September 25, 2017

The law school monopoly myth (Michael Simkovic)

It is often assumed that the only way to become a lawyer is to attend an ABA-approved law school.  That is true in some states and, indeed, the ABA has at times expressed the view that it should be true in all states.  But it is not the case in large jurisdictions such as New York or California, nor is it the case in the majority of jurisdictions.  Claims that ABA-approved law school have a monopoly on entry into the legal profession are exaggerations.  Rather, the most popular—and probably most likely—way to become a lawyer is to graduate from an ABA-approved institution. 

In leading jurisdictions such as New York, California, and Virginia, an individual who wishes to become a lawyer may sit for the bar examination with between zero and 1 years of law school and between 3 and 4 years of apprenticeship and study under the supervision of a licensed attorney (this is also known as “law office study” or “reading for the bar”).  In California, graduates of non-ABA-approved law schools are eligible to sit for the bar examination.  This includes schools with extremely low-cost, technology-driven approaches to teaching, such as online and correspondence schools.

In fact, non-ABA law school graduates are eligible to sit for the bar examination in most jurisdictions (31 in total as of 2017) according to the National Conference of Bar Examiners.**  This includes extremely large and important jurisdictions such as California, Florida, New York, Texas and Washington D.C.  Graduates of online and correspondence law schools are eligible to sit for the bar examination in 4 jurisdictions.

Very few people choose the apprenticeship route, and only a minority opt for non-ABA law schools.  Among those who do, relatively few successfully complete their courses of study or pass the bar examination.  But those who do will have the same license to practice law as someone who graduates from an ABA-approved law school and successfully passes the bar examination.

Why then do so many prospective lawyers choose ABA-approved law schools?

The most likely explanation is that prospective lawyers choose ABA-approved law schools because those law schools provide a valuable and worthwhile service that supports a higher price point than other options.* 

Many employers value legal education.  That’s why they typically pay law school graduates tens of thousands of dollars more per year than they pay similar bachelor’s degree holders, even in occupations other than the practice of law.  When law school graduating class sizes increase, and a lower proportion of graduates practice law, graduates don’t typically see a noticeable decline in their earnings premium. 

In other words, the benefits of law school are versatile. Graduates of ABA-approved law schools also seem to be much more likely to complete their studies and pass the bar examination than students attending more lightly regulated and lower cost alternatives.

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September 25, 2017 in Guest Blogger: Michael Simkovic, Legal Profession, Of Academic Interest, Professional Advice, Student Advice, Weblogs | Permalink

September 18, 2017

Are law degrees as valuable to minorities? (Michael Simkovic)

Frank McIntyre & Michael Simkovic, Are law degrees as valuable to minorities? International Review of Law & Economics (forthcoming 2017) (ssrn download):

"Individuals who complete law school typically receive a large boost to their earnings compared to what they would likely have earned with a terminal bachelor’s degree.  (Simkovic & McIntyre, 2014)  The law earnings premium has exceeded the cost of law school by a wide margin, even toward the bottom of the earnings distribution, and even for graduates who enter the labor force during a recession or with an unusually large cohort of fellow law graduates. (McIntyre & Simkovic, 2017)

 

But is the value of a law degree predictably different depending on one’s race or ethnicity? Estimates by race or ethnicity could help prospective law students and law schools better predict variability in the potential financial benefits of law school, and could help inform outreach, admissions, academic support, and financial aid policies.

 

This article investigates differences in the law earnings premium by race and ethnicity.  Compared to bachelor’s degree holders, a higher proportion of law graduates are white.  

 

Studies of the returns to education at the college level or below have come to different conclusions about differences in benefits by race.  Several studies have found lower earnings among black and Hispanic law graduates compared to non-Hispanic whites.  The reasons for these differences are not fully understood and are hotly debated. . . .

 

Whatever the cause, among those with law degrees, there are differences in average earnings between different race or ethnic groups. However, the same pattern is present among bachelor’s degree holders. [Prior to this study it was] unknown whether there are similar differences in earnings premiums (i.e., the boost to earnings from the law degree), measured either on a percentage or dollar basis. . . .

