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Is The Legal Market Recovery Resistant?

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Just when you thought there couldn't be more analysis about why the lack of lawyer jobs is no big deal, they pull some more in. Robert Anderson, a professor at Pepperdine Law (45.5% Employment Score, 35.7% Under-Employment Score, $46,680/yr (+9.0% vs 2012-13)) says the problems with the job market may be nothing more than the result of an aging lawyer population. From his blog Witnesseth:

Between 1980 and 2005, the median age of lawyers increased from 39 to 49. [...]

That means that the reported oversupply of lawyers may well result from demographic factors, rather than permanent changes in the legal market. The demographic factors, in turn, probably result from a combination of lawyers waiting longer to retire because of 401(k) accounts decimated during the financial crisis together with the "bulge" of baby boomers working their way through the system.

The bulge of baby boomers should be a very rare occurrence, one which the legal market maybe doesn't need to do much of anything to address. It sucks for people graduating while boomers are hanging on to their jobs, but any solutions would take too long, the problem will be gone before there's any affect. But what about that first explanation, that lawyers are staying in the workforce longer in order to recoup their losses from the recession? The market is back, baby:

 

The Dow hasn't just recovered, it's up nearly 12% over it's pre-recession high. If you add in extra income from staying on the job a few more years, lawyers who were delaying retirement because of the recession should now be much better off than they were before the crash. Why not just cash out now and get the demographics back in line? We suspect two reasons.

First, lawyers may be below-average investors. Many lawyers work in small shops that won't have a formal retirement program, so they're going to be handling their retirement savings themselves. And partners in firms big enough to have retirement programs are probably investing quite a bit beyond their 401(k)s. You know what happens when people who have a lot of faith in their intelligence but less information than professional investors try to play the stock market? They lose. People who play the market are also more prone to pulling their money out during a recession, as opposed to people with generic mutual funds who will tend to just let it ride. So, those lawyers who were too smart for their own good didn't get to reap the benefits of the recovery, and now they have to work an extra decade to make up their losses.

Second, there's the availability heuristic at work. The recession is still fresh in everyone's memory, and if you saw your retirement savings wiped out, it's going to be an especially strong memory. That means the goal posts for retirement have moved. You now need enough to retire on plus enough to cover the losses of another recession. It doesn't matter that retirees should be putting their investments into safer vehicles, or that another recession would be followed by another recovery, so you don't really need to save much extra to prep for it; cognitive biases don't care about that stuff. You're once bit and twice shy, and that's the end of that.

Back before the recession, and even during its early days, the pom-pom wavers talked about how law was recession proof, or at least resistant to the recession. Crimes still get committed, those people need lawyers, and there's more bankruptcies and divorces to make up for slower areas. Of course the proof of the pudding is in the tasting, and as it turns out if your clients have less money they can't pay you as much, and it's not all that simple to go from a deals practice to bankruptcy, or a T&E shop to divorce. There are some industries worse than law during a recession, and some areas of law are counter-cyclical, but whatever resistance the law has to recessions is pretty minimal.

But while the law may not resist recessions well, the number of older lawyers still in the work force indicates that law may be recovery resistant. Baby booms are rare, but recessions? They happen frequently enough that if the legal industry gets any worse at recovering, it might not move fast enough to be back on its feet before the next one hits.

Are we producing more or fewer JDs? Arkansas law prof's answer is sleight of time.

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From the "Leave law school alone!" crowd comes this Bloomberg Law interview with Stephen Sheppard, Associate Dean for Research and Faculty Development at the University of Arkansas School of Law, and a man who may be the inspiration for the character naming conventions used in the Harry Potter series.

We wanted to write about the ridiculous idea he puts forth that if law schools cared more about getting jobs for their students, only BigLaw and the government would exist. But, as we tried to suss out the logic behind that theory, we felt our heads getting too close to 'sploding and just gave up. Instead, we're going to analyze this gem:

As a percentage of either Americans or of university students or of college graduates, the number of people who enter law school has in fact fallen as a percentage whether you look at this from a window of 30 years or 20 years.

Let's first toss out the red herrings. Percentage of university students or college graduates entering law school is completely irrelevant. The comparisons that make sense are number of law school graduates compared to demand for legal services, legal industry jobs, and yes, the first comparison Sheppard made, the national population.

