The Faculty Lounge

Volcker Deadline Tomorrow

From the FT:

Some 1,400 questions. A total of 298 pages. One proposal.

Monday is the deadline for financial market participants to submit final responses to the Volcker rule, the eponymous legislation aimed at banning speculative trading at commercial banks. The authorities can expect a deluge of feedback.

Responses are expected to run to hundreds of pages, creating a mountain of electronic paperwork. Big Wall Street groups are putting the finishing touches to their own submissions, polishing their arguments with an analytical rigour that was missing in the years before the financial crisis. Banking lawyers and risk officers will be spending the weekend poring over comment letters in an effort to convince regulatory authorities to tweak the rules.

They’re not the only ones, though it will take me considerably more time than the weekend.  As I’ve discussed here before (see Erik Gerding’s helpful gathering of the complete set of posts for an on-line symposium on this topic), I’ve spent a good chunk of time this year analyzing the 8000 comments on the Volcker Rule solicited by FSOC in advance of their statutorily-required study, as well as the meeting logs of the five federal agencies charged with Volcker Rule implementation. (You can find that paper here) 

Last week, I began a preliminary look into the comments received during the notice and comment period after the Fed, FDIC, OCC, and SEC (and, later, CFTC) NPRM, even though the comment period had not yet closed.  Just a few preliminary thoughts on that, which of course may need revising after all of the comments are in and I've had a chance to more systematically examine them. 

There appear to be far fewer comments during this period than during the FSOC comment period.  In particular, there is less activity from the general public.  At the same time, my initial impression is that these comments are more lengthy and detailed, and are more substantive (including those received from members of the general public) than those received during the initial comment period.  I suspect this reflects a change in strategy by relevant Public Interest Groups, about which I will have more to say later. 

One final item of interest that I have noticed is the number of criticisms of the regulatory and notice and comment process itself from some comment letters.  For example, I have seen complaints that the proposed rule is too long and asks too many questions, that only financial industry members could reasonably be expected to invest the time and resources to understand and meaningfully comment on the rule, leading to one-sided input, and that interest groups have already had enough opportunity to influence the outcome of the rule and should not be afforded any more.  Some of these letters are critical of financial industry efforts to influence Volcker rule implementation, and are quite well drafted. 

I’ll be back with more details, as I continue to go through the comments and meeting logs and wait – along with everyone else – for final rules.

 

Carrots, Strings, and Power: The New York Times on Ruth Grant’s Strings Attached

My fabulous colleague, Ruth Grant’s, new book, Strings Attached, is reviewed in yesterday’s New York Times.  As a bit of background, Ruth is a Professor of Political Science at Duke University, specializing in political theory with a particular interest in early modern philosophy and political ethics. She is the author of John Locke's Liberalism and of Hypocrisy and Integrity: Machiavelli, Rousseau and the Ethics of Politics. She is also the editor of two collections of essays; Naming Evil, Judging Evil and In Search of Goodness.

But it is her newest book, Strings Attached, that currently has the NY Times’ attention, and mine as well.  In it, Grant frames the ethics of incentives within a broader framework that I find infinitely richer than most that I have come across recently.  Specifically, Grant frames the ethics of incentives within an analysis of power.  In doing so, Grant insists that incentives are more than just a voluntary bargained-for-exchange.  Instead, they are one of the mechanisms employed to get people to do things that they otherwise would not.  As such, they are – like all kinds of power – subject to abuse. 

One of the things that I particularly appreciate about Grant’s analysis is the triad of coercion, persuasion, and incentives that Ruth sets up – all three are exercises of power and all three entail ethical considerations.   All three are also judged under the same standards of legitimacy of purpose, voluntariness, and effect on the character of the parties involved. 

Ruth is quite a bit more skeptical of incentives, and quite a bit more accepting of persuasion, than I am, but her critique of some of the assumptions regarding incentives is important and, for me at least, eye opening.  For example, her historical treatment of the rise of incentives and the insight that incentives are often employed in the context of an authority relationship – adult/child, employer/employee, and government/citizen, for example – is a helpful means of getting a handle on what it is about some incentives that instinctively rub many people the wrong way. 

I am not yet persuaded by Grant’s preference for persuasion versus incentives as a means of facilitating democratic deliberation and decision-making.  Says Grant:

When incentives are employed, there is no need to convince people that collective goals are good or to motivate them to pursue those goals by appeals to rational argument, personal conviction, or intrinsic motivation.  Experts and powerful elites can thus direct institutions and shape people’s choices without the sort of public discussion and consent that ideally characterize democratic processes and decision-making. 

But when we move away from ideal democratic processes to real ones, I am not so sure that the types of persuasion employed by powerful elites or the decision-making processes of those subject to their influence are so benign, or that they fare so well as compared to incentives. 