 

[T]he National Longitudinal Bar Passage Study found that long-term bar passage rates were substantially lower for minorities than for whites.[1]  Thus a study of all law degree holders including those who did not pass a bar examination [such as this one using Census data] may find larger racial gaps in earnings [than previous studies that look only at bar-passers].  

 

We find evidence that white graduates have a somewhat higher percentage boost in earnings compared to minorities, but when translated into dollar terms the law earnings premium is substantially higher for white graduates than for minorities.  At the median and including law graduates who are not practicing law, the annual boost to earnings from a law degree is approximately $41,000 for whites, $34,000 for Asians, $33,000 for blacks, and $28,000 for Hispanics.  The law earnings premium is also higher for whites than for minorities at the 75th percentile, the 25th percentile and the mean, and for samples that are exclusively male or female. . . .  

 

Figure 4 for blog post

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September 18, 2017 in Guest Blogger: Michael Simkovic, Legal Profession, Of Academic Interest, Science | Permalink

September 09, 2017

New American Foundation fires a prominent researcher who criticized one of its largest donors (Michael Simkovic)

The powerful Washington D.C. think tank New America Foundation, which has ties to the technology, finance, and aerospace industries, recently fired a researcher within days after the researcher praised the European Union for fining Google for antitrust violations.  Google and its CEO are among the largest donors to New America Foundation, as well as other think tanks.  The head of New America Foundation claims the firing was for a lack of collegiality, but declined to discuss specifics.  

The firing echoes similar incidents at other think tanks, including the American Enterprise Institute and Brookings Institute, where researchers have been fired shortly after offending other important donors or political patrons.

As the Economist magazine explains:

[Think tanks suffer from] a fundamental flaw. Unlike other institutions designed to promote free inquiry, such as universities or some publications, think-tanks do not enjoy large endowments, researcher tenure or subscription revenue to insulate thinkers from paymasters. And thinking costs a lot.

The New America Foundation has played a prominent role in efforts to privatize student loans by making the terms of federal student loans less attractive and making the loans less widely available.


September 9, 2017 in Guest Blogger: Michael Simkovic, Law in Cyberspace, Of Academic Interest, Science, Web/Tech, Weblogs | Permalink

August 25, 2017

Todd Henderson (Chicago): Lawyers make better CEOs in industries with high litigation risk (and worse CEOs elsewhere) (Michael Simkovic)

Professor Henderson finds that: "CEOs with legal expertise are effective at managing litigation risk by, in part, setting more risk-averse firm policies. Second, these actions enhance value only when firms operate in an environment with high litigation risk or high compliance requirements. Otherwise, these actions could actually hurt the firm."

The full article is here.  A summary in the Harvard Business Review is here.


August 25, 2017 in Guest Blogger: Michael Simkovic, Law in Cyberspace, Legal Profession, Professional Advice, Science, Weblogs | Permalink

August 21, 2017

Should the government raid university endowments? (Michael Simkovic)

Vanderbilt Tax Professor Herwig Schlunk wants the federal government to tax university endowments, preferably out of existence.  He writes:  “In the best of all possible worlds, the federal government could and probably should . . . confiscate[e] all private university endowments . . .”

Toward that end, Schlunk recycles arguments that were discredited years ago.

Professor Schlunk is famous for asserting that law school is a bad investment.  Schlunk’s bold claim—based on back of the envelope calculations and highly unscientific website surveys—was popularized by the Wall Street Journal and echoed by sympathetic media outlets.  Peer reviewed research by labor economist Frank McIntyre and me—using high quality nationally representative government data and well-established econometric techniques—subsequently demonstrated that Schlunk was mistaken. (See here and here).

This post critiques Schlunk’s recent work on endowments for misuse of discount rates, overlooking the importance of educational quality, mismeasuring student earnings and higher education expenditures, selectively targeting higher education, supporting policies that undermine economic growth, and overlooking stark differences between popular votes and political power.

Misuse of discount rates

To arrive at his headline-grabbing law school result, Schlunk relied on some spectacularly unrealistic assumptions.  As Frank McIntyre and I explained four years ago:

“Professor Schlunk’s analysis assumes astronomical discount rates, low earnings growth rates, and zero inflation for thirty-five years. None of these assumptions are empirically or theoretically justifiable.

