Home / General / Quantities are limited

Quantities are limited

/
/
/
2150 Views

ggr

Having demonstrated that that, discounted to present value, a law degree from an American law school is worth on average just under one million dollars, Michael Simkovic has turned his attention to a genuine social crisis: the billions of dollars in lost earnings suffered every year by prospective law students, who have made the serious, and eminently preventable, mistake of not enrolling in law school

The blame for this multi-billion dollar catastrophe is easy to ascribe: ongoing bad publicity, based on a sensationalist media environment, that promotes TV shows like “Suits,” which I’ve been told is about document reviewers being paid $15 per hour to be basement-dwelling helots for law firms that use them for casual and mind-numbing labor, and Legally Blonde, a film which has been compared The Seventh Seal in regard to the existential dread in which it envelops the viewer.

Earlier this month, I charted the overwhelmingly negative press coverage of law schools and the legal profession over the last 5 years and discussed the disconnect between the news slant and economic reality. To the extent that news coverage dissuaded individuals from attending law school for financial reasons, or caused them to delay attending law school, newspapers will on average have cost each prospective law students tens of thousands, or even hundreds of thousands of dollars. The total economic harm across all prospective law students could easily be in the low billions of dollars.

What can we learn from this?

Accurate, informed, and balanced news coverage does not happen of its own volition, particularly in a world where sensationalism and negativity attract eyeballs and sell advertising. …

Luckily, a spate of bad PR is a far from insoluble problem:

Law schools are competitors, but they need not compete in ways that are mutually destructive. Competition should drive progress, innovation, and value, not mud slinging. Law schools have a great deal in common, make important contributions to society, and can and should pursue shared goals and values together. …

For years, misinformation accelerated while the Association of American Law Schools failed to respond effectively. … The AALS now has new leadership with new priorities and there have been welcome signs of progress. … However, there is still a great deal of work to be done. …

[T]he AALS needs to become a valuable resource for journalists, helping them provide higher quality coverage and guiding them toward greater accuracy when they err. If this effort is to succeed, it will require more resources. …

Many law schools, facing deficits of their own, may feel as if they cannot afford to invest in a collective communications effort. But law schools cannot afford to wait longer to make this investment. As time goes by, resources will become even more constrained, and misunderstandings will become more entrenched. Law school budgets may be tight, but that is all the more reason to use limited resources prudently.

I propose the following:

The AALS should commit to shifting as many of its own resources as possible from less pressing needs to focus on public outreach efforts
Member schools should temporarily provide additional funds earmarked specifically for public outreach efforts
These efforts could be funded by a 50% to 100% increase in annual dues (roughly $5,000 to $10,000 for the smallest law schools and $15,000 to $30,000 for the largest) for the next 3 years.

A few thousand dollars extra per year per AALS member school—the equivalent of a few hundred dollars per faculty member and administrator—could fund several highly qualified fulltime communications professionals. …

This effort could well save a teetering law school or three, or an exaltation of untenured law faculty, but the real beneficiaries would be the children, who after all are our future:

Providing more accurate information to the public could benefit law schools, but the greatest beneficiaries would be the students whose lives law school can change for the better. For many college graduates, the $30,000 to $60,000 extra per year that they can typically earn with a law degree will mean the difference between living in a safe and clean neighborhood or one that is dangerous and polluted. The expected boost to earnings can improve the healthfulness of their food, the quality of their healthcare, and the quality of education they can afford to provide for their own children. For most law graduates, the extra earnings will affect when and whether they can afford to retire. One of the best things law schools can do to help the middle class is to educate more of them.****

Contrary to popular belief, there is little evidence that larger law school graduating class sizes predict worse outcomes for law school graduates, nor is there evidence that smaller graduating class sizes predict better outcomes—at least not within the range of changes in class sizes we’ve seen over the last 50 years. …

Artificially driving down law school class sizes through misinformation, in the hope that smaller classes will have better outcomes, is misguided. Moreover, misrepresenting law school as high-risk provides fodder for those who wish to scale back federal student loan programs, reduce protections for those unlucky few individuals who do have poor outcomes, and drive up the costs of financing higher education.

Many attacks on law schools are thinly veiled attacks on the legal profession itself—on the quality of the training lawyers receive, on their intelligence and their ethics. If these attacks turn good people away from attending law school, and if the legal academy and the legal profession fail to respond effectively, they risk the critique becoming a self-fulfilling prophecy.

Now this is all very well, but altruism can go too far. Law schools, per Simkovic’s calculations, are producing something like $40 billion every year in enhanced earning capacity for their graduates. How much of this bounty are they (OK we) capturing? Not much, given our current absurdly low tuition rates. To help rectify this situation, I submit the following brief contribution to the literature, suggesting how this revenue ought to be divided, once Prof. Simkovic’s planned publicity campaign has set the record straight:

ARE LAW PROFESSORS UNDERPAID?

