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.
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 21, 2017
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.
January 19, 2017
Established datasets, proxies, and customized data collection: The case of international LLMs (Michael Simkovic)
How should researchers make tradeoffs between the costs of data collection, the speed of the analysis, the precision of the measurements, reproducibility by other researchers, and broader context about the meaning of the data: how we might compare one group or one course of action to another, how we might understand historical trends, and the like?
Must we always measure the precise group of interest, with zero tolerance for over-inclusion or under-inclusion? Or might one or a series of proxy groups be sufficient, or even preferable for some purposes? What if the proxies have substantial overlap with the groups of interest and biases introduced by use of proxy groups are reasonably well understood? How close must the proxy group be to the group of interest?
These are important questions raised by a group of legal profession researchers which includes several of the principal investigators of the widely used After the JD dataset.
Professors Carole Silver, Ethan Michelson, Robert Nelson, Nancy Reichman, Rebecca Sandefur, and Joyce Sterling (hereinafter, Silver et al.) recently wrote a three-part response (Parts 1, 2, and 3) to my two-part blog post from December about International LLM students who remain in the United States (Part 1) and International LLM students who return to their home countries (Part 2). The bulk of Silver et al.’s critique appears in Part 2 of their post, and focuses mainly on Part 1 of my LLM post.
My post, which I described as “a very preliminarily, quick analysis intended primarily to satisfy my own curiosity” used U.S. Census data from the American Community Survey and two proxy groups for international LLM (“Masters of Law”) graduates to make inferences about the financial benefits of LLM degrees to international students who remain in the U.S. Silver et al. agree with several of the limitations of this analysis that I noted in paragraphs 5 through 8 of Part 1 of my post. They also note that historically, many LLMs have returned to their home countries and argue that the benefits of LLM programs to returning students may be greater than the benefits to those who remain in the United States. (While I am skeptical of this last claim—especially if we focus exclusively on pecuniary benefits—it seems likely that both groups benefit).
Silver et al. have also helpfully made several additional points about limitations in my proxy approach and ways in which proxies could over-count or under-count foreign LLMs. The most important of these limitations can be addressed with a few modifications to the LLM proxy group approach. Those interested in the technical details are encouraged to read footnote 1 below.
Returning to broader questions about the use of proxy groups, my view is that proxy groups can be helpful and potentially necessary for certain kinds of analysis.
Suppose that we wish to know the temperature in New York’s Central Park before we take a stroll, but we only have temperature readings for LaGuardia and Newark airport. While neither of those proxies will tell us the precise temperature in Central Park, they will usually be sufficiently close that we can ascertain with a reasonable degree of certainty whether we should bring our winter coats, wear sweaters, or proceed with short sleeves. Indeed, readings from Boston or Philadelphia will probably suffice, particularly if we’re aware of the direction and magnitude of typical temperature differences relative to Central Park.
Should we refuse to venture out until we can obtain a temperature reading from Central Park itself?
December 14, 2016
Republican Tax Plan likely to cause "an explosive rise in federal debt" according to Centrist former Treasury Secretary Lawrence Summers (Michael Simkovic)
Former Secretary of the Treasury Lawrence Summers recently warned that President Elect Donald Trump's proposed tax reform plan "will massively favor the top 1 per cent of income earners, threaten an explosive rise in federal debt, complicate the tax code and do little if anything to spur growth."
Summers served as Secretary of the Treasury during the Clinton Administration, during one of the few periods in the last 4 decades when the Federal Government ran a surplus budget. Summers is a Professor of Economics at Harvard University, served as the President of Harvard University, was the Chief Economist of the World Bank, was the Director of the National Economic Council, and was a managing partner at hedge fund D.E. Shaw.
Summers is widely regarded as data-driven, rigorous, and centrist (Summers has complained about "absurd political correctness" in academe and his potential nomination as Chairman of the Federal Reserve was opposed by Progressive Democrats).
"Unfortunately, neither the Trump plan, nor the one put forward by Paul Ryan, speaker of the House of Representatives, provides for nearly enough base-broadening to finance all the high-end tax cutting they include.
