August 21, 2017

Herwig Schlunk’s latest misguided critique of higher education (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 criticizes 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

August 15, 2017

Charlotte Law School officially closes

Local news item here.  We've now seen three law schools close:  in addition to Charlotte, also Whittier and Indiana Tech, all victims of the collapse in applications to law schools, which occurred in the wake of publicity about the recession in the market for new lawyers post-2008.  Back in 2013, I guesstimated we might see up to 10 law schools close,and I still think that's possible.  Of course, a sudden change to student loan rules could make that guesstimate look way too conservative, and it's hard to predict what Trump/DeVos will do on that front.  But barring that, I doubt we'll see more than ten law schools close, and almost all will be younger and/or for-profit institutions.


August 15, 2017 in Legal Profession, Of Academic Interest | Permalink

August 03, 2017

Bad behavior by the ABA Legal Education Council

Jerry Organ (St. Thomas) has the details.

UPDATE:  At least one of the changes--namely, to stop stigmatizing law-school funded positions--probably makes sense.  Here are comments that were forwarded to me that make the case aptly:

The goal of employment reporting is to provide accurate information, including to prospective students and the general public.   All who are employed by the ABA’s definition (full-time at a salary of at least $40,000) should be counted as employed, regardless of the source of funding.   To not count graduates on school-funded fellowships as employed (or to treat them differently) presents an inaccurate picture of a law school’s actual employment numbers.   I, of course, know that there was a time when some law schools tried to game the rankings by employing students at a very low salary.  But the ABA changed its definition to address this by requiring a salary of at least $40,000, which is approximately market rate for many public service jobs.  In light of this change in definition, it made total sense for the ABA to revise its reporting form as it did to treat all employment that meets its definition the same regardless of the source of funding.  Graduates who are working full-time as public defenders, as legal service lawyers, in non-profits, and for government agencies should be treated the same as those in private firms, regardless of how their salary is being paid. 

The ABA long has professed an important public service mission, including to help close the justice gap by helping to ensure representation for those who otherwise cannot afford it.   In light of this, it was completely appropriate and necessary for the ABA to change its reporting form as it did.  Treating school-funded positions differently penalizes schools that provide fellowships to students to launch their careers in public service and to help provide representation for those who most need it.  The reality is that school-funded fellowships often are essential for graduates who want to begin a career in public service.  My experience is that these fellowships work exactly as hoped with most of these graduates getting permanent offers at their organization or similar ones.  To pick a single example, Gideon’s Promise is a wonderful program where the law school provides a fellowship for one year for a graduate to work in a public defender office and then is guaranteed a job for the next two years in that office.  I would like to see the ABA encourage law schools to fund such positions, but at the very least the reporting should not penalize law schools that do so or create a disincentive for such funding.  


August 3, 2017 in Legal Profession, Of Academic Interest, Professional Advice | Permalink

July 24, 2017

How unemployment at graduation affects lawyer earnings over time

More factual analysis from McIntyre & Simkovic, forthcoming in Journal of Empirical Legal Studies:

We investigate whether economic conditions at labor market entry predict long-term differences in law graduate earnings. We find that unemployment levels at graduation continue to predict law earnings premiums within 4 years after graduation for earners at the high end and middle of the distribution. However, the relation fades as law graduates gain experience and the difference in lifetime earnings is moderate. This suggests that earnings figures from After the JD II and III -- which track law graduates who passed the bar exam in 2000 -- are likely generalizable to other law cohorts because these studies are outside the window when graduation conditions predict differences in subsequent earnings.

 

Outcomes data available prior to matriculation do not predict unemployment or starting salaries at graduation. Earnings premiums are not predicted by BLS projected job openings.

 

While changes in cohort size predict changes in the percent of law graduates practicing law, we find little evidence that changes in cohort size predict changes in earnings. This suggests that law graduates who switch to other occupations when law cohort sizes increase are not hurt financially by larger cohorts.

 

For medium to high earning graduates, successfully timing law school predicts a higher value of a law degree ex-post, but simulations show that no strategy for ex-ante timing is readily available.

 


July 24, 2017 in Legal Profession, Of Academic Interest | Permalink

July 18, 2017

June LSAT takers up nearly 20% last month compared to 2016

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 17, 2017

Some corrected data on trends in law school applications and LSAT scores

Here.  The problem is that the Blog Emperor relies too often on unreliable sources like "Law School Transparency" and the hopeless Matt Leichter.


July 17, 2017 in 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

A law professor's advice for Jeff Bezos

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