The costs (and benefits) of legal education

I was beginning to think the New York Times had tired of whacking the giant, low-hanging pinata that is the American system of legal education, but not to worry.  Yesterday came the latest blow, an op-ed by former Kirkland & Ellis partner Steven J. Harper lamenting what he sees as the continuing oversupply of newly minted law graduates.  Harper blames irrational optimism on the part of law school enrollees, the ready availability of federal student loans, and the willingness of law schools to "exploit" these factors by continuing to enroll large numbers of students at high tuition rates.  He is particularly critical of a recent ABA task force report on the financing of legal education.

Harper is right about a number of points, and his attention to the apparent disconnect between the demand for legal education (and thus the supply of law graduates) and the supply of lawyer jobs (that is, the demand for lawyers) is helpful, shifting the focus as it does from typically simplistic complaints that "law school is too expensive."  I will have more to say about this disconnect later on.  First, though, a few nitpicks about Harper's analysis.

Based on Harper's piece alone, one might get the impression that law school enrollments have steamed along at a breakneck pace over the past few years, blissfully unaffected by the stark realities of the legal job market.  Harper asserts that "law schools have been able to continue to raise tuition while producing nearly twice as many graduates as the job market has been able to absorb," and he focuses on a group of for-profit law schools owned by an outfit called Infilaw, whose graduating class size "almost doubled" between 2011 and 2014, even "as the demand for new lawyers continued to languish."  In fact, as Harper acknowledges in passing, overall U.S. law school enrollment declined steeply during this period, from about 52,000 in 2010 to about 38,000 in 2014 -- a drop of 27% in just five years.  The decline in enrollments reflects, not surprisingly, a corresponding decline in applicants to law school:  the number of individuals applying to American law schools in 2015 looks like the lowest in at least 15 years.

So potential law students are in fact adjusting their behavior in response to market conditions, in a fairly significant way.  And law schools -- rather than simply admitting less-qualified applicants to keep their numbers up -- are, by and large, reducing their class sizes, and thus their tuition revenues, accordingly.  (Among the exceptions to this trend are for-profit outfits like the Infilaw schools, which appear to have no qualms about admitting borderline unqualified students so long as they can pay the tuition bill.  But these are the unfortunate exceptions, not the general rule.)  It's therefore far from clear that the supply-demand disconnect is as severe as Harper implies.

Harper also fails to note the time-lag property of legal education, which further complicates the supply-demand picture.  It takes at least three years to earn a J.D. degree, during which time the demand for employees with that degree can rise or fall substantially.  So entering law school is a bit like investing money in oil drilling or unproven technology:  it's an inherently speculative venture that may not pan out well in the end.  It's not surprising, then, that law school applications continued to climb for a couple years after the 2008 global financial crisis before beginning their steep decline.  And despite evidence that the market for law jobs is now improving, it won't be surprising if applications continue to drop for another year or two.  Indeed, the ongoing decline in enrollments increases the chances that today's apparent oversupply of lawyers won't exist in 2019, when most of this year's entering law students will graduate.

Moreover, Harper exaggerates the oversupply problem by focusing on a single statistic:  the number of law graduates in full-time, long-term, bar-required jobs ten months after graduation.  That number, as Harper notes, was about 60% for May 2014 law graduates.  Does this mean that 40% of those graduates were unemployed ten months later?  No -- it means that 40% of them did not have jobs that (a) were full-time, (b) were long-term, and (c) required their occupants to pass the bar exam.  A close look at the data from the ABA shows that another 11% of the 2014 class held full-time, long-term jobs that were "JD advantage," meaning jobs "for which the employer sought an individual with a JD, and perhaps even required a JD, or for which the JD provided a demonstrable advantage in obtaining or performing the job, but ... do not require bar passage, an active law license, or involve practicing law."  (Examples of "JD advantage" jobs include "corporate contracts administrator, alternative dispute resolution specialist, government regulatory analyst, FBI agent, and accountant.")  Roughly another 6.5% held bar-required or JD-advantage jobs that were either part-time or temporary.  Fewer than 10% reported being unemployed and actively seeking employment.

So Harper probably overstates the current glut of law graduates and understates the market's capacity to correct the problem.  Still, I think Harper is correct about a number of important issues.

