Thoughts on law, business, technology, and economics.

Twenty-seven days ago, the New York Times OP-Ed page ran a piece by a senior Brookings Institute fellow named Clifford Winston.  The piece was entitled, “Are Law Schools and Bar Exams Really Necessary?’  It concluded—flatly—that law schools and bar exams were not necessary.

Exactly five months earlier, that paper’s recurring Business Day feature ran this article.  Here’s the quick summary: top tier law firms, concerned about labor costs, have begun splitting their incoming attorneys into two tracks: a highly paid partner tracks and a lowly paid, non-partner track.  The article  blamed this trend on several factors–the economy, competition from non-traditional sources, growing client dissatisfaction with legal costs on repetitive or process-intensive work, a teeming oversupply of law school grads.  Then it made the dismal prediciton that the legal industry will continue to lose “many of the lucrative partner-track positions for which law students suffer so much debt.”

Four months prior to that sad nugget, the Times’ regular Business Page queried “Is Law School a Losing Game?” in a feature that bluntly deconstructed the sconomics of attending law school. Those economics works like this: (a) most students rack up something like $150,000 in loan debt to get their JDs; (b) they do so because of the promise of high-paying BigLaw associateships; (c) very few of them ever secure such associateships; (d) the majority face increasingly bleak employment prospects; (e) those prospects seem unlikely to improve.  So…why do students bet so much on odds that seem so long?  Quoting Indiana Law School professor William Henderson,  the Times placed much of the blame on the schools and the “Enron-style accounting” they use to keep students and student loan dollars  rolling in.  For a genteel broadsheet that still refers to athletes as “Mr. Jeter” and “Ms. Sharapova,”   this was especially strident stuff.  Besides reverberating througout legal and academic circles, the article touched off one of 2011’s few moments of true bipartisanship, as Senators Barbara Boxer (D-CA) and Charles Grassley (R-IA) both went upside the ABA’s head with stern rebukes.

That’s not all   In the months leading up to that noisome tiff, such varied sections of the paper as Legal/Regulatory, Education, Economics, and Fashion & Style, each weighed in on the hollowing out of the law school value proposition.

[Aside:  The Fashion article is notably odd.  It begins ostensibly as a commentary on a new ABC law drama called "The Deep End."  After just a few paragraphs th0ugh, the author veers sharply away from the over-considered grooming and bottomless self-involvement of the show's young AmLaw associate characters and sails squarely into a dissertation on the economic problems faced by their real-life counterparts.  In the end, the reader is left with the impression that “The Deep End” is some ratio of law school debt to anticipated legal profession earnings.  Which is a shame, because I really wanted to know more about  the show.  I'm sure it had to be transcendant broadcasting fare.  I don't know how it could only have lasted five episodes before ABC pulled its plug. People, I guess, just don't appreciate Billy Zane as much as they should.]

So the Times’ “series” on student-school-firm-client economic model has lasted much longer than “The Deep End.”   But with almost every section of the paper except  maybe Sports weighing in over the past eighteen months, it’s almost feeling  more like a gang-harangue than a series. 

Which is why I was wholly unsurprised while waiting in line at Starbucks today to glance down at the Times front page and see “What They Don’t Teach Law Students: Lawyering” staring back at me. 

The article’s thesis—law schools architect their curricula to teach law students three years and $150,000 of stuff other than how to practice law—is hardly a novel one.    But if you view that thesis along the line of cases the Times has been making against the student-school-firm-client model, it all feels particularly damning. 

(Aside #2: Yes, I did learn the phrase “line of cases” while I was at law school.  So that’s one thing at least…Also, I learned that it was important not to snicker every time a professor referred to a case as being ”seminal.”  And I think there might have been more than one of those Oliver Wendell Holmes guys. )

Connecting the dots, here’s our little drawing of the  Times thesis:

(1) The core mission of a law school is no more to educate students than the core mission of an insurance company is to pay out claims.  Insurance companies live to collect premiums; law schools live to collect premium tuitions.  Everything else is just a means to those ends.

