Monthly Archives: July 2013

Simkovic and McIntyre Respond to Critics (Updated)

Michael Simkovic and Frank McIntyre are blogging at Concurring Opinions, and responding to critics. See for example, Brian Tamanaha Says We Should Look at the Below Average Outcomes (And We Did). It includes a nice summary of key findings:

As we discuss in the article, for technical reasons related to regression of earnings to the median, our 75th and 25th percentile values are probably too extreme. The “75th percentile” value is likely closer to the 80th or 85th percentile for lifetime earnings, and the “25th percentile” is likely closer to the 20th or 15th percentile.

In other words, roughly the top 15 to 20 percent of law school graduates obtain a lifetime earnings premium worth more than $1.1 million as of the start of law school. Roughly the next 30 to 35 percent obtain an earnings premium between $1.1 million and $600,000. In the lower half of the distribution, roughly the first 30 to 35 percent obtain an earnings premium between $350,000 and $600,000. Roughly the bottom 15 to 20 percent obtain an earnings premium below $350,000. These numbers are pre-tax and pre-tuition.

Even toward the bottom of the distribution, even after taxes, and even after tuition, a law degree is a profitable investment. And that is before income based repayment, which can substantially reduce the risk at the bottom of the distribution.

Previously: Study Finds the Net Present Value of a Law Degree is Highly Positive.

I think the best critiques of the study I’ve heard so far are:

1. Maybe there really is a structural shift going on in the way legal services are delivered. If so, past cycles are a poor guide for the future. (To be fair, that’s a different paper; but it may not be a different historical moment.)

2. Because it uses general averages, the study may mislead people who invest large sums in law degrees from low-quality (or even low-prestige, which isn’t necessarily the same thing) institutions. Their outcomes seem to be worse than average. (Although the authors seem to think that even here, the NPV will tend to be positive. I’m a bit dubious especially at full freight.)

3. The study doesn’t discuss bar passage. Is it perhaps the case that there’s a large difference between those who pass and fail? And if so, shouldn’t the bar pass rate at the law school you plan to attend be something to pay close attention to?

4. The study doesn’t discuss the financial, much less hedonic, consequences of carrying heavy debt from college and law school. (Again, sort of a different paper.)

Thus, the study is a useful data point for law school applicants/entrants and a useful corrective to some recent sturm und drang. But it’s not by any means 100% of the story either.

[Update: I’ve thought of a fifth sort-of-critique —

5. The study treats the experience of law school as neutral, neither better nor worse than the three-year alternative job. I happened to have a really good time in law school, so for me it was a net benefit; other people report hating the experience and for them it is a net cost. In some cases the cost of three years of hell may not justify a lifetime increase in net income of, say, $350K. After all, over a 40-year career, that’s an average of just $8,740/year…and indeed most of it comes in the out years, not early when you are struggling to repay debt.]

Posted in Law School | 3 Comments

Study Finds the Net Present Value of a Law Degree is Highly Positive

The hot legal paper of the moment is undoubtedly The Economic Value of a Law Dregree by Michael Simkovic and Frank McIntyre who are respectively a law professor and professor of finance.

Their data-driven conclusion (p. 49) flies directly in the face of recent conventional wisdom:

After controlling for observable differences, we find that a law degree is associated with approximately a 60 percent increase in expected median monthly earnings and a 50 percent increase in hourly wages, as well as reduced risk of unemployment or underemployment. We find earnings differences between men and women, and that these differences are due primarily to differences in hours worked. The law degree earnings premium is cyclical and recent years are within historic norms. Applying reasonable discount rates, we estimate the mean lifetime value of a law degree in 2012 dollars as of the start of law school to be approximately $1,000,000 before taxes, and $700,000 net of taxes. Median pre-tax lifetime values are approximately $600,000 (after taxes, $420,000). This suggests that, for most law school graduates, the value of a law degree typically exceeds its cost by a very large margin.