Steven Mnuchin, Treasury secretary-designate, asserts there will be no absolute tax cut for the upper class because deductions would be scaled back. The rub is that totally eliminating all deductions for those with incomes over $1m would not even raise enough revenue to cover reducing their marginal tax rates from 39 to 33 per cent, let alone offset their benefit from huge rate reductions on business and corporate income, and the elimination of estate and gift taxes.
Estimates of the Trump plan suggest that it will raise the average after-tax income of the 0.9 per cent of the population with incomes over $1m by 14 per cent, or more than $215,000. This contrasts with proposed tax cuts for those in the middle of the income distribution of $1,000, or about 2 per cent.
The repeal of estate and gift taxes is especially problematic because it would provide a window for the very rich to use gift and trust structures to ensure that their wealth passes without tax not just to their children but to their grandchildren and great grandchildren, regardless of subsequent legislation. . . .
The envisioned Trump tax cut is about the same size relative to the economy as the 1981 Reagan tax cut. It is worth remembering that Reagan, hardly a fan of reversing course or raising taxes, found it necessary to propose significant tax increases in 1982 and 1984 (the equivalent in today’s economy of $3.5tn over a decade) due to concerns about federal debt.
August 19, 2016
"There's a new book out about the student loan crisis [Student Debt: Rhetoric and Realities of Higher Education], or what author Sandy Baum suggests is a "bogus crisis." Baum, a financial aid expert and senior fellow at the Urban Institute, claims it has been [sensationalized and exaggerated] by the media in search of a spicy story and fueled by politicians pushing "debt free college" proposals. . . . "
"People who earn bachelor's degrees, by and large, do fine.
The problem is that we have a lot of people actually borrowing small amounts of money, going to college, not completing [a degree] or completing credentials that don't have labor market value. They tend to be older. They tend to come from disadvantaged or middle-income families and they're struggling. [But] not because they owe a lot of money. . . .
Its not realistic to say we're going to pay people to go to college [for free]. Someone has to pay. We can have everyone pay much higher taxes. But short of that, it's not clear how we would pay. . . .
There are some people who borrowed under fraudulent, deceptive situations and their debt should be forgiven. There are people for whom education did not work out through no fault of their own and their debt should be forgiven. . . . We don't give people very much advice and guidance about where [and] when to go to college, how to pay for it, what to study. . . .
[[There are facts that] get little or no attention because they don't fit the "crisis" narrative:
- A third of college students who earn a four-year degree graduate with no debt at all. Zero.
- A fourth graduate with debt of no more than $20,000.
- Low-income households hold only 11 percent of all outstanding [student] debt.
- Almost half of the $1.3 trillion in student loan debt is held by 25 percent of graduates who are actually making a pretty high income.]
This is an investment that pays off really well. The median earnings for young bachelor's degree recipients is about $20,000 a year higher than the median earnings for high school graduates.
Student debt is really creating a lot of opportunities for people. People wouldn't be able to go to college otherwise."
Baum notes that many graduates with high debt levels (>$100,000) have advanced degrees, high expected incomes, and low default rates.
"The highest debt levels are for those earning professional degrees . . . Despite high debt levels, default rates among graduate borrowers are very low." However, Baum expresses some concern about those pursuing expensive master's degrees in fields "that rarely lead to the kind of earnings that doctors, lawyers, and MBAs can expect."
Baum's findings are broadly consistent with recent research by Beth Akers and Matthew Chingos, reviewed by David Leonhardt for the New York Times. Akers and Chingos have a new book coming out this fall.
August 15, 2016
“Glass Half Full” author concedes problems with estimates of solo practitioner incomes and headcounts (updated 8/18)
Professor Benjamin H. Barton recently responded to critiques of his estimates of solo practitioner incomes. Barton does not answer the specific questions that I posed about his use of IRS data, but he generally concedes that the IRS data is problematic.
- Barton wrote:
“Is it possible that the IRS data undersells the earnings of solo practitioners? Yes, for the reasons I state above and for some of the reasons that you and Professor Diamond point out.”
- Barton wrote:
“Do I think that the IRS data are off by a factor of 3.5 or even 2? No.”
