You would think a former BigLaw partner would know better.
It probably won’t convince the rigid ideologues to recognize the world is not flat but worth a shot.
When I first read Brian Tamanaha’s Failing Law Schools (Chicago 2012) I thought it contained some mildly interesting anecdotes about the troubled economy’s impact on higher education thrown together with some decade old memories Tamanaha had of his first law school, the then-languishing St. John’s University in New York. But the book hardly seemed to justify the attention it was garnering.
It became clear to me, though, that a mini-industry was being created – by class action lawyers, naive young law school graduates and a handful of opportunistic legal education reformers – to push Tamanaha’s agenda of weakening tenure and attacking the important role that the autonomous law school has in the university environment. I realized then the book merited closer attention. I wrote an essay that examined the logic of the Tamanaha argument, placing it in the context of the wider debate about the rule of law itself, a subject that had originally established Tamanaha’s reputation. It is almost certainly the case that that prior reputation is a significant factor in the weight that Tamanaha’s decision to join the anti-law school campaign carries.
Unfortunately, my closer read of his book led to my conclusion that Tamanaha had not done the necessary “careful econometric analysis” to assess properly what had caused the volatility in the legal market but instead relied on “broad-brush statistical material and anecdotal information.” This approach did not sustain Tamanaha’s conclusion that law schools were responsible for the bubble in enrollment that followed the economic downturn of the mid-2000s.
Yet, the inevitable bursting of that bubble led the anti-law school mini-industry to argue, with a straight face, that law schools are to blame for the impact on legal employment rather than the worst economic downturn the world has experienced since the 1930′s.
I had hoped to engage Tamanaha in first hand discussion about his book, but within a short time after my review was posted on SSRN he cancelled his long planned visit to our law school to discuss the book. In the meantime he traveled to the conservative Cato Institute, financed in part by the Koch Brothers, where he was celebrated as the “good cop” of law school reform (as opposed to the so-called “bad cop,” namely, another less well known law professor in the anti-law school camp whose demeanor is distinctly less temperate than the usual style of Tamanaha). Cato, of course, proudly attacks teacher tenure and higher education whenever it gets the chance.
It is fortunate, then, that two scholars who have done very careful empirical work on the value of earning a JD, Michael Simkovic of Seton Hall (Law) and Frank McIntyre of Rutgers (Business), have now turned their attention (here) to Tamanaha’s book. It is not likely, of course, that Tamanaha will be willing to engage in serious debate with these authors. Their original work on the positive net present value of a JD (explained here) across the income spectrum of law degree holders caused Tamanaha to engage in a series of vituperative and arguably irrational attacks on their solidly presented data. The original paper, “The Economic Value of a Law Degree,” can be found here. Simkovic recently presented the paper at Berkeley Law and a video of his talk can be seen here. I summarized the paper’s key findings here.
While the Simkovic/McIntyre research largely closes the debate about the value of a JD, it is nonetheless useful to have them weigh in on the original manifesto for the anti-law school campaign. The abstract for Simkivic and McIntyre’s review reads:
The review focuses on problems with empirical claims in “Failing Law Schools” regarding outcomes for law graduates and also regarding law faculty compensation. The review also discusses Professor Tamanaha’s proposals for reform of legal education in light of economic theory and the empirical economics literature, and finds reasons to doubt that Tamanaha’s proposed reforms will have the effects he predicts.
I am pleased to see that their review confirms my original argument about the weak empirical basis for Tamanaha’s book. They note many of the very basic mistakes that Tamanaha made, including:
- using the earnings of very recent JD graduates to drive a conclusion that the JD is not worth it although this greatly understates lifetime earnings for JD holders
- misstating the conclusions of his own sources about the increase in JD holders salaries throughout their careers
- using inconsistent assumptions about age, experience, work status and the definition of earnings to sustain his claim that JD holders do earn enough to justify the expense of pursuing the degree (the result is Tamanaha compares top earning BA holders with the lowest cohort of JD holders)
- citing one key study to support some of his claims but ignoring the same study when it contradicts his claims (e.g., when the study concludes that debt loads of JD earners are sustainable and do not interfere with important life choices like when to purchase of a home or start a family)
- overstating how well law professors are compensated relative to lawyers (in fact, across the distribution law professors earn less than practicing lawyers, undermining the patently absurd and self-serving claim by some in the anti-law school movement that law professors are “rich”)
One of the more important aspects of Tamanaha’s book – overlooked by some – is his call for a weakening of tenure standards. He has now, sadly, been joined in this call by some within the ABA which accredits law schools. Thus, it is welcome that Simkovic and McIntyre take the time to point out that tenure has an inherent value to the American law school including a basic economic rationale that reinforces its importance. It is simply not the case that ending tenure has any rational link to solving the problems of supply and demand for lawyers in the wider economy.
The authors conclude by once more, calmly, calling for constructive reform based on good data. That data makes it clear the JD has real value (a present value of $350,000 at the low end and more than a million dollars at the high end). Sadly, many in the anti-law school camp have been unwilling to respond in kind. Thankfully, reflected in the reception accorded Michael Simkovic at Berkeley recently, most law schools – deans, faculty and alums together – remain committed to responsible reforms that are consistent with the core principles of academic freedom and tenure that have been central to the stunning and progressive success of the American university system.
- I read the recent working paper and was surprised and concerned that the words “academic freedom” do not appear in the paper. Are we to conclude that academic freedom is not a principle to be an integral part of the law school of the future? Presumably not. But I would appreciate learning the Task Force’s views on this basic principle.