A COMMENT ON THE ECONOMIC VALUE OF A LAW DEGREE

INTRODUCTION

In a recent paper, (1) Michael Simkovic and Frank McIntyre undertake a sophisticated econometric analysis, which demonstrates that the mean present lifetime value of a law degree for a law graduate of an ABA-accredited law school is nearly one million dollars, over and above what that graduate could expect to earn with a bachelor’s degree. At least two striking conclusions follow from the authors’ analysis:

(1) Law school is dramatically underpriced.
(2) Law school professors are seriously undercompensated.

Part I of this comment attempts to estimate how much law school tuition should be raised to properly take into account the value of a law degree. Part II offers a proposal regarding how this enhanced revenue should be distributed.

Part I

Simkovic and McIntyre estimate that, discounted to present value, a law degree enhances its holder’s lifetime earnings by an average of $990,000. (2) They also estimate that between 25% and 35% of this value will be appropriated by the government, via taxes. (3) Using the midpoint of the latter estimate yields the conclusion that, on average, a law degree will have an after-tax present value of $693,000 to new law graduates.

Note that while this figure does take into account the opportunity cost of attending law school, it does not attempt to take into account tuition costs. The authors merely assert that, “for most law school graduates, the net present value of a law degree typically exceeds its cost by hundreds of thousands of dollars.” (4) Given that, currently, annual nominal tuition at no law school is higher than $59,360, and that real tuition levels are significantly lower than nominal levels because of discounts on nominal tuition, this assertion seems sound. (5)

What should law school tuition be, given the value of a law degree? We can begin to answer this question by noting that, at present, ABA-accredited law schools are producing approximately 42,600 graduates per year. (6) This means that, after taking taxes into account, the members of each year’s class of law graduates enjoy a net profit of nearly thirty-one billion dollars from their legal educations ($30,858,500,000 to be exact). (7)

Given current real tuition rates, this indicates that law schools are collecting only 12.98% of the internalized value of the law degrees they confer via tuition charges. The percentage of the total social value of a law degree collected by law schools is even lower, although it remains difficult to calculate precisely the value of those beneficial externalities generated by legal education — maintenance of the rule of law, etc. — which are not internalized by graduates in the form of enhanced future earnings. (8)

Although judgments regarding what a “fair” distribution of surplus value are by their nature beyond the scope of econometric analysis, it seems plausible to assert that, from a Rawlsian original position, an equal division of such value between those who confer it and those who receive it seems equitable. (9)

This in turn suggests that current law school tuition, which Simkovic and McIntyre estimate as averaging $30,000 per year after subtracting discounts from nominal prices, ought to be raised by approximately 285%, to $115,500 per year, or $346,500 per law degree issued. How should this surplus revenue be distributed? Part II of this comment examines that question.

Part II

Part I of this comment suggests that raising law school tuition to $115,500 per year would represent an equitable redistribution of the nearly thirty-one billion dollars per year in value created by law schools, from law students back to the institutions that create this value. Part II will put forth a proposal regarding how law schools should in turn redistribute this increased revenue.

Law school tuition can be modeled on the basis of one of two assumptions. On one view, tuition represents the price students pay to law schools to have the human capital law graduates will offer their employers enhanced. This enhancement of human capital via legal education makes the average law graduate employee valuable enough to future employers to make it profitable for employers to pay that graduate approximately one million dollars (discounted to present value) more than the graduate would otherwise receive in wages.

On another view, law school tuition represents a form of rent extraction, in which students are forced to purchase a license, as a prerequisite to legal employment. (10)

Proceeding on the basis of the former view, it seems evident that the most efficient and fair use of the revenue surplus generated by an enhanced tuition structure would be to transfer it to law school faculty. This follows from the fact that law school faculty enhance the value of their students to employers, by producing beneficial alterations in cognitive capacity: in lay terms, they teach students to “think like lawyers.” (11) (Research suggests law faculty also improve the ethical characters and leadership abilities of their students, although the extent to which these improvements contribute to those students’ enhanced future incomes remains unclear). (12)

It may be an overgeneralization, however, to assume that all law faculty members play an equal role in producing both pecuniary and non-pecuniary enhancements in their students’ cognitive, ethical, and leadership skills. For example, it seems implausible to assert that adjunct faculty, or legal writing instructors, or untenured clinical faculty with no research responsibilities, are responsible for generating more than thirty billion dollars per year in enhanced human capital within America’s law schools.

Rather, this striking result is more plausibly explained as a product of the extraordinarily rigorous hiring standards American law schools employ when selecting tenure-track faculty, and when deciding whether or not to grant tenure to those individuals. (13) In addition, those high standards ensure tenured faculty are by and large individuals who could have chosen to pursue, and in many cases obtain, partnerships with the nation’s most prestigious and profitable law firms. (14)

Thus it would be an efficient deployment of enhanced revenues to make legal academic positions more competitive with such firms, which currently feature profits per partner of three to five million dollars per year. (15)

While paying tenured law professors three to five million dollars per year may seem excessive, salaries of two to four million dollars per year could be maintained quite readily by law schools, if schools chose to redistribute the increased revenue generated by a more efficient tuition structure back to their employees who are primarily responsible for human capital enhancement.

