Some Thoughts on ‘The Economic Value of a Law Degree’. Having read a great deal of the commentary on Michael Simkovic and Frank McIntyre’s paper The Economic Value of a Law Degree, as well as the paper itself, I can’t resist making some more comments of my own.
It seems to me that a fair amount of the controversy about this paper is that it does one thing (report on the recent history and distribution of the present discounted value of the earning premium from a law degree as opposed to no law degree), then suggests how its results can or should be used to do a different thing (decide if law school is a good financial bet today). It’s easy to misunderstand the relation between the two things. Some critics misunderstood the relationship between the two things; some others didn’t, but think that the authors of the original paper are (negligently or strategically) inviting prospective law students to misunderstand that relationship.1
In part 2 of this analysis I will suggest that a significant part of the dispute here also can be traced to a different understanding of what real rate of interest ought to apply to a prospective JD’s calculations. Simkovic and McIntyre use a 3% rate, which may in fact be appropriate for the average student. But you can drown in a river that is an average of six inches deep. The more debt students carry, the higher the interest rate they tend to have to pay. Thus for students with a lot of college debt who also borrow heavily for law school, the real rate is 4% or even more. (See the very last table in the paper, Table, Appendix Table A-2.) For a significant minority of these high-debt students — perhaps almost a quarter of the students carrying $200,000 or more debt upon law school graduation — a JD may not in fact be a good investment.
The other big source of controversy has to do with radically different visions of the likely future. Those who believe that the law is undergoing a structural transformation (e.g. outsourcing, mechanization, permanent change in customer demand, or inelasticity of customer demand, especially at the high end) think that any backward-looking study is a poor guide to the future. The authors’ response is that any structural transformation in the provision of legal services is likely to be mirrored by similar changes in many other careers open to BA-holders contemplating a JD. They argue that their study, which reports the income premium over a BA will likely hold true, or mostly true, in a future in which the economic value of a BA will also be devalued. The two sides simply disagree as to whether, as compared to previous legal recessions, this legal recession is (a) worse relative to the overall recession; and (b) different in nature.
I’m going to discuss each of these issues, and also say a few words about the policy implications of (my take on) this study. But before I do, please allow me a lengthy aside to raise a logically prior question: To what extent are Alice and Bob — tomorrow’s potential future 1Ls — likely to be competent to make good forecasts about where they likely will fall on the income distribution?
A. Law School Applications and the Dunning-Kruger Effect
I think that an intuition that Alice and Bob have a tendency to be over-optimistic drives a good chunk of the rage at ‘The Economic Value of a Law Degree’. There may be something to this fear, especially in a steep recession like this one. Right now the number of law school applicants has dropped some 13% over last year. I don’t have the latest data after what appears to have been a late surge in applicants, but back when the decline looked to be more than 20% what we were hearing was that the decline was especially steep at the high end of the credential distribution, that is among students with good grades and high LSATs.
If that’s true, it does raise the issue whether many Alices and Bobs might have a systematic vulnerability to the Dunning-Kruger effect.
The Dunning-Kruger effect is a cognitive bias in which “people reach erroneous conclusions and make unfortunate choices but their incompetence robs them of the metacognitive ability to realize it”. The unskilled therefore suffer from illusory superiority, rating their own ability as above average, much higher than in actuality; by contrast the highly skilled underrate their abilities, suffering from illusory inferiority. This leads to a perverse result where less competent people will rate their own ability higher than more competent people. It also explains why actual competence may weaken self-confidence because competent individuals falsely assume that others have an equivalent understanding. “Thus, the miscalibration of the incompetent stems from an error about the self, whereas the miscalibration of the highly competent stems from an error about others.”
If this is a real phenomenon, then in light of the current legal recession and the declining over-all prospects for law graduates we should (at least before the lessons of ‘The Economic Value of a Law Degree’ get internalized) expect more of the best students to stop going to law school, out of an unjustified fear that they will not be the best, and won’t get the best-paid jobs. Meanwhile, given that there are still some good jobs at the top, even if fewer than before, less competent students will — incorrectly — believe they are the ones who will get the best grades and get the best jobs, and will continue to apply in large numbers. We might thus see a decline in the credentials of the national applicant pool as a whole, and especially in the applicant pool of non-elite law schools.
But wait, it gets worse: if the Dunning-Kruger effect is large in absolute terms, then the absence of the best students will open up some space at the top, and students who formerly were in the middle of the pack will now find themselves at the top of the curve, validating their erroneous beliefs as to their abilities. In short, Dunning-Kruger effect + grading on a curve = wrong signals.
In this view of the world, one of the most important real-world effects of ‘The Economic Value of a Law Degree’ may be to draw back the more able students — the ones who take the trouble to collect data on their prospects — into the applicant pool. Perversely, however, this will make the next cohort’s Alices and Bobs worse off, as now they will be competing on graduation with a stronger talent pool, thus perhaps diminishing their place in the outcome distribution.
I mention this first, before getting to any advice to Alice and Bob about how to use the data in ‘The Economic Value of a Law Degree,’ because the more I think about it, the more I suspect that the effect on the composition of the applicant pool, even more than its size, may be the most lasting effect of this paper: if this data holds up, smart students who do their homework carefully and would be strong applicants to law school may be less likely to be frightened off without reason. Conversely, poor students, who don’t read carefully, may misunderstand the results of this study and the attendant publicity and suffer from unreasonably optimistic estimates of their prospects. Both critics and supporters of the paper might be right since they are looking at different pieces of the elephant.
I don’t know for sure if any of this is even vaguely correct, and there’s certainly nothing in the data I’ve seen that would tell me. But it does illustrate some ways in which it’s hard for even a careful, risk-averse person to guess their future income stream.
B. ‘This Time Is Different’ — Or Not
Recall that one of the big issues that divides Simkovic & McIntyre from their critics is to what extent the current legal recession is due to something special about a change in the demand for legal services — the claim that this time really is different. Simkovic & McIntyre say that the past ought to predict the future, that they don’t think anything terribly special is going on. I can’t claim special expertise on this debate. For what little it’s worth, I tend to think we’re all in the soup together, and that globalization, outsourcing, not to mention robotics and applications of big data will reduce the premiums for many professions, including both law and medicine, but I can’t point to anything that much stronger than a hunch based on current data and what I read about developments in technology. You might reasonably reply that it’s all very well for me to say that, but isn’t it darned convenient to my own economic interests, and a neat way to avoid the discomfort I’d have to take on if I thought law school really was a scam?
To those who say that the last couple of years have been particularly ugly for law graduates compared to past years, I can only say that my understanding is they were also pretty ugly for college graduates. According to 2012 BLS data,
About 1.5 million, or 53.6 percent, of bachelor’s degree-holders under the age of 25 last year were jobless or underemployed, the highest share in at least 11 years. In 2000, the share was at a low of 41 percent, before the dot-com bust erased job gains for college graduates in the telecommunications and IT fields.
Out of the 1.5 million who languished in the job market, about half were underemployed, an increase from the previous year.
The lawyer numbers are bad, but these are, if anything, worse. Things are really bad out there for a lot of people. (This is why macroeconomic policy is so important.) It may be that those of us involved in the production of new lawyers and the reproduction of hierarchy are, or tend to know more of, the ones with a new JD. As we will see, that doesn’t by any stretch mean that every law degree is a good investment. But it does mean that the problems of buyer’s justified remorse may not be due in the main to something about the changes in the nature of the demand for legal services.