- An implication of the push for diversification of law schools is that the ABA should no longer require tenure as an accreditation standard. For a century or more tenure has been considered inextricably linked to the protection of academic freedom. If the Task Force believes that tenure should no longer be part of the standards, how does it believe academic freedom can be protected?
- In light of the concern that many legal academics have about the threat to tenure and academic freedom that is part and parcel of the program being pushed by the law school “reform” or “critics” movement does the Task Force believe that the law school’s place inside independent colleges and universities plays a critical role in the promotion of the rule of law?
There are many ways to build a business in this country but one of the less savory is to dragoon potential customers into buying your product through fear and intimidation. The mafia used to excel at this. One day a bunch of young thugs would show up at some small shop in the neighborhood and either threaten physical harm or actually trash the premises. The next day a smooth talking older figure would show up and “suggest” that the store’s owner really could benefit from employing his “protection” services. The hook was in and the racket was on.
It took decades to eliminate this kind of strong arming from the American economy and in some places variations on this theme still occur. Hence the popularity this century of the Sopranos.
It’s a surprise, perhaps even a shock, then, to watch something similar rolling out inside the environment of the American law school. As only one example, an entity that calls itself “Law School Transparency” set up shop a while back with the alleged aim of providing free information to prospective law students about the cost of going to law school. The real aim seems to have been to discourage people from actually going to law school or at least to particular law schools. Their analysis suffered, as the recent Simkovic and McIntyre paper demonstrates, from a basic misunderstanding of the value of a JD.
When I first entered the debate about the future of the American law school I expressed the view that law school critics like LST had a basic problem grasping the nature of macroeconomics, particularly the longstanding role of economic cycles on the value of a JD. That view has also been demonstrated clearly in the Simkovic and McIntyre paper. What was surprising, though, was that LST and its friends, including a few anonymous former law students and a couple of law professors here and there, were not interested in a genuine discussion about these complex issues. Instead, they kept up a wall of denial and obfuscation which quickly turned to personal attack or attack on the particular institution that any of their opponents happened to come from.
Steven Davidoff picked up on this trend when he reviewed, favorably, the Simkovic and McIntyre results for The New York Times: Their “data [detailing the value of a JD to a majority of law school graduates] refutes some of the arguments made by those who say law school is a ‘scam.’ It is no surprise that this study would be attacked by many of the same people. After all, the law school scam industry has been bountiful for some, just like being a Kardashian.”
I began to suspect that there was another agenda at work. One possibility I suggested was that LST actually was operating like a startup business and it intended, god forbid, to make money from its efforts. Therefore, because of the obligation to build the business no matter what rational thoughts entered the heads of the young LST founders they would suppress them to support their business model. This was denied and not just denied but, in the case of LST ally Professor Deborah J. Merritt of Ohio State, called a “malicious” and “unfounded” claim that should have been censored by the moderators of Faculty Lounge where I suggested this possibility. Professor Merritt is partners with Kyle McEntee, the founder of LST, in another venture called Law School Cafe, which I am sure, she will contend, is as purely non-profit as the driven snow.
In fact, there was some basis for my suspicion about LST, first, because of the way the critics behaved in the face of any genuine effort to consider alternative explanations for the challenges facing law schools other than the assertion that law schools themselves bordered on being criminally fraudulent institutions; second, in the fact that LST was unable to provide the evidence that it had filed the document (a Form 990) required by the IRS for entities claiming non-profit status; and third, by the public statement by LST founder Kyle McEntee himself to the ABA last year that he was seeking $500,000 in angel funding.
And sure enough, now, LST itself has publicly stated it is starting a new “fee for service” product that
extorts, I’m sorry, suggests to shop keepers, oops, Deans, that they might need the protection oh, sorry, “certification” by LST that a law school is meeting the requirements of ABA Standard 509 regarding disclosures to students about financial aid and employment outcomes. For an annual fee of $2,750.00, of course. If LST signs up 50-100 law schools that’s a nice little pile of cash coming in every year and perhaps even enough to attract the interest of that angel or VC that McEntee says he is on the lookout for. In fact, LST says it will lose money at this rate so they are, indeed, seeking funding from other sources.
After several years of the critics beating up on law schools (without substantial basis as the Simkovic and McIntyre paper and several court decisions demonstrate) and attempting to intimidate anyone who dares criticize LST (LST’s “research director” Derek Tokaz on the website he operates has called for me to be fired when I first called out the now clear business goals of LST) there may be a few vulnerable marks out there in the law school world tempted to fall for the LST gambit. Deans should give them a pass. Let’s keep the American law school clear of the unsavory business practices that once weighed so heavily on the wider economy.
Update: With respect to the IRS filing, after various people including McEntee himself and Bernie Burk of UNC dismissed my concerns as unfounded, it appears that LST now admits they need to make such a filing. Their new Facebook page includes the following statement:
We are a nonprofit working on legal education reform, incorporated in the state of Georgia. Our staff and board are preparing to submit the necessary paperwork to the IRS to officially recognize LST as a 501(c)3, at which point all donations dating back to our date of incorporation in GA (Aug. 2012) will become tax deductible. Until then we encourage you to donate as we expand the organization.
McEntee confirms today on Faculty Lounge that they are filing the form required to get 501(c)3 status. That will allow their donors to deduct their contributions. It will also mean that LST must file an annual report referred to as a Form 990. Let’s hope LST takes the “T” for transparency in its title seriously and exercises its option to file a full 990 rather than the minimalist 990-N postcard.