First, even acknowledging the steep decline in demand for legal education over the past half-decade, accounting for the time-lag phenomenon, and noting the existence of many alternative law jobs, there are too many recent law graduates still looking for good jobs in the law -- a problem confirmed not just by the statistics but, anecdotally, by the experiences of many of my own former law students.  Students who have "JD advantage" jobs often wish they had full-fledged lawyer jobs -- and might have had those jobs five or ten years ago.  Too many law graduates are unemployed or underemployed in the current market.

Second, the ready availability of low-interest-rate government-backed loans for most law students, combined with some endemic market failures, distorts somewhat the demand for legal education.  Even if prospective law students acted completely rationally, they might calculate that a roughly 70% chance of a better job on graduation offsets the risk of defaulting on relatively modest loan payments.  And for various familiar reasons -- information asymmetry, cognitive bias, the sexification of lawyers in popular culture -- some (probably many) prospective students overestimate the rewards and underestimate the costs of law school in deciding to enroll.  For their part, law schools suffer no direct financial penalty when a graduate defaults on her loan, because the tuition checks have already been cashed.  So, like home sellers whose buyers take out a mortgage, they have no real incentive to ensure that the other party is making a rational decision (whatever that might mean in practice).

Third, the recommendations of the ABA task force on financing legal education are in fact unlikely, by themselves, to solve the first two problems.  The task force makes three core recommendations:  that law schools be required to provide more disclosure and "debt counseling" to prospective students than is now the case; that the ABA return to its earlier practice of collecting detailed revenue and expenditure data from law schools (and that these data be made public); and that the ABA be more accommodating of experimentation by law schools in the programs they offer.

The membership of the task force (which included the President of my University, Kurt Schmoke) was distinguished, well-qualified, and no doubt very well-meaning.  But I agree with Harper that its recommendations are disappointing.  Greater disclosure and "debt counseling" by law schools might redress some of the information asymmetry that currently hampers prospective students' decisionmaking, but it can do little about the hardwired cognitive biases that cause most law school applicants to believe they will beat the odds, or the inherently speculative nature of investing in a degree whose true value won't be evident for several (perhaps many) years to come.  Nor is there good reason to think that law schools, whose expertise lies in legal education, can become effective life coaches or financial advisors.  Attempting to fulfill that function, moreover, will require law schools to add more administrative staff, thus further driving up the costs of legal education and exacerbating one of the core problems the task force was meant to address.

The recommendation that the ABA return to collecting detailed financial data from law schools might be a good idea, but not because it will have much effect on affordability.  At the margins, having to disclose their finances might reveal for-profit law schools as the profit-maximizing factories they are, taking in as much tuition revenue as possible and spending as little money on education as possible in return.  But most law schools are nonprofit entities, and of these, many -- particularly run-of-the-mill public law schools -- are already cutting expenditures pretty close to the bone.  As the task force's own numbers show, public law school expenditures on instructional (faculty) salaries have decreased over the past decade; their expenditures on administrative salaries have stayed roughly even; only their expenditures on student scholarship grants have increased substantially.  Shrinking expenditures on instructional salaries saves costs at the expense of the quality of education, all else being equal; often these reductions are accomplished by attrition (meaning fewer teachers) or increased reliance on part-time faculty.  Administrative salaries sound like prime targets for cuts, except that (as I pointed out in an earlier post) many or most of these positions either respond to regulatory requirements (see my point about mandated "debt counseling" above) or directly help students by, for example, providing academic support for at-risk students and arranging accommodations for students with disabilities.  And the increase in expenditures on student scholarships -- a somewhat misleading trend, since these "expenditures" typically take the form of tuition discounts, that is, money that is never collected -- directly translate into reductions in what otherwise would be an even higher cost of legal education.

