American Law Institute 93rd Annual Meeting:
[On] the last day of the Annual Meeting ... Young Scholar Medal Recipient Michael Simkovic of Seton Hall University School of Law presented What Can We Learn from Credit Markets. He opened with a quote from, Oliver Wendell Holmes from his address entitled The Path of the Law: “For the rational study of the law, the blackletter man may be the man of the present, but the man of the future is the man of statistics and the master of economics”:
My research uses economic analysis to explore how laws affect financial markets and how courts and regulators can use financial information to make legal and policy decisions. ...
If credit market prices reflect useful information about risk and inform investors’ choices, could a market-‐like mechanism be incorporated into public lending programs to help guide related private investment? My next project, Risk-Based Student Loans, proposed using loan performance data such as default rates and loss severity to inform federal student loan pricing. I proposed risk-adjusting interest rates according to field of study to encourage students and universities to prioritize fields that are most in demand in the labor market.
After I presented Risk-‐Based Student Loans, some readers asked whether law student loan interest rates should be increased because of poor employment prospects for law school graduates. However, I noticed that default rates for law school borrowers, even from low-ranked institutions, were much lower than overall student loan default rates. This suggested that law graduates were likely doing relatively well financially.
I investigated law degree earnings premiums in The Economic Value of a Law Degree [43 J. Legal Stud. 249 (2014)] with labor economist Frank McIntyre. Our findings suggested that a law degree boosts lifetime earnings far more than the costs of the degree for most students under most conditions. Our findings challenged popular narratives. But our findings were consistent with labor economics studies that find that education generally increases lifetime earnings.
The consistently high returns to education raised another important question. How can education be such a good investment? In an efficient market, unusually high returns attract a flood of investment that pushes down returns to ordinary levels.
One possible explanation is our tax system. My article The Knowledge Tax [82 U. Chi. L. Rev. 1981 (2015)] argued that our federal tax system disproportionately taxes labor income more than it taxes income from capital. This places investments in education at a serious disadvantage and leads to inefficient under-investment in education.
Law depends on predictions about human behavior and how laws alter that behavior. These predictions will inevitably be imperfect. Therefore laws will have unexpected consequences. I believe that improvements in law require an iterative process that tests hypotheses using data. The results of these empirical studies refine our intuitions and enable us to refine our laws. Just as medicine advances by studying the impact of treatments, we can use empirical methods to improve the law. We make mistakes, and we learn from those mistakes.
Today, Holmes’ vision of a legal system informed by economic and statistical analysis continues to inspire a new generation of legal scholars.
Young Scholar Award Presentation to Michael Simkovic from The American Law Institute on Vimeo.