 

Most studies [of higher education] by economists have generally used a discount rate between 2.5% and 3%. . . . Compared with the 3% discount rates applied in labor market studies by economists and suggested by the real (net-inflation) costs of financing a law degree . . .  Professor Schlunk applies real discount rates of between 8% and 27%. 

 

If Professor Schlunk had used comparable assumptions about discount rates to evaluate the value of a college degree compared to a high school diploma, he would have reached the conclusion that few should go to college. Indeed, given a 30% nominal discount rate, whether it makes financial sense to complete high school might be debatable.”

 

Undeterred, Professor Schlunk once again relies on unrealistically high discount rates and overlooks differences in completion rates, this time to argue that private non-profit universities provide little value when compared to leanly funded, politically vulnerable public universities.  Based on this analysis, he concludes that the federal government should tax universities more heavily than it already does.  Higher discount rates mean that future cash flows have a lower present value.  Thus the value of a lifetime of higher earnings from higher quality education is diminished by choosing a higher discount rate.

Schlunk’s justification for using such high discount rates is that higher education “puts me in mind of income streams I confronted when advising investors in the private equity sector [where] discount rates of as high as 30% were generally applied.”[1]

For the record, peer reviewed research generally finds that private equity returns net of fees are close to or less than those that can be found in the stock market—not remotely close to the 30 percent returns assumed by Schlunk.  (In addition, discount rates are supposed to reflect the weighted average cost of capital, NOT the (higher) returns to equity).[2]  If P.E. investors were applying high discount rates to cash flow projections, this likely means that investors believed that P.E. cash flow projections were over-optimistic.

Overlooking college completion rates

In his latest critique of higher education, Schlunk also overlooks large differences in completion rates.  Four-year completion rates for bachelor’s degrees are almost twice as high at private non-profit universities as at their more leanly funded public counterparts. If one accepts Schlunk’s assumptions of extremely high discount rates, even a modest delay in completion would have a dramatic impact on value.

Overlooking effects of increased educational expenditures and educational quality

Peer reviewed studies that control for differences in student characteristics consistently find that higher expenditures per student lead to significant increases in student earnings and likely contribute to higher completion rates.  (For brief reviews of the literature, see The Knowledge Tax and Populist Outrage, Reckless Empirics; See also here). 

Professor Schlunk overlooks these studies.  

Mis-measuring student earnings and educational expenditures

Schlunk overestimates the difference in expenditures and resources at elite public and private universities, which leads him to over-estimate the earnings premiums necessary for more resource-intensive private education to be worthwhile.  Schlunk assumes incorrectly that all students at elite flagship state universities pay low in-state tuition, when many students at these institutions pay much higher out-of-state or international student tuition.  He overlooks the extent to which expenditures per student at elite public universities exceed in-state tuition because of state subsidies and cross-subsidies from out-of-state students.  He overlooks the extent to which differences in financial aid affect net-tuition—and therefore educational resources and expenditures—at different universities.

The elite public universities that Schlunk presents as controls that he sees as similar to private universities, but without endowments, actually have larger endowments than many private universities.  

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August 21, 2017 in Guest Blogger: Michael Simkovic, Legal Profession, Ludicrous Hyperbole Watch, Of Academic Interest, Religion, Science, Student Advice | Permalink

July 31, 2017

Focus group of California lawyers defends tight restrictions on entry into the legal profession (Michael Simkovic)

California is an extreme outlier in the extent to which it restricts entry into the legal profession compared to other U.S. jurisdictions.  Two examples of this include an unusually high minimum cut score on the bar exam and a refusal without exception to permit experienced licensed attorneys from other jurisdictions to be admitted without re-examination.

California lawyers are relatively highly paid, and relatively few in number considering the size of the workforce in California.  Restrictions on entry into the profession may help maintain this status quo.  There are serious questions about whether this protects consumers, or is economic protectionism.  Economic protectionism could benefit California lawyers, but it would likely also harm consumers of legal services by making legal services less available, more expensive and perhaps lower in quality because of reduced competition.  Protectionism would also reduce economic opportunity for those denied the option of practicing law in California, much as immigration restrictions deny economic opportunity to those excluded from high-income countries.

The Supreme Court of California, concerned about the anti-trust implications of a licensed profession establishing criteria for entry, instructed the California State Bar to prepare recommendations on revising the California bar cut score.

