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The usual suspects


Jeff Toobin has a piece in the New Yorker pointing out that increasingly stratified economics of the legal profession reflect larger social trends:

In the legal world, the haves are doing better than fine. In 1985, average profits per partner in The American Lawyer’s list of leading law firms was $309,000 ($623,000 in current dollars); today, the profits per partner for roughly the same group is about $1.5 million. These numbers hide an even greater disparity. Those at the very top of the pyramid—firms such as Wachtell, Lipton, Rosen & Katz; Quinn Emanuel Urquhart & Sullivan; Cravath, Swain & Moore; and a handful of others—are thriving as never before, with annual profits per partner in the multimillions.

But those at the bottom of the pyramid—recent law-school graduates—are struggling. A recent article in The Atlantic recited the grim numbers . . . [Yet] law schools have continued to cycle students through their doors and load them up with debt, in spite of the reduced demand for legal education (and for lawyers). Eighty-five percent of graduates now carry at least a hundred thousand dollars in debt. Even dubious operations, like the Thomas Jefferson School of Law, in San Diego, have kept their doors (and palms) open.

It’s clear that the nation needs fewer law schools, for many that remain are only offering their students false hopes of employment in exchange for big debt. These students are getting the legal-education equivalent of the subprime loans that helped sink the national economy. In this case, though, the risk to the broader public is small, while the indebted students may struggle with the burden for the rest of their lives. (The vast middle of the legal academy—at the big state schools, for instance—is doing only a little better than the schools at the bottom. For a full view of the depressing facts, see the superb Law School Transparency Web site.)

As with law firms, the top law schools are doing fine. Graduates of the most highly regarded institutions may not have the cornucopia of options that their predecessors enjoyed a few years ago, but few, if any, will go jobless. These students have large loans, too, but they’ll be able to repay them. As in days past, they will migrate to the big firms, where, by and large, their prospects are bright. And the cycle will continue: the rich (in credentials, at least initially) prospering, and the poor struggling. So it goes for lawyers—and, it seems, for everyone else.

(The last paragraph overstates in my view the extent to which graduates of even the most elite law schools are insulated from financial disaster, but Toobin’s general point is correct).

Speaking of New Yorkers, here’s a nice illustration of the perverse economic structure of the system:

New York Law School is a large, perpetually unranked law school, occupying a fancy new building that it put up on prime Tribeca real estate.

The school charges nearly $50,000 per year in tuition, and estimates the nine-month cost of living for students as $23,591 — a realistic figure for anywhere within reasonable commuting distance — meaning that someone paying full tuition who finances the cost of attendance with federal loans will rack up around $273,000 in debt, including interest, by the time the first federal loan payment comes due six months after graduation. Even someone with a 50% scholarship who takes out federal loans will have $180,000 in non-dischargeable loan debt. (Last year, fully half of all NYLS students paid sticker tuition, and 96.5% paid more than 50% of the sticker price).

Job outcomes for 2013 grads:

56% of graduates did not get a legal job within nine months of graduation.

Nearly 30% had no full time work of any kind.

More than 100 of 562 graduates were completely unemployed nine months after graduation.

5.7% of graduates (at most) got jobs with salaries that would theoretically allow them to begin to repay in a timely manner the average graduate’s debt load, even with that debt being paid back on the government’s 25-year extended repayment plan.

Meanwhile, on the other side of the accounting ledger:

In FY2013 the school reported earning $106,725,026 in revenue. More than $71 million of this came in the form of tuition (slightly less than 10% of this tuition was redistributed to students receiving “scholarships,” i.e., cross-subsidized tuition discounts, paid for by their less fortunate brethern).

Most of the rest of the school’s income came from the fruits of its financial investments, made possible by the collection of tuition revenues over many years. Note that NYLS has a very small endowment relative to its revenues — $32.3 million at the end of FY2013. These funds are of course almost all restricted by the terms under which they were donated. Such restrictions don’t apply to the “donations” students (or more accurately taxpayers, via federal loans) make in the form of tuition payments.

As of the end of FY2013 NYLS owned, outside of any endowment restrictions, more than $158,000,000 in publicly-traded securities, and $110,000,000 in other securities. In addition, the school has been engaging in the most straightforward (from an accounting perspective at least) financial speculation, in the form of interest rate swaps. Gambling on these financial derivatives cost the school $17,548,000 in losses in FY2012, while earning it $13,038,000 in FY2013.

Where is all this money going? Apparently, to a handful of favored faculty members, who, even by the standards of contemporary law schools, are drawing stupendous salaries and other forms of compensation.

Consider Prof. Marshall Tracht. Prof. Tacht entered legal academia 20 years ago, published three law review articles on the way to getting tenure at Hofstra (and apparently not much else since, besides teaching materials and brief notes for practitioners), then moved over to NYLS in 2008.

I asked a couple of colleagues who write in the areas in which Prof. Tracht specializes if they had ever heard of him. They hadn’t. Nevertheless, Prof. Tracht was paid $451,477 by NYLS (or more precisely by NYLS’s students, or more precisely yet by the taxpayers who unwittingly lent those students the money that in due course found its way into the professor’s accounts).

Five other NYLS faculty members (not counting the dean, who was paid $468,635) were paid between $327,892 and $383,499 in FY2013.

What possible justification could there be for this sort of thing? Let’s round up the usual suspects:

(1) NYLS must compete for top scholars in order to preserve and enhance its scholarly reputation.

NYLS has no scholarly reputation in the legal academic world.

(2) NYLS must compete for top scholars in order to preserve and enhance its place in the law school rankings.

NYLS place in the law school rankings is that it is unranked, i.e., tied for last place with about 65 other schools.

(3) NYLS must compete for top scholars in order to attract students who will want to study under various luminaries of the profession.

See (1) and (2) supra.

(4) NYLS is merely charging what the market will bear, and distributing the proceeds of these efficient market transactions to key employees on the basis of institutional self-interest, which, in an efficient market, results, in the long run, in socially beneficial outcomes.

This sounds somewhat more plausible if you say it to yourself in a robot voice.

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