I should note, too, that the ABA had a decent justification for discontinuing its practice of collecting these financial data a few years ago.  The much-loathed U.S. News rankings, piggybacking on ABA-required data, used (and still use) "expenditures per student" as an important ingredient in their ranking formula.  EPS was (still is) figured by, in essence, dividing a law school's total annual expenditures by the number of full-time students enrolled.  Many schools protested (still do) that this figure is only loosely related to quality of education and thus unfairly favors well-financed elite schools (usually private) over relatively poorly financed non-elite schools (often public).  I suspect, though I don't know for sure, that the ABA's decision to stop collecting detailed financial information was motivated at least in part by this concern, and by the hope that U.S. News would follow suit and drop the EPS measure as a factor in its rankings.  This hope proved unfounded:  U.S. News still "asks" schools to provide these data (and uses them to figure EPS) even though the ABA has stopped requiring them.

Finally, there's the recommendation that the ABA become more flexible in allowing law schools to "experiment" in ways that might reduce costs.  This echoes similar recommendations by an earlier ABA task force.  There's nothing objectionable about this recommendation, as far as it goes; the problem is that it relies entirely on the law schools, not only to be willing to engage in experimentation, but actually to come up with good, workable ideas.  It reminds me of the old joke about the economist who, stranded on a desert island with an unopened can of beans, suggests that his fellow castaways "assume a can opener."  The recommendation simply shunts the responsibility for proposing solutions, perhaps unrealistically and certainly unhelpfully, onto some of the very actors who were hoping for specific guidance from the task force.

Of course, it's one thing to criticize the task force report and quite another to improve upon it; it takes a theory to beat a theory.  I don't yet have anything remotely resembling a theory of how to fix the economic challenges facing the American system of legal education.  What I have is some rough thoughts that might, with a bit more work, be assembled into the framework of a theory.  So bear with me for a moment while I work through them.

We should start with a better understanding of what exactly the problems are.  It's far from clear that we have an oversupply of law graduates, as Harper claims.  Here I'm not referring again to the nitpicks I make above regarding Harper's assumptions or methodology.  I'm referring instead to the more-significant fact that a great many legal services needs in this country are regularly going unmet, despite the apparent plethora of lawyers.  From the BigLaw perspective -- one Harper, whose former firm had the fifth highest revenues of any law firm in the nation in 2014, appears to share -- it looks like we're in the midst of a lawyer glut, with far more qualified applicants than (high-paying) legal jobs.  But things look different from other other end of the legal-services spectrum.  According to a recent article by a distinguished legal scholar and his student, "[e]ighty percent of the civil legal needs of low-income people are unmet by lawyers and forty to sixty percent of the needs of middle-income individuals are unmet."  These estimates account only for civil legal needs (e.g., landlord-tenant disputes, potential tort claims, divorces), not criminal cases, and only for individual needs, not those of nonprofit organizations or small businesses; taking account of this broader picture would surely reveal the level of unmet demand to be much higher still.  For these potential clients, there are too fewer legal services providers, not too many.  The better way to describe the problem, then, is not that there are too many lawyers, but rather that there are too many lawyers to do certain kinds of jobs and not enough lawyers to do other kinds of jobs.

Nor is it entirely accurate to say that legal education is "too expensive."  Any rational consumer of legal education (like any other product or service) would of course prefer that it come at a lower cost.  But for many law graduates, the investment turns out to be well worth it:  they end up earning far more money over their lifetimes than they would have made without a law degree, with the difference being greater than the cost of earning the degree.  Law graduates who go to work for the top "BigLaw" firms, for example, typically start with salaries well into the six figures and often retire with incomes well into the seven figures.  It would be difficult for most of these individuals to claim, when all is said and done, that their legal education was "too expensive."  Even at the more modest levels of the profession, most law graduates find steady work that they could not have found without a law degree and are able to pay off their loans on time.  Not to mention the nonfinancial rewards many lawyers find in law practice.  From the perspective of many lawyers, then, legal education cannot fairly be said to be "too expensive."

Many others, however, probably can make this claim with a straight face.  For a solo practitioner or public-interest lawyer who can barely pay off her student loans, law school might have been more expensive than it should have been.  The same might be said for a graduate who would like to take a public-interest job but takes a big-firm job instead to pay off her loans, or for a prospective law student interested in serving low-income clients but deterred from applying to law school by the inevitable debt burden.