Interestingly, on Faculty Lounge McEntee said LST was incorporated in 2009 yet now only those people who donated since August of 2012 will be able to claim a deduction. This is most likely because of their failure to make the 501(c)3 filing in a timely manner.
It would also be nice to know the names of all of their advisory board members and their precise relationship to the class action lawyers and law suits they have publicly backed against the same law schools they now hope to extract fees from.
With respect to the question of “angel funding,” LST founder McEntee told Faculty Lounge that he is now seeking something called an “angel donor,” which is a previously undetected form of funding species, especially one willing to “donate” a half million dollars. If McEntee were smart, he would tap into the very large “social venture” fund world where VC or angel type funding is readily available for ambitious non-profits.
Of course, as I have suggested here, LST and its founders – in their various efforts around the web – have behaved in a manner that goes beyond just being ambitious. The word predatory comes to mind. Apparently some law school deans have reacted to the latest moves of LST in the same fashion, as Brian Leiter explains here.
Well so much for that, then. Brian Tamanaha has conceded that indeed Simkovic and McIntyre are right about the positive net present value of the lifetime earnings premium secured by holders of a JD.
He reached this conclusion only a few days after publicly proclaiming their work to be “faulty,” “misleading,” “not true,” having only “the external trappings of precision and rigor,” a “puffed up exaggeration,” a “brazen bluff,” “sloppy,” “slanted,” “ad hoc,” “compromised,” “chest-pounding,” “full of holes,” “dubious,” “hell bent on proving a law degree pays off,” “flawed,” “fudged,” “distorted,” with results that are “substantially overstated.”
But he has now suddenly proclaimed:
“Their study has convinced me that I was wrong to exclusively focus on the short term–the long term return at the 25th percentile is better than I would have guessed (assuming the validity of their numbers).” And, “ignoring the long term was my error.”
Well, as Emily Litella would have put it, “Never mind.”
While Tamanaha seems to feel some regret at his unjustified and unprofessional remarks, he actually repeated the claim that the Simkovic and McIntyre paper was “sloppy” in the course of apologizing for it in comments at TaxProf.
Their research was reviewed in advance of its posting on SSRN by a large array of respected senior scholars in law, economics and business. It was also peer reviewed prior to its acceptance at the American Law and Economics Conference held at Vanderbilt earlier this year, prior to its public posting on SSRN. As a test, without telling the authors, I wrote to one of those reviewers who, in fact, is a fan of the work of Tamanaha and asked him for his view of the research. He sent me the copy of the comments he originally sent to the authors in which he concluded their paper to be “very careful and well done” although he reserved judgment on whether what is happening in the market for JDs is “all cyclical or at least partially structural.” This is hardly the reaction of a reader who believes the work he is considering is sloppy much less faulty or misleading.
Of course, the problem for Tamanaha, who is the author of a widely read book that claims the law school as an institution is failing based largely on anecdotes and very limited data, is that a conclusion that the NPV for JD holders is indeed positive deep into the left side of the distribution is the entire ball game in this debate. If Simkovic and McIntyre are right it means that, indeed, for the vast majority of JD holders there is an earnings premium for attending law school and receiving the JD, relative to going through life with just a BA. It also means that this premium has held up despite the effect of downturns in the wider economy.
And, of course, as Simkovic and McIntyre found, the earnings premium has turned upward already for the cohort of JD holders they tracked including all graduating classes from 1996 to 2008. In other words, the premium held for a group that includes a large number of relatively young JD holders and suggests that, indeed, what we have been experiencing was cyclical not some structural effect that somehow is hitting JD’s but is having no impact on BA-only holders.
Having held up a white flag, Tamanaha attempts to suggest now he really didn’t mean to call into question every law school and every law student only those at the “very bottom” who attend “risky law schools.” Well, no one in this debate has ever said the JD had positive NPV for every graduate of every law school no matter where they ended up in the class. So for Tamanaha to now say that he is in fact only concerned about a narrow “band” of law schools is more than a little disingenuous. He boldly proclaimed in his book’s very first pages that “law schools are failing abjectly in multiple ways….The economic model of law schools is broken.” His book was called “Failing Law Schools” not “Risky Law Schools” or “Very Bottom Law Schools.”
As I explained in an earlier post about the significance of the Simkovic and McIntyre paper, an institution that can produce graduates who achieve the kind of results they demonstrate is not, by any measure, a failing institution.
I posted this letter today in response to the recent article at American Lawyer by Steven Harper criticizing both the Simkovic and McIntyre paper and me:
There are a number of problems with your response to the work of Professors Simkovic and McIntyre and I am sure the authors will reply as they see fit.
However, I should point out that your understanding of the implication of the valuation process is incorrect. A careful reading of my posts on this matter should help clarify the problems. In a nutshell, when faced with only two choices, it makes sense to choose the one with relatively higher positive net present value. The magnitude of the difference is irrelevant.
The challenge for an individual law student is to determine where they are likely to fall along the distribution. I don’t think the Simkovic/McIntyre paper was intended to be a calculator for prospective law students and so criticizing them for that issue is unfair. However, the paper does provide concrete evidence that such a distribution actually exists and that for most points on the distribution the present value of the earnings premium associated with a JD is positive.
This is the difference between engaging in “astrology” and “astronomy” and it should and I think has shifted the debate away from amateur stargazers.
I do also want to correct your characterization of my work on this issue as “resisting” necessary change. I can only conclude that you have not been able to take the time to read my numerous suggestions for reform of legal education and in particular my Lawyers for America proposal to help relieve the debt that unemployed JDs now face.