Some other key findings:

  • [A] law degree increases both work hours and wages per hour, and most of the increase in earnings is due to increased earnings per hour. (p. 15)
  • The mean annual earnings premium is approximately $53,300 …. starting salaries are not very good predictors of lifetime earnings. (16)
  • Law degree holders’ annual earnings grow faster and peak later than bachelor degree holders (20).
  • “Even at the 25th percentile, the earnings premium is large …. on a percentage basis, the earnings premium is similar for those at the median and 25th percentile, and considerably higher for those at the 75th percentile. In 2012 dollars, the annual earnings premium increases from $17,300 at the 25th percentile to $32,300 at the 50th percentile, to $62,200 at the 75th percentile.” (22-23)
  • “The data does not suggest that law graduates were unaffected by the recession. Rather, earnings dropped for both law graduates and college graduates after the late 2000s recession, and law graduates maintained their relative advantage. It is this relative advantage—not absolute outcomes— that measures the value of the law degree. Our data suggest that law degree holders are not immune to economic downturns, but they have continued to fare better in the recent downturn than bachelor’s degree holders without advanced degrees. Moreover, long-term historic data remains a reasonable and appropriate data source to forecast future earnings premiums.” (32)
  • “Rounding to the nearest $10,000, we find that the mean value of a law degree is $990,000, the median is $610,000, and the 25th and 75th percentiles are $350,000 and $1,100,000 respectively. The Internal Rate of Return at the median is 13 percent in real terms, or approximately 16 percent in nominal terms.” (41)
  • “[E]ven at the 25th percentile, a law degree exceeds typical net-tuition costs by hundreds of thousands of dollars. At the mean and 75th percentiles, the difference is close to one million dollars. We therefore reject the claim that law degrees are priced above their value. Indeed, the value compared to net-tuition prices suggests that legal education is a competitive market in which surplus redounds to the benefit of student-consumers.” (41)
  • There is a large gender difference at the high end: “Rounding to the nearest $10,000, the mean value of a law degree is $1,030,000 for men and $820,000 for women. The median values are $580,000 each for both men and women, although the premium is higher for women in earlier years and higher for men in later years. At the median, internal rates of return are 11.5 percent for men and 14.3 percent for women. Higher earnings for men at the high end of the distribution are likely due to longer hours and increased labor force participation.” (42)
  • “Even at the 25th percentile of women, our estimate of the lifetime earnings premium of a law degree, $350,000, exceeds the typical cost of a law degree by a wide margin. That is, in spite of lower average lifetime earnings premiums for women compared to men, a law degree remains a good investment for most women who obtain a law degree.” (42)
  • These are pre-tax dollars, but the after-tax story, at current tax rates, is similar: “the mean after tax value of a law degree is $720,000 for men and $570,000 for women. For low earners, such as those in the 25th percentile, values should be multiplied by 0.75. For very high earners, such as 75th percentile men, or for those anticipating higher tax rates in the future, values can be approximated with a 0.65 multiple.”
  • The paper also presents data suggesting that the current law school ‘crisis’ is similar to previous cyclical downturns; they argue that the decision as to the value of law school should be based on relative earnings and unemployment to those with just a BA — to the extent everyone is doing badly now, law school graduates may still be doing well in relative terms.
  • Key point: “Because we discount our estimated law degree value to the start of law school, interested parties can multiply annual net-tuition by three and compare the results to our estimates of after-tax value.” (43 n. 109)

I should note four assumptions in the calculations, set out at pages 39-40, that I think increase the claimed value of the law degree, although I don’t think any or all of them would change the bottom line enormously:

  1. The authors assume that students graduate at 25 (thus giving them more years to realize the increased earnings).
  2. They assume that law school costs $30,000 per year in tuition and expenses (which they say is consistent with ABA data on average net tuition after scholarships and grants in 2010-2011) — this allows them to say the opportunity cost per year is c. $55,000, which feels low to me although I admit I’m not clear on whether in light of #4 below this number includes living expenses; if it doesn’t it might be reasonable.
  3. They assume law students earn an average of $24,000 in summer and term-time work during the 3 years of law school, which may be high.
  4. They assume costs of living while in school are similar to costs of living while working full-time and that “any differences reflect consumption benefits, and therefore need not be accounted for separate from opportunity costs of lower in-school earnings.”

