Thursday, July 25, 2013
Eric B. Rasmusen (Indiana University, Kelley School of Business), Critics of The Economic Value of a Law Degree Are Making the Paper Better:
The Economic Value of a Law Degree by Michael Simkovic and Frank McIntyre (S-M) has attracted a lot of negative comment, which is good. Knowing Prof. Simkovic a little, and knowing that Prof. McIntyre is an economist, I am confident that they agree in welcoming the negative comment. When a scholar comes up with a conclusion contrary to the conventional wisdom, the proper response is skepticism. This can take two forms. One is dismissal without reading the paper, because you assume there’s a mistake. The other is extra-careful reading, to try to find the mistake you’re sure is there. Their paper has gotten a lot of careful reading, and it is making the paper better. The referees of economics journals are tough, so this is a good thing for them. As in the courtroom, it’s best to find out your weak points in advance, admit them, and address them as best you can before the other side gets a chance.
The idea of the paper is simple, really: Use government earnings data to see how much more people with law degrees earn over their lifetimes compared to similar people who didn’t get law degrees. The hardest part is to find “similar people”. We can compare male history majors who did and who didn’t get law degrees, but we don’t know whether the ones who chose to go to law school are better or are worse. If the ones with law degrees earn more at age 50, that might be because the smartest and most ambitious were the ones who went to law school and law school itself made no difference. On the other hand, maybe the laziest and most disorganized male history majors went to law school, because they couldn’t or wouldn’t find a job right out of college. This is the study’s main problem, but note that this problem might mean that S-M have underestimated the value of a law degree, not overestimated it.
A lot of the immediate reactions to the paper misinterpret it, though, and the results aren’t as surprising or revolutionary as they seem. Let me go through a few points.
1. They are looking at the value of a law degree, not the value of being a lawyer. A big part of what they are addressing is not how much lawyers make, but how much the actual education you get in law school helps you think. We business-school professors often scoff at the value of our degree too, but then I go teach an MBA class and realize how muddled students are on ideas such as “Money now is worth more than money later” or “Don’t keep going with a project just because you’ve already spent so much on it”. I also see how poorly MBA students use their brains, even after five or so years of job experience. I admire how the first year of law school teaches people how to think. Liberal arts majors learn how to use chains of reasoning, and STEM majors learn that logic works with words as well as numbers. Thus, it isn’t clear that the J.D. who can’t find a law job has wasted his time in law school.
Indeed, maybe that J.D. will do better than his friend who does get a law job. I didn’t go to law school, but college roommate did. As a partner at Baker and Botts, he probably earns over five times my salary. But he’s made a big sacrifice in picking that career. I don’t mean the time and strain of midnight toil preparing bond deals--- young professors work hard too. No, like me he picked a career based on what he liked rather than on money, because he could have gone into investment banking. By choosing Big Law, he’s sacrificed at least a million dollars per year year (see “Wall Street and Main Street: What contributes to the rise in the highest incomes?” S. Kaplan, J. Rauh, Review of Financial Studies, 2010.) If he couldn’t have gotten a law job, perhaps he would have had to settle for Wall Street. Similarly, John Doe, B.A., chooses between becoming a bank loan officer and earning $70,000/year in mid-life or getting a J.D that gives him the credential and mental training to be an attorney at $90,000/year or a real estate developer at $110,000/year.
2. They are looking mainly at the benefit of a law degree, not the benefit minus the cost. It would be strange if having a law degree actually reduced your earning ability. True, if you get a law degree and then insist on a law job, you may end up unemployed. But surely employers in non-law jobs would prefer you to a fresh college graduate.
The question is whether the benefit of the law degree is worth the cost. That depends on three things: tuition, lost wages, and the rate of return on investment. Tuition is the least important. Even if you are paying $30,000/year, that is less than the wages you are losing by studying instead of working. (I couldn’t find the wage levels S-M use in the current version of their paper for the cost estimates; they should clarify that.) What is most important is the rate of return on investment. S-M use an after-inflation rate of 3%, which is a good choice. The rate is important because the key calculation is whether a cost at the start (tuition and lost wages) is worth a return later on (the post-JD wage premium). If you could get a return of 8% by investing the tuition plus 3 years’ wages in the stock market instead of going to law school, then law school would not be as good an investment as if we use a return of 3%. The real return on the stock market 1970-2007 was indeed about 8% (see Table 4.4), but that included a big risk premium (the safest investments only yielded 1.3%) and for various reasons I’d expect future stock returns to be less than they were in the past.
3. If a lot of the benefit of law school is flowing to non-lawyers, that has implications for what law schools teach. A common response to the depressed law market is to say that law schools should teach more practical lawyering skills instead of how to analyze appellate opinions, use history and economics, and make good policy. If there are fewer legal jobs, though, teaching more practical skills doesn’t make sense. Teaching a student how to take depositions or fill out forms isn’t going to increase the demand for lawyers. In fact, those skills are useless if the student isn’t going to end up in a law job. For students who don’t find law jobs, skill at reasoning, bringing different disciplines to bear on problems, and designing incentives may be just what they need. If a student is going to fail in the legal job market then what he needs is less practical training, not more.
- ABA Journal, Is a Law Degree Really Worth $1M? Law Prof Says Value Overstated; Study Author Defends Stats
- Jonathan H. Adler (Case Western), Debating the Value of a Law Degree
- Dan Filler (Drexel), The Long-Term Value Of A JD: Michael Simkovic Gets Very Serious
- Stephen J. Harper (Northwestern), The Dangerous Million-Dollar Distraction
- Jeff Lipshaw (Suffolk), The $1,000,000 Law Degree Kerfuffle: Getting in Touch With My Inner Kahneman
- New York Law Journal, A Law Degree Is Still Worth a Million, Earnings Study Shows
- Frank Pasquale (Maryland), Simkovic's Response to Tamanaha on "The Economic Value of a Law Degree"
Prior TaxProf Blog coverage:
- What Is the Economic Value of a Law Degree -- $1 Million? (July 17, 2013)
- More on The $1 Million Value of a Law Degree (July 18, 2013)
- NY Times, WaPo, Others Debate The $1 Million Value of a Law Degree (July 18, 2013)
- What Is the Economic Value of a Law Degree -- $1 Million or $100,000? (July 19, 2013)
- More on The $1 Million Value of a Law Degree (July 20, 2013)
- Merritt on The $1 Million Value of a Law Degree (July 21, 2013)
- Diamond on The $1 Million Value of a Law Degree (July 22, 2013)
- Tamanaha: How 'The Million Dollar Law Degree' Study Systematically Overstates Value (July 23, 2013)
- Tamanaha: How the 'Million Dollar Law Degree' Study Understates Risk (Part I) (July 24, 2013)
- Tamanaha: Why the “Million Dollar Law Degree” Study Fails (Final Post) (July 25, 2013)
- Pasquale and Simkovic Respond to Tamanaha (July 25, 2013)
- The American Lawyer: Paper on Law Degree's Economic Value a Non-Sequitur (July 26, 2013)
- Simkovic Responds to Tamanaha (Part 3) (July 26, 2013)
- Tamanaha: Short Term Versus Long Term Perspective (July 27, 2013)
- Harper, Diamond: The $1 Million Value of a Law Degree: Distraction, Astronomy, or Astrology? (July 28, 2013)
- Simkovic Responds to American Lawyer Op-Eds (July 29, 2013)
- Diamond Responds to Tamanaha (July 29, 2013)
- Rasmusen: The Economic Value of a Law Degree and the 'Typical' Law Student (July 29, 2013)
- Simkovic Responds to Tamanaha (Part 4) (July 30, 2013)