I encourage Professor Barton to present a revised estimate that he thinks is more accurate. Several studies that he cites for support suggest that his solo income estimates are off by a factor of approximately 2 to 3 (see below for details).
- Barton defends his use of IRS data on three grounds, each of which is problematic:
a. “The IRS data on lawyer earnings is the longest running data I could find and thus the best dataset for a discussion of long term trends.”
Professor Barton overlooked the U.S. Census Bureau’s Decennial Census, which has data on Lawyer’s incomes since 1950 (which reports 1949 incomes).[i] The IRS data presented by Barton starts 18 years later, in 1967.
When considering long term trends in occupational incomes, it’s important to consider changes in the race and sex of members of the occupation. Across occupations, women and minorities generally earn less than white men. Race and sex variables are available in Census Household data, but not public-use IRS data.
b. The IRS data “separates lawyer earnings into solo practitioners and law firm partners”
Professor Barton acknowledges that his data misses incorporated self-employed lawyers, and that this group likely has higher incomes than those that he captures.[ii]
This means that Professor Barton’s IRS data is much less useful for identifying small and solo practitioners in 2013 than it was in 1970. This is because the proportion of solo and small attorneys who incorporated has likely increased dramatically. In 1970, 5 percent of full-time self-employed lawyers were incorporated. By 2014, the share increased to more than 50 percent.[iii]. Barton is missing many solo and small time practitioners. If trends toward incorporation continue, his data will become less useful every passing year. The IRS data has different biases at different points in time, making trends potentially unreliable.
July 28, 2016
Some questions for Professor Benjamin H. Barton about his use of IRS data to estimate solo practitioner incomes (Michael Simkovic)
After Tuesday's post explaining why IRS schedule C data dramatically underestimates incomes for solo practitioners and other sole proprietors, Professor Benjamin H. Barton emailed to indicate that his views remained unchanged and he did not intend to respond beyond his previous comments on Professor Stephen Diamond's blog. Barton's comments did not address many of the issues I raised.
On Wednesday, I asked Professor Barton to consider the following questions:
1) Do you think that 20 million or so U.S. small business owners are living below the poverty threshold for a 2 person household?
2) Do you think the IRS is wrong about its own data and schedule C does not in fact understate net income? Why do you think that you understand IRS data, IRS enforcement capabilities, and the level of tax evasion better than the IRS?
3) Do you think that everyone who files schedule C has no other sources of income?
4) Do you think that Treasury and JCT estimates of tax expenditures are way off and exclusions and deductions from tax concepts of income are negligible?
5) If apples to apples comparisons using schedule C data show that legal services sole proprietorships are more profitable than 97 percent of sole proprietorships, is that something you should mention? Would you at least agree that using schedule C data for legal services and census data for everyone else is a methodological error?
Professor Barton has not yet responded.
Aug. 11, 2016. Professor Barton responded without specifically answering the questions above, but generally conceded that IRS data is problematic.
Aug. 15, 2016. I replied to Barton.
July 26, 2016
In 2015, Professor Benjamin Barton of the University of Tennessee estimated for CNN.com, and Business Insider that attorneys working in solo practice earn an average of slightly less than $50,000 per year. Barton made similar estimates in his book, “Glass Half Full.” Professor Stephen Diamond of Santa Clara argues that solo incomes are quite a bit higher. (Barton responded in the comments section).
There is little doubt that solo practitioners typically earn substantially less than lawyers working in large Wall Street Law firms. However, a closer reading of the Internal Revenue Service data on which Barton relies and Census data both suggest that solo practitioner average (mean) annual earnings are likely closer to $100,000.
I. Average (Mean) Incomes of Lawyers: Census Income Data vs. IRS Schedule C Net Income Data
According to the U.S. Census Bureau’s American Community Survey, average (mean) total personal income for lawyers who are “self employed, not incorporated” (a proxy for those in small legal practice) was around $140,000 in 2012 and 2013. For those who were self-employed, incorporated (a proxy for those who are owners of larger legal practices) average total personal income was around $180,000 to $190,000. These average figures include those working part time. Restricting the sample to those working full-time increases average earnings for “self employed, not incorporated” lawyers to around $160,000 to $165,000 and for the “self-employed, incorporated” lawyers to $185,000 to $200,000.