When trying to figure out if we're making too many or too few lawyers, comparison to the total population makes sense, though it doesn't give a final answer. As the federal government passes more laws of greater complexity, the need for lawyers per capita may go up. Policies such as the war on drugs may also increase the need for lawyers per capita. So might something such as growing wealth and home ownership among the middle class, which creates a greater need for lawyers to write wills, or a growing divorce rate and child custody suits. On the other hand there are variables that could decrease the needed lawyers per capita, such as electronic research tools making individual lawyers more effective at their jobs, or increased education among the population and access to online research and DIY guides allowing ordinary folks to handle many routine legal matters on their own. So, lawyers per capita only tells a part of the story, but it's still an important part.

Currently there is one law school grad for every 169 people. In 2010, the ratio was 1:174. [Flustercucked] Remember, Sheppard's claim is that the percentage of people is going down compared to previous decades. In 1993 the ratio was 1:163, and in 1983 it was 1:161. So, how do we rate Sheppard's claim? True.

And damned misleading. Let's take another look at his exact wording:

the number of people who enter law school has in fact fallen as a percentage whether you look at this from a window of 30 years or 20 years.

When we first heard this, it sounded to us like he meant "pick whatever time frame you want, doesn't matter, percentages are going down." The truth is that he means "the percentage is going down only if you make a 20 or 30 year comparison." If you pick any other time frame, the percentage has gone up.

In 2003 the ratio was 1:187. In 1973 the ratio was 1:190. And in 1963 it was an amazing 1:490. But wait, the "window of 30 years or 20 years" comment is even more misleading than that. From 1987-1990, we produced fewer lawyers than we do now, with ratios ranging from 1:171.1 to 1:174.1.

For Sheppard's statement to be true and not misleading, it would need to read something a bit more like this:

As a percentage of Americans, the number of people who enter law school has in fact fallen as a percentage whether you look at this from a window of 30 years or 20 years, but not 10 years, and not 40 years, and also not 23 to 26 years, or 15 years, or 28 years.

Impressed with Sheppard's bit of sleight of hand, we decided to give it a go ourselves. How did we do?

Whether you're talking about Pam Bondi or Megyn Kelly, women with JDs are total babes.

Study Shows Law School Is A Losing Bet For A Whole Lot Of Folks

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We investigate the economic value of a law degree and find the opposite: given current tuition levels, the median and even 25th percentile annual earnings premiums justify enrollment.

Bold claim by Simkovic and McIntyre in their Economic Value of a Law Degree article that has been making the rounds. At the 25th percentile, JD holders still have an earning premium of $350,000 over someone who just holds a bachelors degree. And, with law school only costing $30,000 a year (sticker minus scholarship), that looks like quite a nice payout.

If only that's what law school really costs. At 11 schools sticker price is above $50,000. Though to be fair, at the three most expensive schools the majority of students receive a scholarship, with UC-Davis giving 97% of students a break. But, at the fourth most expensive school, Cornell, the majority of students pay sticker. The majority are also paying sticker at Columbia, Penn and Northwestern (where only 34% get a scholarship). There are another 27 schools charging at least $45,000, and another 36 charging more than $40,000. Only 29 schools charged $30,000 or less. These are the rates for 2011-12, so the numbers are undoubtedly already worse, and we all know what direction the numbers are trending in.

Anyone still paying off their student loans also knows that tuition is not the end of the story, there's that nasty beast called interest. And with legislation working its way through Congress, interest rates are about to get considerably higher. It's theoretically possible for the rates to go down since they're tied to 10 year T-bill rate, but for Grad PLUS loans to hit the statutory cap, the T-bill rate needs to only be 4.1%, and in the last 20 years it spent more time over 6% than it did below 4%, so for this analysis, we'll be using the cap.

And remember, the number we're aiming at is the 25th percentile earnings premium: $350,000.

A student paying $150,000 in tuition will take out $61,500 in graduate stafford loans at 9.5% interest and $88,500 at 10.5%. Assuming a 20 year repayment period, and discounting for a 3% rate of inflation, our student will pay $48,546 in interest on the stafford loans, and $82,608 on the PLUS loans.

Our student also needs to pay for room and board. Counting cost of living as a cost of law school is a bit controversial, so we're not going to do that. What we will do though is count the interest paid on debt-financed living expenses. You need a place to live whether you go to law school or not, but if you didn't go you'd presumably be paying out of pocket and not incurring a mountain of debt. If our student takes out $20,000 a year, he'll end up paying $56,000 in interest on that debt.