It has been disappointing to me that so few, if any, of the leading so-called “critics” of law school have been willing to support efforts to deal with the current plight of thousands of highly trained and motivated young people.
I think it also fair to say that among my law school colleagues I am considered an aggressive advocate for change, including, for example, an endorsement of the experimental use of MOOC in law schools.
You can find these and other suggestions on the same website that you linked to in your article, www.stephen-diamond.com.
Stephen F. Diamond, Associate Professor of Law, Santa Clara University School of Law
Mr. Harper is, of course, as is noted at the end of the article a part of the campaign to convince the world that legal education is “deteriorating.” It is interesting to note that Mr. Harper is the author of a moving memoir of his father’s experience as a rank and file Teamster who clashed, at significant personal expense, with Jimmy Hoffa. Despite what was clearly a traumatic experience with a powerful labor union, Mr. Harper professes to be the supporter of what he calls in the book a “progressive” labor movement. It is remarkable then that he seems intent on undermining one of the most important progressive institutions in American history, the American law school. I explained the law school’s importance to a democratic society in my essay on Brian Tamanaha and his book Failing Law Schools here.
Indeed, Simkovic and McIntyre have responded to the allegations of Harper as well as AmLaw Daily contributor Matt Leichter here.
It was the Good Cop’s turn today to take a pot shot at the solid empirical work of Michael Simkovic and Frank McIntyre in their important new paper, The Economic Value of a New Law Degree (powerpoints here).
Of course, by Good Cop I mean Brian Tamanaha of Washington University who earned that little sobriquet from the Cato Institute, the right wing “think” tank, when he spoke there alongside a former “law and literature” (yeah, I don’t know what that is either) professor from University of Colorado who earned from Cato the title of “Bad Cop” in legal education reform, presumably because of his oddly testy demeanor and willingness to use slander and smears as part of his repertoire.
Well, today, however, the Good Cop apparently took the gloves off until he was hit on the knuckles by Professor Seto of Loyola, who is acknowledged by the authors for his comments in advance of its posting. Professor Seto noted on TaxProf that Tamanaha had peppered his account with a wide range of personal attacks aimed at questioning the motives of the authors of the JD value study. As Professor Seto pointed out if there are questions about the data or methodology then one has to come up with genuine errors or go out and prove the data wrong. Professor Seto wrote:
“Prof. Tamanaha needs to tone things down: “puffed up exaggeration, a brazen bluff”, “sloppy, ad hoc”, “chest-pounding confidence”. He explicitly attacks Simkovic’s and McIntyre’s motivations: “Rather than conduct an open-minded inquiry into the economic value of a law degree, it appears that S&B were hell bent on proving that a law degree pays off handsomely for nearly all law grads.” I would have expected ad hominem attacks from Above the Law. They seem out of place in scholarly debate.
“Simkovic and McIntyre’s analysis is the most sophisticated and careful we have seen to date, by orders of magnitude. For the first time, they apply the methods of labor economics to a problem previously addressed largely through amateurish, back-of-the-envelope approximations. Whether they have correctly applied those methods, time will tell. But calling them names and questioning their motivations is unprofessional.
“The standard scholarly response to an empirical study with which one does not agree is a more sophisticated empirical study that takes into account one’s critiques. I look forward to reading Prof. Tamanaha’s study.”
Now it seems Tamanaha admits he went too far and in deference to what he called Professor Seto’s professionalism he seems to pull back but then just repeats his claim that the study was indeed “sloppy”:
Ted, Out of respect for your professionalism, I removed from the Balkinization post “brazen bluff” and “sloppy.” The other terms were entirely appropriate and descriptively accurate and well supported. (And what they did was sloppy, by the way, but I can see that it is an insensitive way to put it.)
Of course it is not Ted to whom Tamanaha owes an apology and retraction, it is the authors of the study. Their work is anything but sloppy. It was peer reviewed prior to its acceptance at the American Law and Economics Conference at Vanderbilt earlier this year. It benefited from the comments prior to its posting on SSRN of several senior leading scholars in several fields in addition to Seto, including Bernie Black and Kate Litvak at Northwestern, both respected empirical law and economics figures; Eric Rasmusen at the Kelley School of Business at Indiana University, a MIT trained economist; Ronald Ehrenberg, a senior labor economist at Cornell’s School of Industrial and Labor Relations; and Louis Kaplow, a Harvard-trained lawyer and economist who has long held an endowed chair at Harvard. Paul Oyer at Stanford and Peter Arcidiacono at Duke, both well known labor economists, also reviewed the work.
If the work of the authors is sloppy then presumably Tamanaha thinks the reviewing done by these individuals was also sloppy.
Now, it is clear that Tamanaha is genuinely threatened by the working paper’s conclusions and it is understandable that he should be. He, like his Colorado colleague, have completely re-engineered their careers to jump on the law school attack bandwagon. If the JD Value study is right then they have made a colossal error.
I am certain that the authors will reply in greater detail to the random comments made by Tamanaha but let me note a few things.
First, Tamanaha admits that he has only a “crude” understanding of the empirical methodology that the authors employ. That should have been a warning to him. Instead of jumping to conclusions he should have consulted someone on his faculty who does have the technical background to help him understand the argument. As I have learned over the last six or seven years in my work on market microstructure with my co-author, an economist, there is a level of subtlety to empirical analysis that can easily escape the uninitiated. Instead, Tamanaha irresponsibly jumped into the fray with a range of personal attacks questioning the motives of the authors.