Ultimately the question whether legal education is "too expensive" is a public-policy question that has to be answered by reference to the common good, not the needs or desires of particular individuals.  From a public-policy perspective, it's relatively rare that we talk about goods or services being "too expensive."  You or I, as individual consumers, might decide not to go to Whole Foods because it's "too expensive" to shop there, but few would seriously suggest regulating how much Whole Foods can charge for a watermelon.  Only when the good or service in question falls into one of two categories do we ask the "too expensive" question as a matter of policy.

The first category consists of basic necessities of life, like food (the staples, not the luxury Whole Foods variety), shelter, and healthcare; we care as a matter of policy about how much these things cost because we believe that everyone should have access to them.  Unlike K-12 education and, arguably now, college education, a legal education is not one of these basic necessities; it's hard to make the case that every American is entitled to a law degree.  But legal services might be a basic entitlement, and if so, the cost of legal education -- a necessary precursor to the provision of legal services -- is a public-policy concern.

The second category consists of what economists call "public goods" -- benefits from which no one can effectively be excluded and whose enjoyment by some does not diminish their availability to others.  National defense is a public good:  it benefits all of us, not just those who directly pay for it, and my enjoyment of it does not diminish your capacity to enjoy it.  Clean air and clean water are public goods; there are many other examples.  The problem with public goods, however, is that private actors typically lack sufficient incentive to produce them, since they cannot charge for them (there being no way to deny them to people who refuse to pay).  So the public as a whole, in the form of government, typically provides particularly valuable public goods (e.g., national defense) or requires private actors to provide them (e.g, clean air and water).  And since the public is paying for these public goods, how much they cost -- how much the public has to pay to provide them -- obviously is a matter of public policy.

There is a strong argument to be made that legal education -- or more precisely, the legal system made possible by the existence of legal education -- is a public good.  It is to everyone's advantage to have competent, ethical lawyers to operate the legal system and uphold the rule of law.  These public benefits of a legal system inure to all of us, whether we pay for lawyers or not, and my enjoyment of these general benefits does not in any way reduce your capacity to enjoy them.

Of course, legal education also provides a private benefit to those who undergo it and earn a law degree.  I will have more to say about this in a moment.  For now, the point is that the cost of legal education has public-policy implications, in part because access to legal services probably is a matter of basic entitlement, and in part because a well-functioning legal system is a public good.

So we need to ask whether law school is "too expensive" from a social policy perspective.  Here I suspect the answer (as from the individual perspective) will be, "it depends."  With respect to law graduates lucky enough to land high-paying BigLaw jobs, legal education probably is not too expensive, and indeed making it cheaper across the board might unfairly subsidize these fortunate few.  With respect to law graduates serving legally underserved clients, or wanting to do so but having to take other jobs instead (or to forgo law school altogether), legal education probably is too expensive as it stands and, from a public policy perspective, ought to be made cheaper.  The same might hold true with respect to many law graduates who go into government or nonprofit work.  These latter two categories -- lawyers serving underserved populations and lawyers working for government or nonprofits -- probably disproportionately fulfill the central public-policy aims of a legal system, namely providing access to legal services and contributing to the proper functioning of the legal system.  So it is good public policy (all else being equal) to incentivize people to take these jobs and support them when they do, and affirmatively bad policy to penalize or discourage them with high tuition and a heavy debt burden.

For me, then, the central question about the financing of legal education -- and a central question of legal education generally -- is how to change the system so as to incentivize more qualified people to fill legal-services, government, nonprofit, and other law jobs that benefit the public and currently are going underperformed, while not overincentivizing people to seek higher-paying law jobs that currently are in short supply (and I suspect will be for the foreseeable future).  I don't pretend to have well-worked-out proposals for answering this question.  I do have a couple tentative big-picture suggestions, however.

The first is that government actors -- at the federal, state, and public-law-school levels -- ought to take the public importance of legal education more seriously than many of them currently are and subsidize or regulate accordingly.  The current system of legal education operates in uncomfortable hybrid fashion -- partly according to market principles (that is, as a method for allocating private goods) and partly under public control (that is, as a method for providing public goods and basic entitlements).  As with private goods, law schools basically offer a service at a price people are willing to pay, without caring how the purchasers obtain the money to pay for it or what they do with that service after they've bought it.  But the terms of the transaction are distorted in multiple places by public regulation and subsidies.  Government-backed student loans increase the price consumers are willing to pay for legal education, and thus the price law schools are able to charge for it.  State bar authorities and national accrediting organizations (the ABA, the AALS), ostensibly in the public interest, impose requirements for the content of legal education (think "professional responsibility courses") that consumers and law schools might not bargain for if left to their own devices.  State legislatures and trustees of public universities raise or cap law school tuition, often in ways driven by political and budgetary concerns rather than market forces or sound educational policy.