But wait! There's more! There's also university fees and books. We'll use the average of Harvard and Seton Hall, Simkovic's alma mater and his current employer, respectively. Fees come out to $899 per year, and books are $1313. Assuming no increase over 3 years (har!), that's another $6,636, and an additional $6,194 in interest payments.

We're also assuming that our law student went to undergrad first (Simkovic compares the JD to stopping with a bachelors, so we think this is a pretty fair assumption). That's not a cost of attending law school, but the interest accrued while in law school certainly is. The national average tuition at a private four-year university is $25,000 per year. A student with $100,000 in undergraduate debt at 8.25% will accrue another $15,750 while in law school (again, deducting 3% inflation). That's not the number we'll use though. The average undergrad debt is about $27,000, and with that amount, our law student just accrues $4,253.

Now let's get out our adding machines and do some adding!

$150,000 - Tuition

$48,546 - Grad stafford interest

$82,608 - Grad PLUS interest

$56,000 - Cost of living interest

$6,636 - Books and fees

$6,194 - Books and fees interest

$4,253 - Undergrad interest

354,237 - Total

Let's remember the initial claim Simkovic and McIntyre made:

We investigate the economic value of a law degree and find the opposite: given current tuition levels, the median and even 25th percentile annual earnings premiums justify enrollment.

The 25th percentile premium is $350,000, so for someone paying sticker at a school that costs $50,000 a year or more, the 25th percentile earnings premium does not justify enrollment.

Fortunately, most of the schools charging that much tend to have employment outcomes that are far above average. Most, not all. Cardozo only has an LST Employment Score of 53.2%, below the national average, and a tuition rate of $51,200 for the 2013-14 school year. Brooklyn has an ES of $48.5% and a 2013-14 tuition of $50,800. New York Law School had an AS of 39.4% and 2012-13 tuition of $49,600 (new tuition has not yet been announced). Chapman has an ES of 33.7% and 2013-14 tuition at $44,400. St. John's has an ES of 49.1%, and a 2013-14 tuition rate of $49,700. Catholic is at 36.6% and $44,000; Loyola Marymount 41.1% and $44,000; Southwestern is 42.6% and $45,200; Hoffstra is 51.2% and $47,000; Pepperdine is 45.5% and $47,000. You get the idea.

 

But wait! It gets worse! There's this little thing called taxes. According to Simkovic and McIntyre:

For low earners, such as those in the 25th percentile, values should be multiplied by 0.75.

That is, assume a marginal federal income tax rate of 25%, so the earnings premium is really only $262,500. For someone paying the high-end price of $354,000, the 25th percentile outcome represents not a positive return, but a loss of $90,000. Ouch!

In fact, taxes take such a big bite out of the earnings premium that law school starts to be a losing proposition for the 25th percentile not at a tuition rate of $50,000, but at $35,000. So... rah rah law school!

 

PS: We left out some significant costs associated with law school, such as the $700-1500 students pay for LSAT prep, $165 to take the LSAT, $165 to take the LSAT again, $2,000-4,000 in bar exam prep courses, the $14,000 in interest you have to pay back on your bar loans, $250 to take the bar exam, and $73 to take the MPRE. You probably also need a nicer suit that you'd have used for interviewing with just a bachelors degree. All these little extras can very easily make law school cost an addition $20,000, chipping away at the percentage of students who will see a positive return on their investment.

Follow @JudgeDillard On Twitter

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Privacy, social media, and legal ethics have been all the rage for the past couple years, with their being a bit of a cottage industry now dedicated to telling lawyers how to keep e-mails private and what not to say on their blogs and Facebook posts. But that's all kinda dull. Of course, most of the fun territory has already been explored so much that it's became passe. An angry e-mail accidentally gets the Reply All treatment? tl;dr. Lawyer has skanky pictures on Facebook? Plz, we were there when those were taken.

We want to explore new territory, and thankfully social media provides a nice way to do it. One of the key features of social media is that it has a sort of currency. On Facebook getting people to click Like or post comments shows your other friends where you stand in the social pecking order. Reddit has upvotes. Twitter has followers and retweets.

We all know that lawyers (and non-lawyers) giving money to judges is a big no-no and can have all sorts of consequences. But what if we strayed from real currency and just used ethereal social currency?

...Dunno. But let's find out!

 

If you have a Twitter account, we want you to follow Judge Stephen Dillard (@JudgeDillard) of the Georgia Court of Appeals. Retweet his tweets, and recommend that your followers follow him.

Phase Two will involve getting into some sort of legal trouble in Georgia. No plans for that yet, but we got our eyes on Uga.

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