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More on law schools losing money

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In a previous post I estimated that the large majority of ABA law schools are running substantial deficits this fiscal year. This post is about the consequences of that situation.

As a preliminary matter, I’m going to briefly address commenter Dan’s argument that it doesn’t make economic sense to close a law school as long as its operating deficit disappears if its parent university only attributes marginal as opposed to pro rata indirect university operating costs to the school’s budget. This is a distraction. Indirect costs are real operating costs, and a school arguing that it should only be responsible for the marginal indirect costs it generates is really an argument that the school should be allowed to free ride on other schools within the university, since the university’s schools have to collectively pay for all those costs one way or another.

Basically, the bottom line question, for the 90% of law schools that have parent universities, is whether it’s acceptable to central for the law school to be subsidized by the rest of the university’s programs. (For the 10% of law schools that are free standing, the bottom line is much simpler, since they don’t have the option of not at least covering their operating costs in the long term).

The answer to this question is likely to vary a lot between institutions. Law schools have several potential arguments as to why they should be subsidized by the excess revenues over costs generated by Psych 101 etc.

(1) This is all very temporary, and one day soon demand for legal education will increase to levels that will eliminate the deficit.

(2) It’s prestigious for the university to have a law school. In its more common form this is modified to “a highly-ranked law school.” In this model, the law school is like a football team that loses money. Sure, it spends more than it appears to bring in, but that’s because you’re not taking into account the less easily quantifiable benefits of having a football team/law school in regard to undergrad applications, alumni donations, university rankings, and so forth.

(3) Legal education is a public good that should be subsidized by somebody, aka can you really put a price on the Rule of Law?

(4) Lots of politically influential people in this state are graduates of this law school. These people care a lot more about the law school than the journalism school.

Central administrations will, it’s safe to say, vary quite a bit in regard to how receptive they are to these sorts of arguments. Some law schools may actually be able to continue to operate in deficit mode more or less indefinitely, assuming argument (1) doesn’t pan out. But a lot won’t. (And again, this isn’t an option for the free-standing schools). What will happen/is beginning to happen to schools that won’t be indulged in this way?

My guess is that very few if any ABA law schools currently operating will actually get shut down. The reasons are two:

(a) Completely shutting down its law school would be embarrassing to the parent university, and it will avoid doing so if there are other realistic options.

(b) It’s not at all difficult to operate an ABA law school that doesn’t lose money, even in a world in which half as many people, or even fewer, apply to law school as was the case in the salad days (Crucial caveat: (b) only continues to be true in a strong form as long as something like the current federal educational loan system remains in place).

These reasons are obviously related, since (b) means that realistic options do exist for both parent universities and free standing schools.

Here’s a simple illustration, via one data point, of how easy it would be, in the semi-long term, for almost all law schools to get their budgets in line.

Student to faculty ratio at ABA law schools, by year (figures exclude schools with less than 300 total law students):

1980: 29 to 1

1990: 25 to 1

2000: 18 to 1

2012: 14 to 1

I don’t have comparable number for student to administrator ratios, but I would bet dollars to donuts, using 1950s prices for this now-ruined figure of speech, that the decline in that ratio has been even more extreme.

In short, quite literally the only reason law schools are spending so much money is because they can. Economic necessity has absolutely nothing to do with it, which is another way of saying that what we have here is a spectacularly successful exercise in rent-seeking.

I have detailed historical budget information for one law school that reveals the school is spending exactly twice as much money, in constant inflation adjusted dollars, as it was in the mid-1990s, despite maintaining the same size student body. This spending spree, by the way, has not resulted in better employment outcomes for graduates, or even a higher average ranking in the pestilential US News hierarchy. What it has resulted in is:

(a) Vastly more administrators, and an explosion in compensation for the top of the administrative hierarchy.

(b) Far less teaching responsibility, both in credit hours taught and average class size, for the tenure track faculty. (25% of the teaching is done by adjunct faculty who in some cases are paid literally nothing, or rather are paid in “prestige.”)

(c) Genuine Corinthian leather facilities.

The school is running a big deficit, which wouldn’t exist, holding everything else constant, if it had increased annual real spending by 60% rather than 100% over the past couple of decades.

The solution to this completely self-inflicted financial crisis, is to stop spending so much money. Maybe we could even give some of the resulting savings back to our students, in the form of lower tuition, instead of sticking them with six figure non-dischargeable debts and increasingly poor job prospects.

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