This has now led Eric Rasmusen of Indiana to comment wryly: “Anyone who is dismissive of Simkovic and McIntyre should read their working paper and rethink. If you don’t understand it, you’re not smart enough to dismiss it.”
I am also reminded of my reaction when I read and commented on Tamanaha’s book Failing Law Schools. I noted:
“Tamanaha relies on very generalized data sets that do not provide persuasive evidence of misbehavior by any individual school, fails to test for counter-factual explanations, and draws conclusions that are only one among several possible explanations for the current situation….[Instead of performing] careful econometric analysis…Tamanaha chose not to do that work but to rely…on broad-brush statistical material and anecdotal information that allows us, in fact, to come to several possible explanations for the situation we face.”
It is one thing to be a conceptual or theoretical scholar who relies on serious qualitative methodology. That is a perfectly acceptable alternative. But it is another to try to dismiss the work of someone with whose methodology you are entirely unfamiliar.
Second, Tamanaha has conceded apparently a key argument I have been putting forward for some months and that the Simkovic and McIntyre paper provisionally confirms: there is a cyclical effect to the earnings premium associated with the JD. That was my instinct and yet it was met with derision and worse, from the critics camp. Now comes Tamanaha who demands that the authors extend their substantial data base to include what? Yet another cycle! He wants the authors to push back the start date of their research to 1992 so that it encompasses the LBO/real estate crash of the early 1990s. Yet, when I pointed to that very event on Faculty Lounge six months ago it was dismissed as an attempt to demonstrate the legal market was cyclical.
And now it is at the centerpiece of Tamanaha’s response to the new research. How can that be? Tamanaha’s whole case has been based on the idea that we were now in a new normal. That it is different this time. That, as I put it in another post, some kind of neutron bomb has hit the legal profession to cause the collapse in JD jobs of late that will now be permanent. In other words, that there is no historic long lasting cyclical pattern at work but something secular and structural.
Of course, Tamanaha behaves as if the Simkovic and McIntyre paper does not deal with this issue. Yet he ignores the evidence they present of the upturn in the earnings premium recently. And despite his suggestion that somehow the research does not show the impact of the recent downturn he has to accept the fact that for all JD holders who graduated from 1996 to 2008, and who worked through the last five years of that downturn, their earnings premium over non-JD holders has, once again, consistent with past behavior, turned north.
Equally important is the fact that the earnings premium they document accrues over a lifetime. Pushing back the data base to rope in a few years more of JDs starting out their careers is likely not significant (statistically – and I hope Tamanaha understands what that means.) I made a similar point in an earlier post about the initial argument by some critics that the inability of the authors to look at the prospects of post 2008 JD graduates. It likely is not material because the amount earned in the early years of a career by JDs is not where the premium gets a large boost. That takes time. The authors point out that it “peaks late” in life. (See Slide 7.)
This makes intuitive sense because, of course, only a small number of students leave school, join a major NY or Silicon Valley law firm and then go on to become full equity partners in that firm. A substantial number of lawyers still enter practice by setting up their own shop or joining a small practice. It takes time to learn the ropes and even more importantly build up a reputation in their community and in the local courthouse.
In any case, the research DOES capture the impact of the very steep and deep downturn that hit the profession after the dotcom crash, the downturn that followed the Asian financial crisis (when it was “pens down” on every deal I was working on for two months), AS WELL AS the impact of 2008. The latter point is not well understood, certainly not by Tamanaha. Since Simkovic and McIntyre track lifetime earnings of all JD holders who entered the profession from 1996 going forward they capture the impact of both of those events. The point is that the premium over BA’s held, if volatile, because of the advantages of a JD to those individuals. Those individuals were working,or not, through 2011 and yet the premium was positive at the median and mean to the tune of hundreds of thousands of dollars.
And there is an even more fundamental objection to the idea of going back to 1992: why stop there? Does Tamanaha not recall what led to the LBO/real estate crash in the post-92 period? It was the boom of the Reagan era in the late 1980s. So why don’t we push the research back to 1982. A simple glance at the up and down nature of the post-Carter era American economy demonstrates the cyclical nature of the situation. It is inherent in the nature of capitalism and of course lawyers are not immune from this volatility.
There is more to what Tamanaha has to say, in particular, his amateurish attempt to wade into the complex area of “ability sorting.” This is another of the areas that the critics have jumped on to question the research results. Again, this is an entirely separate discipline with which it is clear Tamanaha not only has very little prior exposure but about which he seems not to have attempted prior to commenting to gain some understanding. It is clear that the authors have spent a good deal of time considering its effects and attempting to control for them. They control for the impact of non-JD college graduates for the possible effect of the JDs having talents and backgrounds that would lead to higher incomes aside from the degree.
Even an admirer of Tamanaha’s anecdotal work noted the problem in a comment:
Brian,I have been one of your supporters.
However, your points here are wrongs. I read carefully the slides published by Simkovic and your claim about the 10% premium doesn’t hold. The authors have studied 3 groups: JDs (a), bachelor degree holders who look like JDs based on different variables (b), and the broader bachelor degree holder population (c). The authors have compared group (a) to group (b) in estimating the premium. You are saying that they have compared (a) to (c). So your conclusions are pointless, because that’s not what the study did….I understand that your points about the problem with law school are touching the heart of many students who are having a rough time. However it’s important that you don’t mislead people on this important issue.
I am beginning to wonder if Tamanaha even understands what it means in empirical analysis to “control” for something.