Stephen Diamond reports that the California State Bar recommended that its bar examination should either stay the same or be made even harder.  

The California Bar arrived at this conclusion by asking a panel of California lawyers how hard the bar exam should be.  To be more specific, panelists read essays, categorized them into good, medium and bad piles, and, with the assistance of a psychologist who specializes in standardized testing, used this categorization to back-out an extremely high recommended bar passage score.  

Finding that people with high multiple choice scores also tend to write better essays is about as surprising as finding that cars that Consumer Reports rates highly are also often highly rated by J.D. Power.  It's also about as relevant to the policy decision facing the California Supreme Court about minimum competence to practice law.

The relevant question for restricting entry into the legal profession is not whether good (and presumably expensive) lawyers are better than mediocre (and presumably more affordable) lawyers.  Rather, the relevant question is when consumers should be able to decide for themselves whether to spend more for higher quality services or to save money and accept services of lower quality.  Most people will agree that a new Lexus is likely a better, more reliable and safer car than a similar-sized used Toyota.  But this difference in quality does not mean that the government should banish used Toyotas from the roads and permit to drive only those who are willing and able to buy a new Lexus. 

Is there evidence that a bar examinee who would be permitted to practice law in Washington D.C. or New York or Boston or Chicago, but not in California, would routinely make such a mess of clients' affairs that California clients should not even have the option to hire such a lawyer?

Is there evidence that consumers of legal services cannot tell the difference between a good lawyer and a dangerously bad one?  

If these problems exist, could they be addressed by simply requiring lawyers to disclose information to prospective clients that would enable those clients to judge lawyer quality for themselves?  

The California Bar has not yet seriously addressed these questions in arriving at its recommendations.

The California Bar also reported that other states have sometimes recommended increases or decreases to their own bar examination cut score.  But these states are almost all starting with much lower bar cut scores than California's baseline.  It appears that few if any other states recommended bar examination cut scores as high as California's.


July 31, 2017 in Guest Blogger: Michael Simkovic, Legal Profession, Science, Weblogs | Permalink

July 18, 2017

Is California’s bar examination minimum passing score anti-competitive? (Michael Simkovic)

Occupational licensing regimes can help markets function when those markets suffer from what Economist George Akerlof coined a “lemons” problem.  In a lemons market, it is too costly or difficult for consumers to distinguish goods or services of acceptable quality from those that are close to worthless or even harmful.  Licensing regimes can help solve this problem by assuring consumers of a minimal baseline level of quality.  Effectively, licensing removes the bottom of the market, increasing quality, consumer confidence, volume, and price.

But economists worry that licensing regimes could be abused.  For example, if members of a licensed occupation were to seize control of licensing, they might set unnecessarily high barriers to entry for their industry, above what is optimal for consumer protection.  This could create an artificial shortage, reduce competition, drive up prices and drive down quality of services.  Political leaders also worry that excessive state or local licensing regimes could deprive workers of valuable economic opportunities and reduce their geographic mobility.

The deans of almost all ABA approved California law schools have jointly expressed concerns that California’s minimum passing score (‘cut score’) on the nationally uniform, multiple choice, Multi-State Bar Exam bar examination is excessively high. 

These leaders of legal education note that California has a higher cut score than any state except Delaware, no justification has been provided for this unusually high cut score, and some parts of California may have a shortage of lawyers.  Moreover, although law graduates from California score better on the MBE than the national average, they are less likely to pass the bar exam because of California’s unusually high cut score.  The case for bringing California’s cut score into line with those of other leading legal jurisdictions such as New York has been most forcefully stated by UC-Hastings Dean David Faigman. 

Amid concerns about possible anti-trust lawsuits against the State Bar, the Supreme Court of California has agreed to supervise the state bar of California and may set a lower bar cut score.

High cut scores are not the only signs of possible anti-competitive protectionism in California. California is among the few states that, without exception, forces experienced attorneys licensed in other states to sit for reexamination prior to relicensing. The overwhelming majority of jurisdictions—including New York, Washington D.C., Illinois, Texas, and Massachusetts—permit experienced lawyers who are licensed in another state to obtain a license to practice law on motion, without the need for reexamination.  (Some impose additional requirements, such as graduation from an ABA-approved law school or reciprocity by the state of origin).