Barton based his earnings estimates on average “net income” data from the Internal Revenue Services Statistics of Income for Non-farm Sole Proprietorships for “Legal Services (NAICS Code 5411)”. This data is based on Schedule C of form 1040, which is used to calculate one of several sources of income on an individual tax return (“Business Income or Loss”).
Looking at the same IRS schedule-C net-income data for all non-farm sole proprietorships and applying Barton’s reasoning suggests that in 2013, 24 million American small business owners earned an average (mean) income of $12,500. This is barely above the poverty threshold for a 1 person household, and considerably lower than average (mean) earned income figures for all Americans reported by the U.S. Census’s American Community Survey (around $47,000 including only those who are employed in some capacity, and $22,000 averaging in everyone—children, the retired, and those not in the work force).
A. IRS Schedule C Data Is Biased Downward:
What explains the large discrepancy between low IRS sole proprietor net income data and higher Census earnings data—for lawyers and for everyone else? There are several problems with IRS sole proprietor data that are likely to lead to dramatic underestimation of individual earnings.
June 24, 2016
Last week I wrote an open letter to New York Times reporter Noam Scheiber discussing problems with his law school coverage and his reliance on low quality sources such as internet blogs and "experts" who lack relevant expertise rather than peer reviewed labor economics research. By email, Scheiber insisted that there was nothing wrong with his coverage, but he'd be happy to hear of any specific factual problems I could identify.
I identified 6 clear factual errors and multiple misleading statements. I also reinterviewed his lead source, John Acosta and found important discrepancies between how Scheiber depicted Acosta as someone who was suckered into un-repayable debt, while Acosta describes his own situation as hopeful and law school as a worthwhile and carefully researched investment. New York Times Dealbook reporter and U.C. Berkeley Professor Steven Davidoff Solomon weighed in, citing my research and supporting my points.
Scheiber posted a response to his facebook page, after running it by his editors at the New York Times. The New York Times agreed to correct the most minor of the six errors I identified. They also "tweaked" two sentences so that the language was less definitive.
Scheiber's response includes some good points (many students from Valparaiso might be below the 25th percentile of law school graduates) as well as strained interpretations of the language of his original article: "fewer" did not actually mean "fewer"'; "Harvardesque" did not actually mean "similar to Harvard." Scheiber describes my presentation of data that contradicts his factual claims as "strange", "bizarre", "odd", "overly-literal" and (on Twitter) "gripes." Interestingly, Scheiber thinks that "most law school graduates who pass the bar are going to have at least a few hundred thousand dollars in assets like 401k and home equity by the time they work for 20 years." This level of savings would make them far more financially secure than the vast majority of the U.S. population.
My response to Scheiber is below. I explain why The New York Times has an obligation to its readers to correct the remaining uncorrected factual errors in Scheiber's story.
Scheiber embedded his response in my explanation of the 6 clear factual errors in his story, and I in turn embedded my response within his response. To ease readability, I have color coded Scheiber's response in orange, and my new response in blue. Scheiber's response is indented once, and my new response is indented twice. The least indented black text at the beginning of each thread is from the list of 6 clear factual errors, and can be skipped (scroll down until you see orange or blue text) by those who have followed the discussion thus far.
UPDATE: June 25, 2016: Yesterday, The New York Times posted an additional minor correction to its discussion of taxation of debt forgiveness, stating that debt forgiveness would "probably" be treated as taxable income. This is an improvement over the original, but could still mislead or confuse readers. It also leaves many of the most important errors uncorrected.
Scheiber tells me that the "tweaks" to the language which he communicated to me in his facebook post from Tuesday 6/21 actually happened on Friday evening 6/17. This would make them coincide with the timing of my open letter, but before my more detailed explanation of 6 clear factual errors. Scheiber tells me that these "tweaks" were not made in response to my letter, although he has not specified when on Friday evening the changes were made. They appear to have been made after I sent him the letter.