August 21, 2017
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.”
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). 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.
February 20, 2017
We noted awhile back Syracuse's impressive results on the July 2016 New York bar exam--a pass rate of 89%, fourth highest in the state, behind only Columbia, Cornell, and NYU, and ahead of Fordham, Cardozo, Brooklyn, Buffalo and others. I recently visited Syracuse, and talked with Professor Christian Day about the changes they made to achieve these results. He kindly gave me a written version to share; I'm sure this will be of interest to many schools. Professor Day writes:
In the later 1990s and early 2000s Syracuse had a terrible bar pass rate. One year it was dead last among the 15 New York law schools. A faculty ad hoc committee was created and it developed a program over several years.
Under Dean Hannah Arterian’s leadership the faculty adopted 1L and upper-class curves. The curves are centered on a low B (2.9-3.0) and approximately 8% of the 1L class is dismissed. Before the implementation of the curve, most of the students who were dismissed were re-admitted and placed on probation. But only 10% of that group passed the bar for the first time. With the new curve, a much smaller group of students is re-admitted and placed on probation. The Structured Curriculum, described below, and a comprehensive bar success program, which includes a staff member dedicated to the bar success effort have provided a foundation for achievement. We also inaugurated a comprehensive third year bar prep program. That program was mandatory for those on probation and voluntary for the balance of the student body.
A consultant worked with the College and confirmed that bar exam success was correlated to 1L class rank AND the number of so-called “bar courses” students had taken. Syracuse had a 90% pass rate for students in the upper 75-80% of the 1L class who had taken most of the bar courses for grade. Students who failed the exam took around four of those courses, often on a pass/fail basis. The faculty adopted the Structured Curriculum that requires all students on probation and those below a 2.50 average at the conclusion of the first year to take the following courses for grade: Commercial Transactions, New York Civil Procedure, Business Associations, Constitutional Criminal Procedure—Investigation and Adjudication, Wills and Trusts, Family Law, Evidence, and Foundational Skills for Professional Licensing (a bar prep course taught by faculty or staff that emphasizes exam prep and writing).
The efforts have borne fruit. In 2014 Syracuse and St. John’s tied for fourth place among the New York law schools. In 2016, with the adoption of the Uniform Bar Exam, Syracuse was again in fourth place behind NYU, Columbia and Cornell.
December 01, 2016
November 25, 2016
October 04, 2016
A clever and charming welcome to our new law students, with lots of good advice too!
July 18, 2016
July 12, 2016
June 21, 2016
June 18, 2016
New York Times reporter Noam Scheiber was kind enough to respond to my open letter and ask if I could point to anything specifically factually wrong with his story. My response is below.
Thanks so much for responding. Yes, there are at least 6 factual errors in the article, and several misleading statements.
I’ll start with my interview with Acosta from earlier today, and then we can discuss empirics. Here’s what Acosta said:
"There’s no way I could pay back my student loans under a 10-year standard payment plan. With my current income, I can support myself and my family, but I need to keep my loan payments low for now. I’ve been practicing law since May, and I’m on track to make $40,000 this year. I think my income will go up over time, but I don’t know if it will be enough for me to pay back my loans without debt forgiveness after 20 years. What happens is up in the air. I’m optimistic that I can make this work and pay my student loans. I view the glass now as half full.
Valparaiso did not mislead me about employment prospects. I had done my research. I knew the job market was competitive going in. I knew what debt I was walking into. I think very few Americans don’t have debt, but for me it was an investment. I saw the debt as an investment in my career, my future, and my family.
Valparaiso gave a guy like me, a non-traditional student a shot at becoming a lawyer. Most law schools say they take a holistic approach, but they don’t really do it. I had to work hard to overcome adversity, and they gave me a shot to go to law school and to succeed. They gave me a shot at something that I wanted to do where most law schools wouldn’t.
My situation might be different from other law students who start law school right out of college. I was older and I have a family to support."
On to empirics.
The story states that:
“While demand for other white-collar jobs has rebounded since the recession, law firms and corporations are finding that they can make do with far fewer full-time lawyers than before.”
This is incorrect.
First, the number of jobs for lawyers has increased beyond pre-recession levels (2007 or earlier), both in absolute terms and relative to growth in overall employment. (error #1)
Focusing only on lawyers working full-time in law firms or for businesses (I’m not sure why you exclude those working in government), there are more full-time corporate and law firm lawyers in 2014 according to the U.S. Census Bureau’s Current Population Survey (CPS)—870,000—than in 2007—786,000. There have been more full-time corporate and law firm lawyers in every year from 2009 on than there were in 2007 and earlier.
You were looking at NALP or ABA data, which is measured at a single point in time—9 or 10 months after graduation—and is therefore much less representative of outcomes for law graduates—even recent law graduates—than Census data. Indeed, many law graduates who will eventually gain admission to a state bar will not have done so as of the date when NALP collects data. NALP and the ABA also use different definitions from the Census, so you cannot readily use their data to compare law graduates to others.
The trend of growth in lawyer jobs holds true for other cuts of the data (all lawyers; all full time lawyers) using other data sources—U.S. Census or Department of Labor (BLS OES) data.[i]
This is in spite of large declines in law school enrollments, which would be expected to reduce the number of working lawyers.
Second, employment has not rebounded to pre-recession (2007 or earlier) levels outside of law. (error #2)
May 11, 2016
Sarah Lawsky's entry-level hiring report for 2015-16--plus the percentage of successful job seekers from each school
Professor Lawsky (currently UC Irvine, moving this fall to Northwestern) has produced her annual, informative report on rookie hiring this year. As she notes, it reflects only those who accepted tenure-track jobs, not tenure-track offers. (This matters for Chicago this year, since two alumni turned down tenure-track offers for personal reasons; as I noted earlier, 75% of our JD and LLM candidates on the market received tenure-track offers.)
Here are the statistics based on the percentage of JD, LLM and SJD (or Law PhD) seekers from each school who accepted a tenure-track position this year (I excluded clinical and LRW jobs, since that market operates differently from the market for "doctrinal" faculty--there were 80 of the latter, as I had estimated--a 20% uptick from recent years, but still about half of the pre-recession numbers); only schools that placed at least two candidates and which had at least nine job seekers* are listed:
1. University of Chicago (58%: 7 of 12)
2. Yale University (50%: 21 of 42)
3. Stanford University (42%: 8 of 19)
4. Columbia University (29%: 6 of 21)
5. Harvard University (27%: 12 of 45)
6. New York University (24%: 7 of 29)
7. University of Michigan, Ann Arbor (22%: 2 of 9)
8. University of California, Berkeley (19%: 3 of 16)
9. University of Virginia (17%: 2 of 12)
UCLA had just five job seekers, but two (40%) got tenure-track jobs.
*I used 9 rather than 10 is the cut-off, since Michigan was just under ten, but still had enough candidates to make the figure somewhat meaningful.