Data from the U.S. Bureau of Labor Statistics, Occupational Employment Statistics[i] shows that California lawyers earn more, on average, than lawyers in any jurisdiction except Washington D.C. 


2016 BLS mean lawyer earnings by state

Top paying States for Lawyers:

State

Employment

Employment per thousand jobs

Location quotient[ii]

Hourly mean wage

Annual mean wage 

District of Columbia

31,470

44.81

10.16

$87.89

$182,810

California

76,840

4.81

1.09

$77.89

$162,010

New York

72,760

8.00

1.81

$77.53

$161,260

Massachusetts

17,440

5.04

1.14

$76.33

$158,760

Delaware

2,590

5.87

1.33

$75.77

$157,610

While this may be great for lawyers, it is not necessarily an unmitigated good.  It means that legal services likely cost clients more and may be less widely available. 

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July 18, 2017 in Guest Blogger: Michael Simkovic, Legal Profession, Of Academic Interest | Permalink

July 05, 2017

Wall Street Journal trims legal coverage (Michael Simkovic)

The Wall Street Journal closed several of its blogs on Monday, including its Law Blog.  The WSJ has maintained its blogs with broader readership, such as those about economics and personal finance.  


July 5, 2017 in Guest Blogger: Michael Simkovic, Legal Profession, Of Academic Interest, Weblogs | Permalink

June 23, 2017

Least educated county on Oregon's Pacific Coast shuts its last public library rather than increase taxes by $6 per month per household (Michael Simkovic)

Douglas County in rural Oregon recently shut its last public library rather than increase property taxes by around $6 per month per household.  Less than 16 percent of the population of Douglas County has a bachelor's degree or above, making it the third least educated county on the Pacific Coast of the United States and the least educated coastal county in Oregon. 

 

Across the Pacific, cities like Singapore, Hong Kong and Shanghai have built globally competitive workforces by investing heavily in education and infrastructure and embracing global trade.  In the United States, excessive anti-tax movements have contributed to disinvestment and have slowed U.S. economic growth.

 

Update:  Michelle Anderson (Stanford) and David Schleicher (Yale) debate policy responses to local economic decline and migration of educated populations away from depressed areas.  Hat tip Paul Diller. (Willamette).

 


June 23, 2017 in Guest Blogger: Michael Simkovic, Of Academic Interest, Science, Web/Tech, Weblogs | Permalink

June 21, 2017

House Democrats propose bill to reduce debt burden for graduate students (Michael Simkovic)

Representative Judy Chu (D-CA) (Pasadena) recently introduced H.R. 2526, the Protecting Our Students by Terminating Graduate Rates that Add to Debt (POST GRAD) Act. The bill would restore the in-school interest subsidy for graduate and professional students who borrow federal Direct Stafford Loans.  

Federal in-school subsidies were terminated by The Budget Control Act in 2011, which ended the debt ceiling crisis of 2011.  During the debt ceiling crisis of 2011, Congressional Republicans successfully maneuvered for large cuts to federal spending (other than military spending and pension and health benefits for retirees) by threatening to force the federal government to default on its sovereign debt unless then President Obama agreed to large spending cuts.

The POST GRAD Act would reduce the disparity between funding policy for graduate education and undergraduate education by reinstating graduate students’ eligibility for federal subsidized student loans, although graduate student borrowers, who have lower default rates, would continue to pay a higher interest rate after they complete their studies.

Christopher P. Chapman, CEO of the AccessLex Institute, estimated that the bill would save the typical law student $4,000 if passed.  

If the interest rate subsidy encourages more investment in graduate education, it could more than pay for itself with higher future tax revenue.

 

UPDATE:  The New America Foundation, which has close ties to the private student loan industry, has condemned proposals to reduce federal student loan interest rates.   NAF claims that the immediate benefits of higher education financing only benefit a "small majority" of households and therefore are bad policy.  New America argues that an increased military presence in Syria, Iraq and surrounding countries would be a better use of taxpayer dollars.

 

UPDATE 2, 6/30/2017: The New York Law Journal covers efforts to reduce student loan interest rates for graduate students.


June 21, 2017 in Guest Blogger: Michael Simkovic, Of Academic Interest, Science | Permalink