It seems like a careful job. I do want to stress that the numbers offered are present discounted value in current dollars and that they do NOT take account of the cost of tuition. Thus, to figure out how these numbers work for a prospective student, the student would need to compare the total of three years of law school tuition with a PDV of income estimate adjusted for these factors:

  1. Age at graduation (the higher it is, the lower the PDV of the increase in the projected lifetime income stream)
  2. Tuition (but not living expenses unless they are much higher than the alternative)
  3. Lost salary during law school, after taxes (?), if much in excess of $25,000 per year
  4. Gender, if you think existing patterns of work and/or discrimination will continue
  5. Where you think you might be in the income distribution

Thus, to take a near-worst-case scenario assume you are a woman planning to graduate at age 25, who believe sex discrimination will continue, or that you may choose to drop out of the workforce, or take reduced hours, for a chunk of your career. Assume further you are risk-averse, and thus want to find out if a degree is a good value even if you earnings are at the 25th percentile in the class. [Note that the study ranked earnings by percentile, it did NOT estimate earnings by class rank, although we know there is some imperfect correlation. Thus the 25th percentile here is an income outcome not an educational outcome.] The present discounted value of your expected earnings is $427,500 (which is less than a similarly distributionally challenged male, who would have a PDV of $540,000). If your law school tuition and expenses (other than room and board you would pay anyway) are less than this in 2010 dollars, odds are you are making a smart bet in terms of net lifetime earnings. So if tuition is $160,000 total, and before law school you make $65,000 per year, you compare ($160,000 + (65,000 – 25,000)*3*[1-tax rate]) to the PDV post-tax value of the degree, which is $427,500. Because, say, $280,000 is less than $427,500, the law degree has a real positive net present value — over your expected life time, even if not in your first year out of law school. And of course the numbers are substantially better with less restrictive assumptions.

Note, however,that the analysis assumes you graduate. And it doesn’t attempt to take much account of the practical effects of an increased debt service burden when combined with undergraduate debt (except to note the historically low rate of student loan default for law grads as a group). Nor does it consider the effect that debt may have on your career choices or happiness. It could be that having less debt young might allow you to buy a house younger and thus be happier while having less money over all. But economists are not concerned with that sort of issue; this is a strictly financial calculation. Even so, it’s interesting work — and encouraging stuff for those of us engaged in the production of law graduates.

[Note: Latter part of next-to-last paragraph edited and expanded for clarity.]

Posted in Law School | 7 Comments

Is .kosher Kosher?

Harold Feld is always worth reading. Usually he posts on telecoms; today he has a great read on the issues surrounding the application to ICANN for .kosher. Surprisingly, the issues include the role of he US government in bringing concerns to ICANN, and whether objections to .kosher will get the same hearing as objections to .halal.

See Is Sauce for the .Halal Goose Sauce for the .Kosher Gander At The ICANN Meeting In Durban? for the full scoop.

Posted in ICANN | 1 Comment

Interviewed by Slate

I’m quoted a bit in Slate’s Florida almost certainly did not accidentally outlaw computers, which is the contrarian reaction to a bunch of stories yesterday. Katy Waldman sets the scene like this,

Back the truck up, compadres. Florida did not just inadvertently outlaw the 21st century. The Internet lit up Wednesday with reports of a new lawsuit claiming that, in its efforts to crack down on illegal gambling, the state had banned all computers, smartphones, or other devices capable of connecting to the Web. What happened: In April, Gov. Rick Scott signed a bill making illegal slot machines, which the bill defined (in admittedly billowy terms) as “any machine or device or system or network of devices” that requires “an account number, code, or other object or information” to play “games of chance or skill.”

I’m quoted accurately, and I stand by what I said about why two different canons of construction suggest the courts would read the statute narrowly… but Ms. Waldman did leave out the bit where I also said that “the statute is in fact drafted broadly and sloppily, so the suit is not frivolous.”