This mixed system is in many ways the worst of both worlds, unable either to respond organically to market forces or to effectively promote the public interest.  The public subsidizes legal education just enough to distort the market by creating a cohort of under- or unemployed law graduates looking for steady paychecks to pay off their loans, but not enough to meet the needs of drastically underserved communities.  Getting government out of the business of subsidizing legal education is not the answer; it would only result in more legal needs going unmet.  Instead, government should better target its subsidies to encourage law graduates to serve the public good.  The government currently forgives some direct loans for graduates working in public-interest jobs; this program could be expanded to include government-backed private loans and to cover graduates working in "for-profit" positions that serve low-income or otherwise underserved clients.  Indeed, government at the federal and state levels could go further, funding full- or part-tuition scholarships (not just loans) for students who commit to working in public-interest jobs or serving underserved populations for a period of time after graduation.  Law schools too, particularly public law schools, could make fundraising for such scholarships a top priority.

State governments also need to get more involved in another way:  they need to partner with law schools and the bar to develop alternative ways to provide many legal services.  This leads to my second big-picture suggestion (like the first, far from an original one):  licensure requirements can be altered to allow many legal services to be performed by professionals other than full-fledged lawyers.  Many legal tasks, such as drafting basic wills and leases and representing clients in relatively simple disputes, can be effectively performed with less than the three full years' worth of legal training currently required for a JD.  Often these tasks are precisely the things many lower-income clients need from a legal professional.  The idea is familiar in the medical context, where nurses, nurse practitioners, and osteopaths handle many diagnoses and treatments that MDs used to perform.  Lesser credential levels for these professionals would translate into reduced educational requirements -- a 12- or 18-month program rather than three years -- and thus lower-cost options for individuals who want to enter the legal profession.  Saddled with less debt, many of these graduates could take lower-paying or riskier jobs with nonprofits or practicing in underserved communities.

Interestingly, the availability of lower-cost legal education options might free up law schools to enhance the JD program rather than scaling it back, as some current reformers advocate.  These proposals have always coexisted uneasily with another common refrain of legal-education reformers:  the notion that law schools aren't doing enough to prepare their graduates for practice in "the real world."  It's hard to provide more knowledge and skills to law students while at the same time reducing a three-year degree program to two or two-and-a-half years; and it's difficult to pay for resource-intensive skills courses (e.g., law clinics, which require high faculty-to-student ratios) while at the same time lowering costs.  With a stream of tuition income from sub-JD programs, law schools might be willing to put more resources into their JD programs rather than less, perhaps even extending them from three years to four (with, say, an entirely experiential final year), perhaps experimenting in other ways.  Indeed, it might be good for the system to make full-fledged JD programs more expensive -- more like the MD programs at American medical schools.  Doing so would help support enrollment in the (cheaper) emerging sub-JD programs, while imposing the high costs -- and conferring the enhanced benefits -- of a full JD only upon those committed enough to devote four years' worth of study and tuition to obtaining it.

So, to sum up:  claims (like Harper's) that there are "too many law graduates" miss an important part of the picture -- the undersupply of legal professionals serving low-income clients and certain other segments of the community.  Legal education may indeed be "too expensive" to meet these underserved public needs.  But this is not to say that it is too expensive across the board -- only that the current system generates a mismatch between high-end supply and low-end demand.  That mismatch is caused in large part by the hybrid public-private nature of legal education:  government regulations and subsidies distort the market, pumping up the demand for and thus the cost of legal education, while failing to effectively promote the public goods legal education should serve.  The only solution, as I see it, as greater and more targeted public involvement:  subsidies that are contingent on public service by law graduates, and regulation that expands the availability of legal services by reducing the credentials necessary to perform many of them.

There's a great deal more to be said on this topic.  But if you've made it this far, I'll spare you that.  At least until the next post.