One last comment on crowding out, which I think is more complex than one would gather from the book and the Times review.  There is a large literature on crowding out, some of which finds support for the crowding out theory and some of which does not.  Moreover, the findings appear to be very sensitive to experimental conditions, such that it is not always clear what factors are driving the experimental outcomes.  Finally, any crowding out effects can sometimes be overcome through other interventions, such as an option to donate any monetary rewards to charity.  In other words, crowding out appears to be a very complicated phenomenon and, in most settings, at least, it would, to my mind, be premature to conclude that we might predict with confidence the outcome of a well-designed incentive structure.

To illustrate, the Times discusses a study, referenced in Strings Attached, in which women offered cash to donate blood were almost 50% less likely to give blood than women who were offered no money.  Male subjects exhibited no such crowding out.  (The NY Times references a “study of British women,” though I believe they mean this study, which is also the one Ruth cites to in the book).  But there is no mention that the study actually measured the willingness of subjects to undergo a health examination, which was a precondition to donate blood, rather than actual blood donations (a test condition that could operate differently on men and women), that the monetary offer was only about US $7, and that the crowding out effect disappeared when subjects were given the option to donate the proceeds to charity.

A more recent NBER working paper by Nicola Lacetera, et. al., Rewarding Altruism? (released after the book was in press, I believe), a natural field experiment involving nearly 100,000 individuals, contradicts these findings.   Lacetera finds a large, positive effect of economic incentives on blood donations, with limited or no crowding out in both the short and long term. They find no gender effects.  All of this is just to say that crowding out appears a complicated phenomenon, and one that we’re still learning about.

Don’t be fooled into thinking that because Grant is a respected political theorist and the book deals with weighty ethical issues it will be dry or abstract.  Grant’s theories and examples are extraordinarily timely and relevant.  The section on IMF loan conditionality caused me to reframe the entire Greek debt crisis debate in terms of coercion, persuasion, and incentives.  And the sections on recruiting medical research subjects (which, perhaps surprisingly, Grant finds relatively benign) and pleas bargaining will be of interest to those working on medical ethics and the criminal justice system, respectively.  A highly recommended read!

A Few Ways NOT To Solve America's Unequal Access To Justice

“The very rich,” F. Scott Fitzgerald famously observed, “are not like you and me.”  True enough, Dorothy Parker reportedly quipped: “They have more money.”  Parker's remark also backhandedly lends some perspective on a genuinely serious contemporary problem receiving more currency than usual these days:  America's unequal access to justice.

We find ourselves at a sadly ironic moment in the history of the American bar.  After many years of increasing demand for lawyers, structural changes in the pricing and staffing of legal services that have been both exposed and amplified by the Great Recession have created a downdraft in the demand for new lawyers.  As a result, something like one-third of recent law school graduates have found it impossible to find or keep a job requiring or preferring a law license.  Some appreciable additional quantity of recent graduates have been able to find only episodic "legal process" piecework such as document review, often yielding relatively meager rewards, no security or benefits, and virtually no hope of meaningful training or advancement.  Talk about quiet desperation.

At the same time, for many years legal aid programs have been turning away substantial numbers of applicants for their services, not for ineligibility or lack of expertise, but simply for lack of the resources necessary to meet the poverty population's needs.  The recent slashes in the budget of the Legal Services Corporation (a congressionally created and funded entity that distributes money to programs providing legal services to the indigent), and plummeting revenues from states' IOLTA funds (Interest on Legal Trust Accounts, the funds many states derive by requiring depository institutions to remit the interest on lawyers' trust accounts to the state to fund legal services for the needy) resulting from swan-diving interest rates, have only made things worse.

The irony emerges when we lay these two points side by side:  There are currently tens of thousands of unemployed or underemployed recently-licensed lawyers, and hundreds of thousands of low- and moderate-income consumers in aching need of legal assistance with housing, employment, education, healthcare and government benefits issues (among other things).  Why, it would be fair to ask, has this excess supply not linked up with this excess demand?

One plausible explanation is simply the inverse of Dorothy Parker's rejoinder:  The poor are poor because they have no money.  As a result, an economist might easily conjecture, their needs provide a meager draw for the many lawyers in today's economy with no (or insufficient) work. 

Up to this point, I imagine that my readers (assuming one or the other of them isn't otherwise occupied) will consider this discussion obvious.  But it raises some potentially interesting implications:

First, a hat-tip to David Segal, the New York Times' cheerful basher of the legal academy and the organized bar with a striking knack for getting things almost exactly half-right, who in one of his recent jeremiads suggests that law schools' costs of meeting ABA accreditation standards have so raised the price of a legal education that graduates simply can't afford to serve the legal needs of the poor and middle class.  (Full disclosure:  I spoke with Segal at some length before his recent and widely remarked-upon New York Times piece about how law schools don’t teach “lawyering.”  The story completely ignored several issues with Segal’s perspective I had brought to his attention during our conversation that I thought he had agreed were worthy of consideration.  For the record, I am disappointed.)  Segal offers the alternative of the multi-tier system in the UK, in which there reportedly are different levels of licensure to practice law, with the most modest requiring only limited education at inexpensive institutions roughly equivalent to community colleges, and authorizing the holder to perform a correspondingly limited array of less complicated tasks.  I confess ignorance of the UK's professional licensing scheme (other than the existence of a mandatory two-year postgraduate apprenticeship for at least some practice certifications, which I take quite seriously); and I also confess that this multi-tier idea presents some genuinely interesting possibilities worth examining.  But the notion that it would make any significant dent in our current access to justice problems seems doubtful at best. 