Update: a fuller version of what I said is at Suit: Internet cafe law also bans computers in the Tampa Bay Tribune.

Posted in Florida, Law: Free Speech, The Media | Leave a comment

Edmund S. Morgan, 97

Yale historian Edmund S. Morgan died yesterday. He was one of the leading historians of US colonial and revolutionary history — and also one of the greatest teachers in a great college. I not only got to listen to his lectures as an undergraduate, I got to listen to them again a few years later (with several quite changed) during my year as a Teaching Assistant for him while in law school. Listening to him recreate the sometimes quite alien perspective of figures ranging from Cotton Mather to George Washington was often the high point of the day. And his final part of his final lecture of the year was personal, and included a call to be sensitive to the injustices of the moment. The example has emboldened me, more than once, to be similarly personal at the end of a semester.

As a supervisor of his TAs Morgan was unfailingly gentle; he trusted our judgment more than I thought I, a rank beginner as a teacher, deserved.

Edmund Morgan was the author of several very scholarly and yet highly readable books that taught two generations about our history. He was also (as I later discovered) the author of the colonial/revolutionary section of one of the leading high school US history text books. That part of the text was, when I came as a parent to read it many years after college, a wonder: so concise, so pared down, so optimized for the capacities of its readers, and yet still rich. Even its generalizations were carefully crafted to be faithful to the twists and turns of more specialist knowledge. Long after Morgan retired officially to Sterling Emeritus status he kept writing books, and also important essays for the New York Review of Books. And he set up a wood shop in his basement.

Ed Morgan did not think law school was perhaps the best way for a person to spend his time. His father had been a major Evidence scholar, and being around law faculty had not given this otherwise sweet and charming human much liking for the subject, or I suspect the breed. He treated my interest in law as bemusing, but we usually avoided the topic.

One of my Ed Morgan anecdotes is pure hearsay, but I have it from a a History graduate student who claimed to have witnessed it regularly: Ed Morgan, she told me, was a great fan of Yale Hockey, and could regularly be seen cheering the Yale team as players delivered a particularly vicious hit on the opposing team. It was hard to imagine the elfin, gentle man, the giver of meticulously prepared eloquent lectures, roaring at a hockey game. But people, as Edmund Morgan taught us over and over, are complicated, and only if you take them as you find them can you hope to understand.

Posted in Personal | Leave a comment

An Appropriate Petition

Rename the 10+ Military Bases Named After Confederate Generals

The White House’s online petition site was a good idea in principle, but it hasn’t amounted to much since the replies to petitions the Administration doesn’t intend to accept have so often turned out to be the usual mealy-mouthed mush you get from a political press office. They have not, in key cases, met the more demanding tests one would apply under the Administrative Procedures Act if an agency were required to respond to public comments. Even so, the petition site is still good for symbolic issues, and what could be more symbolic than the names of military bases?

Rename the 10+ Military Bases Named After Confederate Generals

Today we have over 10 US military bases named for generals of the Confederate States of America.

For example, Fort Polk is named after a plantation master of several hundred slaves. Fort Pickett’s namesake was accused of war crimes in executing 22 Union prisoners.

Forts Benning, Bragg, Polk, A.P. Hill, Rucker, Beauregard, Lee, Hood all carry similar tales.

When these bases were built, during the World Wars, it may have made sense to name them after local heroes. Now, with over 20% of our forces African-American why do we insult them by asking them to serve at a base named after defenders of slavery WHO KILLED AMERICAN TROOPS?

Would we have a Goering Air Base or Camp Cornwallis?

There are so many honorable people who upheld our American ideals, can’t we find 10 to honor?

Created: Jul 06, 2013

The petition needs 100,000 signatures in order to force the White House to reply with an explanation as to why it won’t do it. Sign here. I was #34, so there’s a long way to go.

More background at Political Animal, Sign the Petition–Retire General Hood!.

Posted in Politics: US | 14 Comments