The professionally valid scientific response when someone suspects that results might not be valid or that the wrong methodology has been applied is to take the same data and try to replicate those results. I challenge Tamanaha to do that, until then he should hold his tongue.
For several years much hue and cry has been made by a small group of disgruntled law professors and a somewhat larger group of unemployed recent law school graduates about the allegedly “unsustainable” nature of the American law school.
The pain that has motivated the concerns of the law school graduates is readily understandable. Many of them, no doubt most, are unemployed through no fault of their own. Just by virtue of the fact that they completed law school and passed the bar exam, it is clear that they are highly motivated, that they are hard working relative to most of their peers and that they are in a position to make a significant contribution to their community and wider society.
It is less clear how one explains the aggressive demeanor of those few law professors who have turned on their colleagues, their institutions and their own careers in order to push for the widespread shut down of dozens of law schools. The behavior of some of them borders on the pathological. One indication of the true nature of the faculty critics is the fact that so few of them expressed any support for concrete proposals, such as debt relief linked to pro bono legal training and practice, that would have helped this lost generation of law school graduates. Instead they have seemed quite intent on simply exploiting those students’ condition to advance an ideological agenda.
It may be difficult for many academics to recognize the inherent hostility that surrounding society has for the academic project and, because of the unusual role lawyers must play in a law bound nation, the particular hostility held by many towards lawyers. I spent a substantial amount of time in that “real world” prior to re-entering academia and came armed with a pretty good feel for this issue. It has two dimensions to it, including a general anti-intellectualism in American life (one recalls Richard Hofstadter’s famous work on this problem) and an inherent hostility to lawyers. Combine that problem with the free market agenda of some at places like Cato and Hoover to destroy tenure in education generally and you have a fairly toxic brew.
While the personal motivations of these law faculty “critics” with respect to law school itself may be difficult to explain, the nature of their core argument is much easier to understand. They have been artful and persistent in contending that the real meaning of the recent downturn in legal employment is that the American law school is based on an “unsustainable” business model.
Because of the surrounding macroeconomic crisis – which, like a one hundred year storm swept up everyone in its path – separating cause and effect with respect to this model has, in fact, been very difficult. The anecdotal data appeared to be very much on the side of the critics. After all, with even the most prestigious law firms laying off partners and the most prestigious law schools reporting difficulties for their graduates in the job market it was very hard to consider the possibility that what was happening was, in fact, the result of the inherently cyclical and volatile nature of modern capitalism.
The result is that it is very likely the case that almost every law school dean in the country is enduring one of the most difficult summers they have ever experienced in their professional lives. While I cannot divine a solution to every one of the individual situations these deans and faculty are now facing, I can point to some important new research that should significantly ease their pain.
A new paper, peer reviewed prior to its presentation to the 2013 American Law and Economics Conference at Vanderbilt, provides concrete data upon which to judge the sustainability of the law school model.
The paper is authored by Frank McIntyre, a Stanford-trained labor economist and finance professor at Rutgers, and Michael Simkovic, a Harvard-trained empirical law and economics scholar who used to work at McKinsey and Davis Polk and is now on the faculty at Seton Hall. It is available here. The very helpful power points can be accessed here. In addition to being peer reviewed upon submission to ALEC, the paper’s authors thank a wide range of well established scholars from several disciplines for their comments on the paper including Bernie Black at Northwestern Law, Eric Rasmusen at Indiana Business, and Ronald Ehrenberg at Cornell’s Industrial and Labor Relations School.
The good news is that, yes, the recent crisis is cyclical not structural; yes, law school represents a worthwhile investment for a substantial majority of students who earn JDs; and, therefore, as a general matter, law schools and their university administrations should be very cautious about taking drastic action in response to the recent pressure created by the downturn in law school applications.
The reason one can draw these general conclusions is that through careful empirical work the authors are able to track the lifetime earnings premium that holders of JDs win over those students who hold only BA degrees. Their estimate is that at the mean this premium is worth $990,000 for JD holders and at the median is worth $610,000. These figures do not include taxes or tuition although they do include the cost of living incurred while attending law school. After deducting for tuition, however, it is the authors’ conclusion that “for most law school graduates, the net present value of a law typically exceeds its cost by hundreds of thousands of dollars.” Deducting taxes lowers that outcome, although it remains positive for most law students and, the authors argue, “may dramatically increase” at the lower end of the distribution with the availability of debt forgiveness or IBR type programs.
Of course, an institution such as the American law school that can produce graduates who attain such a substantial financial advantage over their non-law school BA colleagues can easily maintain a sustainable business model.
It is important to stress two important aspects of the study that one should keep in mind when considering this paper against the arguments of the law school critics:
1) this paper is based on a large data set from the U.S. Census Bureau over a long period of time (1996-2011) and thus is the first thorough effort (that I can find) to consider the sustainability of earning a JD without relying on anecdotal information; and
2) the authors conclude and, in my view clearly demonstrate, that the recent difficulties for JD holders were generated by a cyclical downturn in the wider economy and not by some kind of unique event that hit the legal profession in a manner not experienced by every other profession; and perhaps of greater importance the study’s data clearly show this downturn is over now and the earnings premium of JD holders has now turned upward consistent with its behavior over many years and in spite of the ongoing, if short term, difficulties of recent JD holders (the data on earnings is carried through 2011 for all JDs who graduated from 1996 through 2008).
What are the implications of these key results?
Well, first, let’s put on the table what the results do not mean: they do not mean that law schools are not facing significant short term challenges. And as Keynes once quipped, in the long run we are all dead. The short term matters. And for schools facing enrollment challenges that short term is happening right now. And that is why it is important to read this paper, understand its conclusions and absorb its implications.