(2) To collect these tuitions, schools intentionally create in their students unrealistic expectations about the likelihood of landing a high-paying job in the legal profession.

(3) Spurred on by these expectations, students become increasingly willing take on more student loan debt than is economically rational.

(4) By guaranteeing higher and higher amounts of this debt, (before ultimately taking over all of it), the federal government keeps creating larger and larger piles of money for schools to chase.  And schools, unsurprisingly, chase that pile.  Which might explain why we’re building more and more law schools as the legal industry is hemorrhaging more and more jobs.

 (4) Law schools–and the professors they employ–simply do not consider it their responsibility to teach their students the skills they will need in order to do the jobs that will pay off these massive loans.  As today’s article points out, a recent survey revealed that as many as half of law school professors have never practiced and the median practice experience level among all professors is somewhere around one year.  This doesn’t make those professors bad people.  It does mean that the things they do (produce scholarly and sometimes esoteric law review articles) and the things their students’ employers do (practice law) are fundamentally different things.  It also means that someone has to assume the cost of training those students how to practice once they begin practicing.

(5) For a long time, firms have been hiring these untrained graduates and billing their time out to clients at hundreds of dollars an hour while those graduates train on the job.  This effectively transfers the cost of that training from the schools (who don’t feel they need to provide it) and the firms (who need it) to the clients.

 This feels an awful lot like a bubble, right?  People paying sums they can’t afford for things that likely will not be worth those sums…paying those sums because the sums’ recipients are shading value propositions of what they sell…cost and risk are being offloaded onto unrelated third parties.  In fact, it feels especially like one particular bubble.  Try this…swap in these phrases: homebuyer for law student, mortgage for student loan,  mortgage industry for law school,  Fannie Mae (federal mortgage guarantor) for Sallie Mae (federal student loan guarantor), collateralized debt obligation for student loan guarantee,  taxpayer for client, and taxpayer for taxpayer…and the logic holds.  This is because both housing bubble finances and law school finances depend on the same three things:  (a) payees (schools/mortgage industr)y being blind to or disingenuous about the risks of signing up for what they’re selling; (b) students/purchasers committing irrational faith to the proposition that their purchase will appreciate in value  (“My degree/house will be worth so  much money to me that it almost doesn’t matter what it costs…besides….EVERYONE I know is doing this!”); (c) a market-wide practice of passing the bucks by transferring costs and risk away from sellers and onto third-parties (guarantors, taxpayers, clients).

The trouble with bubbles, of course, is that a system dependent on transferring risk to third parties (economists call this “negative externality”) is that eventually that third party is going to refuse to accept, or become incapable of accepting, more of that risk.  And then, in Yeats’ words, “things fall apart, the center cannot hold, a blood-dimmed tide is loosed upon the earth.” In the case of the housing crisis, this market risk rejection began on a sharply involuntary note with gigantic buyers of mortgage debt collapsing overnight.

For the law school bubble, the market risk rejection is a lot simpler…and hopefully a lot less blood-dimmed:  clients just started saying “no.”  Today’s article cites two stats familiar to legal industry mavens:  about half of law firms have had clients push back on paying for work done by 1^st year and 2^nd year associates; and a greater number have been pressured about flat or alternative fees.  Again, the concept is hardly novel.  Echoing a recent ACC survey, the ABA reported last month that over 20% of all legal departments now refuse to pay for work done by 1st year (and in some cases, 2nd year) associates.

So, the third-party client rejecting the cost and risk ain’t new.  But the rate of that rejecton and the feelings underlying it are on the rise.  That feeling is expressed most plainly in today’s Times by Jeffrey Carr, general counsel of FMC Technologies and  a leading advocate for reform of longstanding legal economics:

”The fundamental issue is that law schools are producing people who are not capable of being counselors,” says Jeffrey W. Carr… “They are lawyers in the sense that they have law degrees, but they aren’t ready to be a provider of services.”

The larger question is when will law schools be ready to be providers of providers of legal services.