 20 years’ experience, if you include overtime, maybe. You heard the occasional rumor of a case manager at a sweatshop making $200K/year.

          Second point is kind of unlikely – they would probably defer to the paralegal on some procedural matter, but it seems like it takes a lot more time and money to recruit an attorney than a paralegal, so.

        • Julian says:

          the market rate for firms (I don’t know the total number of associate jobs this represents) is 160k for first year associates, and I don’t think many experienced paralegals make more. But that is for market-paying firms.

        • Anonymous says:

          I have no idea what they get paid, but I’m pretty sure the most senior paralegals at my (market-rate, biglaw) firm bill at or above the hourly rate we first-years bill out at.

    • L2P says:

      Being a teacher is hard but not as mind-killingly annoying as being a lawyer. If teachers and lawyers made the same amount of money, can you think of anyone who wouldn’t rather spend their time teaching kids instead of arguing with other attorneys about discovery deadlines and whether a claim is worth $200,000 or $250,000? I don’t.

      I don’t think anybody leaves teaching because they just love being a lawyer. I know a lot of ex-teachers who became lawyers to make more money, but not because they just love arguing over the proper notice for a motion or because they love going over contracts with a fine-toothed comb. YMMV.

      • Anon21 says:

        If teachers and lawyers made the same amount of money, can you think of anyone who wouldn’t rather spend their time teaching kids instead of arguing with other attorneys about discovery deadlines and whether a claim is worth $200,000 or $250,000? I don’t.

        Ooh, me, me! But I really don’t care for children. (And before you riposte that other lawyers are like children, it’s the need to talk down to kids that gets me, not the stubbornness or emotionality or whatever.)

    • djw says:

      But as long as people expect that being a full-fledged lawyer is going to be a gateway to a six-figure income, that’s always going to be true, isn’t it? Even if law school were priced reasonably, if you expect to be making huge bank, you’re always going to try and price yourself accordingly. This is going to end up pricing the people who most need your services out of the market, isn’t it?

      This claim would seem to be at odds with the situation for legal employment outlined in Paul’s post; stuff like A 2009 survey of Alabama lawyers found that 23% of the respondents with active law licenses had an income of less than $25,000 in the previous year. I don’t think there’s any good reason to believe Alabama is a huge outlier. Whatever expectations JDs have about six figure incomes, eventually reality sets in and they start behaving according to it. My understanding is that there just isn’t a good way to provide truly low-cost legal services and make an actual living doing it, even once we set aside cultural expectations.

  8. Monday Night Frotteur says:

    Most people in this country have no money, and thus have very little at stake with any legal proceeding that they wouldn’t get court-appointed counsel for.

    The exception might be Termination of Parental Rights cases, but I have to say that in my experience, the parents who fought for their Parental Rights were abhorrent people in shocking situations who should never have been allowed to have kids in the first place. In other words, I don’t think adding more lawyers to that process is going to increase the amount of justice in the system.

    • L2P says:

      Also, in most states the state provides an attorney for the parents in those cases.

      The places I usually see “ordinary people” with attorneys are workers comp and bankruptcy. Otherwise, it’s only contingency cases.

  9. curiouscliche says:

    Once again, there are rich lawyers and there are poor/unemployed lawyers. We need to seize control of state bar associations and increase annual bar dues for the richer lawyers. We can use these increased bar funds to pay money to non-profit legal clinics, like domestic violence clinics and other legal service clinics. These clinics can then hire more lawyers for desperately needed legal needs, which would also tighten up the legal labor market and help every lawyer get a job and higher pay. We could even abolish or reduce pro bono requirements to make this change more politically palatable for state bar associations. Simple.

    But yes, we should also demand the shutdown of lots of law schools, too. But doing that won’t help people get currently unaffordable legal services or help the hundreds of thousands of lawyers who are already unemployed or underemployed.

  10. CJColucci says:

    A great deal of my work involved the defense of cases where the a winning plaintiff benefits from fee-shifting — the winning lawyer submits a statement of the hours put in and his or her hourly rate, they parties squabble, the judge cuts the award somewhat to prove he or she is awake, and the losing defendant pays. (For those who care about such details, winning defendants can’t get fees from losing plaintiffs unless the plaintiff’s position was not only unsuccessful but damn near frivolous.)
    Fortunately, I don’t lose often, because then I have to green eyeshade the hours spent and research hourly rates. The hourly rates are almost always fictitious, and understood by all concerned to be so, because the client almost never has the money to pay a market rate. So what the courts do is look at how long the plaintiff’s lawyer has been practising in this subject area, see what firms with real paying clients charge and get for, say, a local commercial litigator with similar years of experience — usually looking at smaller to mid-size firms, not Sullivan & Cromwell, and multiply the fictitious rate by the allowable hours.
    Inevitably, when I get bored doing this, which is also inevitable, I start to imagine what hourly rate I would be awarded if I successfully represented a plaintiff. In the Southern District of New York, I could ask for $400 an hour with a real likelihood of getting it; $350 would probably be leaving money on the table. (Knock about $50 an hour off each figure if I try the case in Brooklyn federal court instead of Manhattan federal court, a 10 minute subway ride away.)
    I begin to daydream about hanging up a shingle: 1500 billables at $400, overhead and staff salary about half…. All I’d need is about half a dozen cases or so…. But I don’t hang out with anyone who could afford to pay me $400/hour, and certainly not anyone who has significant legal business to throw my way. And I know from experience (remember, I don’t lose often) how few fee-shifting cases, where I could charge this fictitious rate on behalf of an impecunious client, actually pay off. I’d be rejecting at least 3/4 of the cases that come in my door, and couldn’t find in a year a half-dozen worthwhile fee-shifting cases if my life depended on it, which, in a sense, it would.

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