But it is important to keep in mind that law schools are not, by a long shot, sinners in the recent events despite the strenuous efforts of the critics to convince people otherwise. Formal attempts to pin responsibility for the largest meltdown since the Great Depression on law school marketing materials have had very little success when faced with an open test in court (by my count, four such cases have been dismissed and two have survived an MTD). Less formally, the opportunistic behavior of the critics has led many JD holders to turn on law schools and law professors.
Now, however, with actual verifiable data in front of us, it is clearer that the challenges facing recent JD graduates and now law schools are consistent with the long term cycles of the wider economy. In fact, the decline in the earnings premium of JD holders in the wake of the dot com crash in 2000-01 was steeper and deeper than what was experienced by JD holders after 2008. Yet the earnings premium recovered and increased substantially for the next several years, then turned downward (but retained an advantage over the BA) and has now turned upward once again. Thus, the authors conclude that the “law degree earnings premium is stable over the long term, with short term cyclical fluctuations.”
The following chart illustrates this:
This is consistent, interestingly, with the intuitive assessment of Nobel Prize winning economist Gary Becker, who noted in a recent debate about legal education with Judge Richard Posner that he is “optimistic that the demand for lawyers will pick up again once the American economy returns to long-term growth levels. The US remains a litigious society, and the number of laws and regulations to be litigated are increasing, not decreasing.” He also affirms the argument of the authors about the economic value generally of higher education.
The authors are sceptical as well that anything has occurred in the last few years that suggests some kind of unique “neutron bomb” like event has hit the legal profession that did not also hit the rest of the economy. Thus, the relative significant advantage of a JD, across a wide range of income levels (i.e., for JD holders at both the 75th and 25th percentile of lifetime earnings – see chart below), persists.
In short, for most JD holders law school has made sense for a very long time and it continues to make sense today.
Nonetheless, while the economic recovery helping the earnings premium turn upward again is taking hold, it is doing so slowly and so the job market for many graduates remains a challenge. While eventually the market will absorb these talented and hard working and highly trained JD holders and in light of past experience they will do well, their shorter term plight is impacting the attractiveness of law school to new applicants. In addition, as the economy recovers there are more opportunities for BA holders and so larger numbers are staying away from what may appear to be a higher risk effort to enter law school. That actually may hurt recent JDs who have not found work as lawyers because they are competing for similar jobs with those BA-only candidates. Over time, the added value of the JD will take hold if one accepts the results of the authors but it will take time. The following chart illustrates the earnings curves for both groups over a lifetime:
This means, of course, that for many law schools there are significant pressures with respect to enrollment. Schools that were too aggressive during the period prior to when the recent crisis took hold will be under pressure to meet their costs. That may mean some difficult conversations with University Provosts, Presidents and even Trustees. Thus, it is a good idea for law school faculty and deans to absorb fully the conclusions reached in the Simkovic/McIntyre paper.
If a law school or university panics and makes significant cuts based on the propaganda and anecdotal data pushed on them by those who have another agenda, they could be making very serious mistakes. The human capital that a university builds up and the goodwill it accumulates can disappear very quickly. As Warren Buffett once remarked, ”It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
I recall when I was in law school during the downturn that followed the LBO/real estate crash of the early 1990′s that students were abuzz with the news that Latham & Watkins, then a law firm with about 400 lawyers, had laid off a handful of associates. Latham had prided itself on building up a public commitment that it would never lay off an associate because of the careful way they engaged in the hiring process. Yet, it happened. Students were understandably, then, leery for some time about Latham. (Not me, I should note, I sensed an opportunity and joined their firm in 1994. It was a terrific experience.) Today the firm is a global powerhouse with 2,000 attorneys, yet it took several years to regain that reputation halo. I think the process for a law school or university could be much more traumatic and longer lasting.
Of course, this approach will be much easier to consider if the school and its university have been well managed over time, happen to be located in a booming area (like Silicon Valley), have had a balanced approach to expansion over the last decade and have a flexible culture.
It also has to be kept in mind, for both students and universities, that while the Simkovic/McIntyre results confirm a significant positive earnings premium even at the lower end of the earnings level that at some point in the left tail of the distribution positive net present value will turn negative. It is possible, even arguable, that negative net present value results will be concentrated at certain schools. Those institutions will face unique pressures.
Even worse, given the fact that we do not live in a collectively planned society, other higher ranked institutions may be tempted to cherry pick from lower ranked schools and thus a race to the bottom can take hold.
It is, thus, very fortunate that the American law school now has a data-based objective picture of the overall economic value of the JD project.
[This post has been updated as noted in brackets and italics below to account for responses to it and to attempt to help clear up some of the confusion out there about valuation methods.]
In the world of corporate finance there is a very simple decision rule: managers should accept all positive net present value (NPV) projects. This is a very simple and powerful concept. It lies at the heart of how we train managers at every business school in the world.
The steps to apply the rule, however, can be deceptive to the uninitiated.
Thus, it is perhaps understandable that Paul Campos, the notorious “bad cop” of law school reform according to the Cato Institute, who is trained in something called “law and literature,” believes he has debunked the most important finding of a recently posted study of the value of earning a JD called The Economic Value of a JD.
[Update - Professor Campos' confusion about present value continued today in his response to my blog, so it might help him and some readers to take a look at these slides prepared by Campos' Colorado colleague Jaime Zender, a Yale trained economist and endowed chair at CU's Leeds Business School. As Professor Zender states: "The net present value rule states that you should accept projects with a positive NPV and reject those with a negative NPV. All agents agree on the desirability of positive NPV projects."]