At present, ABA-accredited law schools employ approximately 5,300 tenured faculty. (16) A distribution of only half of the $30,858,500,000 of the added value these faculty members produce every year back to the producers themselves would yield an average compensation package of $2,911,179.24 per faculty member. (17)

Of course this is merely an average: nothing in the foregoing would preclude law schools from maintaining a broad salary range. In addition, when proper adjustments are made for compensating law faculty who take on significant administrative duties – including, but not limited to, deans, associate deans, and assistant deans – the average compensation for non-administrative faculty at a number of schools might end up being significantly less than three million dollars per year.

Similarly, Simkovic and McIntyre emphasize their figures on graduate lifetime earnings are not stratified to take into account variations between law schools. At some elite schools, the earnings premium for the average graduate is no doubt many millions of dollars. It follows that, at such schools, an average salary of three million dollars per tenured faculty member may represent significant under-compensation.

In any event, an enhanced salary structure would still leave most law school faculty with considerably less generous compensation packages than those enjoyed by leading business-generating partners at top law firms, which suggests that law schools will continue to have to depend on non-pecuniary benefits to attract the best legal talent to their faculties. (18)

CONCLUSION

Simkovic and McIntyre demonstrate that, in strictly econometric terms, the average American law school leaves the average law graduate approximately one million dollars wealthier at graduation than that graduate was at the time he or she enrolled. (19) This suggests American law schools are radically underpriced. In particular, the average tenured law school faculty member is currently foregoing tens of millions of dollars in the compensation he or she would receive, if that compensation reflected both the contribution law faculty members make to the lifetime earnings of their students, and the opportunity costs faculty members incur by foregoing partnerships in the nation’s leading law firms. Indeed, the analysis above suggests that redistributing some of the wealth generated by legal education back to the producers of that wealth is not only a matter of economic efficiency, but of basic social justice. (20)

____

Endnotes

1. Michael Simkovic and Frank McIntyre, The Economic Value of a Law Degree, 43 J.L. Stud. (2014).
2. Id., at 42.
3. Id., at 49.
4. Id., at 1.
5. On tuition discounting, see id. at 39-40.
6. ABA accredited schools awarded 42,600 JD degrees in 2014. See http://www.nalp.org/uploads/NationalSummaryChart2014Class.pdf.
7. This is based on Simkovic’s and McIntyre’s estimate that real tuition is approximately $30,000 per year.
8. Some observers have calculated that these benefits are “priceless,” i.e., infinite. See, for example, Linda Greene, “A Priceless Degree,” New York Times, Nov. 7, 2011.
9. See generally, JOHN RAWLS, A THEORY OF JUSTICE (1971).
10. On the concept of rent extraction, see Robert Tollison, Rent Seeking: A Survey, 35 Kyklos 575 (1982).
11. “More than teaching students what to think, the law professor must—like the old adage about teaching a man to fish so he can feed himself for a lifetime—teach students how to think.” Jay Sterling Silver, The Case Against Tamanaha’s Motel 6 Model of Legal Education, 60 UCLA. L. Rev. (Disc) 52 (2013).
12. “We are not producing plumbers and bookkeepers, we are producing the leaders of our Society whose primary ability is the strength of their intellects.” Peter Bayer, Response to the Paper Waste, Constitutional Daily, Sept. 16, 2011.
13. On contemporary law school hiring practices, see Brad Wendel, The Big Rock Candy Mountain: How to Get a Job in Law Teaching, http://ww3.lawschool.cornell.edu/faculty-pages/wendel/teaching.htm
14. See, for example, Prof. Theodore Seto’s observation that “I could make far more money as a big-firm partner; I have chosen not to.” http://taxprof.typepad.com/taxprof_blog/2013/07/diamond-on.html
15. See Profits Per Partner Increase Moderately, The American Lawyer, http://www.americanlawyer.com/PubArticleTAL.jsp?id=1202596369694&Profits_Per_Partner_Profits_Increase_Moderately
16. See Elizabeth Mertz et. al., After Tenure:Post-Tenure Law Professors in the United States. This survey concludes there were approximately 4200 tenured faculty at ABA-accredited law schools in 2005. An adjustment for subsequent growth yields the higher figure in the main text.
17. Note this figure would include benefits, and funding for summer research projects, in addition to base salary.
18. Such benefits might include, for example, social prestige, flexible work schedules, and more intellectual autonomy.
19. Recall that the authors’ estimate of graduates’ enhanced future earnings discounts these earnings to present value, i.e., at the time of graduation.
20. On questions of wealth redistribution and social justice, see generally Thomas Piketty, CAPITAL IN THE 21st CENTURY (2014).

  • Facebook
  • Twitter
  • Linkedin
This div height required for enabling the sticky sidebar
Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views :