The study in question was authored by Frank McIntyre, a Stanford-trained labor economist and finance professor at Rutgers, and Michael Simkovic, a Harvard-trained empirical law and economics scholar who used to work at McKinsey and Davis Polk and is now on the faculty at Seton Hall. It is available here.
The steps in applying the rule require a projection of cash flows over a certain period of time, an estimate of the startup costs for the project and the calculation of an appropriate discount rate. All three of those components are then combined by dividing the future cash flows by the discount rate and then subtracting the startup costs.
(Formally, PV of a lump sum = C/(1 + r)[t] where “t” is an exponent for the time periods. If the startup costs are spread out over time they, too, would need to be discounted back to present value. As I note below, tuition is such a startup cost.)
If the resulting figure is positive, the rule dictates that the project should be undertaken. This is true even if that positive number is very small. It is this last dimension of the rule that can be the most mystifying and it is, indeed, the one that has thrown off Professor Campos.
He argues in a recent post at the equally notorious website “Lawyers, Guns and Money” which Professor Campos uses as his home base (Guardian journo and Edward Snowden interviewer Glenn Greenwald refers to LGM as a “filthy cesspool” and a “cesspool of unprincipled partisan hackdom”) that the discounted value of a JD at the median is something north of $100,000. He concludes that he has therefore succeeded in “critiquing” the paper by Simkovic and McIntyre.
He has, however, done nothing of the sort.
He has simply done exactly what the paper implies all analysts of the value of a JD should do – apply relevant costs such as potential debt and taxes and subtract those from the expected and discounted future cash flows. Sure enough, even with his inputs (like the implication that students must borrow $200,000 to go to law school) the result Professor Campos comes up with is a NPV of $109,000, i.e., positive.
[UPDATED: In fact, reaching that 109K result assumes that he uses the correct inputs, but Campos also includes cost of living in the $200K figure he uses as a borrowing cost when those are (roughly) the same for both JD's and BA holders who do not go to law school. He also includes undergraduate debt which of course a BA holder also has. And at one point he even suggests one should subtract the future value of the 200K (440K) from the earnings premium. That makes no sense - the future value of 440K and the 200K are the same values expressed at different times - that is the entire point of the exercise. Fortunately for all concerned he backs away from that strange exercise. Instead, in what might be called the "alchemy of Paul Campos" he turns 200K of future debt into 311K of present value and deducts it from the accepted 420K PV of future earnings to reach his final figure of 109K. Of course, even if indeed a law student needed 200K on the first day of law school to attend there would be no reason to transform that into 311K.
[Giving Professor Campos the benefit of the doubt I think what he actually did was come up with future value of law school debt and compare it with present value of earnings. That's apples and oranges. You can use future value of debt but then you also have to use the undiscounted value of the lifetime earnings premium which, of course, is far higher than $420,000. That would mean approximately $910,000 post-tax at the median and $1.33 million at the mean post-tax.
[In any case, instead, Campos should have only subtracted the three years of tuition discounted back to present value, as explained by Simkovic and McIntyre, an amount closer to 90K when one includes grants, etc., based on ABA data. The opportunity cost a law student pays because she is not working while a BA is is reflected already in the $420,000 earnings premium that Campos concedes. Tuition is the only material cost a law student pays that a BA who does not go to law school does not. Even Derek Tokarz, a leading figure in the critics' camp, agrees this is appropriate, commenting on Concurring Opinions (#36): "Your study puts the average net cost (sticker minus scholarship) at $90,000, and that looks reasonable even against the 25th percentile's $350,000 premium." Unfortunately, Tokarz then makes the same mistake that Campos made and uses a future value calculation of debt, again comparing his oranges to the authors' apples.
[When you use the correct inputs you end up with $330,000 not $109,000 in PV. How? The median earnings premium for a JD holder in PV terms is $420,000 after tax and if you subtract the PV cost of tuition, $90,000, you end up with $330,000 not $109,000. This is an apples to apples comparison. The mean figure is substantially higher, of course.]
In any case, the central point is that Campos concedes the number is positive.
Now return to what I said at the outset: managers – in this case the managers are prospective law students “managing” their own human capital – should accept a project with positive NPV. In other words, even under Campos’ analysis the conclusion that a student should reach is that law school makes sense. The actual net dollar amount above present value is irrelevant as long as it is positive.
The discount rate is a challenging figure to determine properly (at one point, for example, Professor Campos asks his blog readers for their view on the correct rate, even though he had already posted his conclusion using a supposed rate) but it should take into account all of the quantifiable risks associated with the project. Of course, if a student can find another project that has a larger NPV it would make sense to undertake that project. But Simkovic and McIntyre have already considered that because the cash flows they examine are based on the earnings premium that comes with a JD above and beyond what a college graduate would earn without going to law school.
They also suggest, reasonably enough, that the range of graduate study opportunities for most JD applicants are limited in value. Nearly 70% of law school applicants come out of social sciences and the humanities not STEM or business school (much like Professor Campos and therefore not likely exposed to the subtleties of the valuation process).
Of course, a handful of such students might get lucky and wander into the marketing department writing ad copy for pre-IPO Google….well, one can see the problem.
So, far from undermining the Million Dollar JD Value paper, Professor Campos simply confirms its fundamental insight: law school is a positive net present value project for the vast majority of law students even when tested by the institution’s leading opponent.