Why?  To reiterate, the poor are poor because they have no money.  The hundreds of thousands of American families currently facing foreclosure can't afford to pay their mortgages.  Obviously they can't afford to pay attorneys, even if they could get them at minimum wage.  To put it slightly differently, if there were any paying market to provide legal services to low- or moderate-income consumers (outside legal aid, whose shrinking resources come from sources other than clients) thousands of recent law graduates would be rushing in to serve it.  In fact, what is striking about the current excess supply of lawyers is that it has not apparently found any substantial untapped lower-price market even among the middle class.

The obstacle is not that these new graduates have large student loans to pay.  Though many of them do, bear in mind that many recent government-funded student loans require the borrowers to pay only a percentage of whatever income they earn, rather than a fixed monthly amount.  More importantly, most unemployed law graduates understand that the best way to clear a path to a more satisfying and remunerative law job is to get actual experience doing legal work, even at subsistence wages; and that the surest way to make yourself less competitive and eventually unemployable in the legal job market is to lie fallow and do nothing (or to put food on the table with work that makes no use of the expensive diploma hanging over that unsightly crack in the wall).

Please understand that I am in no way suggesting that our unemployed law graduates are lazy, or stupid, or elitist.  In fact, I believe exactly the opposite--I think a great many are doing everything they can think of to address a terribly difficult situation, bringing tremendous effort, initiative and creativity to bear day after day after day.  Which is exactly why it ignores reality to recycle old suggestions that all we need to do to moderate the cost of legal services and meet currently unmet needs is lower the cost of entering practice.  (Examples include Segal’s New York Times article referred to above, and the buffoon at Brookings who recently enjoyed his fifteen minutes of fame advocating—as if it were a new idea—the abolition of any license to practice law.)  Excess capacity already exists and has effectively left those problems untouched; why would you want to create even more, even if it spawned none of the serious externalities these suggestions drag into the picture?  There may be other reasons to consider adjusting the barriers to entering the legal profession, but the ones most commonly advanced these days are refuted by current events.

--Bernie

Now back to that “how important are citations?” debate . . .

Via Henry at Crooked Timber comes news of a recent article in Science (pay wall, full copy here), Saudi Universities Offer Cash in Exchange for Academic Prestige:

At first glance, Robert Kirshner took the e-mail message for a scam. An astronomer at King Abdulaziz University (KAU) in Jeddah, Saudi Arabia, was offering him a contract for an adjunct professorship that would pay $72,000 a year. Kirshner, an astrophysicist at Harvard University, would be expected to supervise a research group at KAU and spend a week or two a year on KAU’s campus, but that requirement was flexible, the person making the offer wrote in the e-mail. What Kirshner would be required to do, however, was add King Abdulaziz University as a second affiliation to his name on the Institute for Scientific Information’s (ISI’s) list of highly cited researchers.

“I thought it was a joke,” says Kirshner, who forwarded the e-mail to his department chair, noting in jest that the money was a lot more attractive than the 2% annual raise professors typically get. Then he discovered that a highly cited colleague at another U.S. institution had accepted KAU’s offer, adding KAU as a second affiliation on ISIhighlycited.com.

Kirshner’s colleague is not alone. I have learned of more than 60 top-ranked researchers from different scientific disciplines—all on ISI’s highly cited list—who have recently signed a part-time employment arrangement with the university that is structured along the lines of what Kirshner was offered. Meanwhile, a bigger, more prominent Saudi institution—King Saud University in Riyadh—has climbed several hundred places in international rankings in the past 4 years largely through initiatives specifically targeted toward attaching KSU’s name to research publications, regardless of whether the work involved any meaningful collaboration with KSU researchers. 

Al Arabiya News reports:

According to several Saudi academicians, the report published this month in Science Magazine under the title “Saudi Universities Offer Cash in Exchange for Academic Prestige” ─ which accused both universities of paying researchers to cite their names as a second affiliation ─ is jeopardizing the reputation of two of Saudi Arabia’s most prominent institutions especially that the magazine is one of the most credible in the world. . . .

The two universities have already denied allegations made by the magazine, said Rahman al-Salhabi, head of the Scientific Research Program ay King Abdul Aziz University Abdul.

“Officials at both universities admitted to ongoing cooperation with several foreign researchers but stressed that they are doing real work together and not just making them put the universities’ names on their research for money like what the magazine claimed,” he told Al Arabiya.

The article concludes:

“A university cannot be founded on propaganda, but on what it really achieves.” 

Hmm . . . back to my holiday law porn reading.

Cohen on Flynn v. Holder

Glenn Cohen has a very nice write-up on Flynn v. Holder, the bone marrow transplant case, in the New England Journal of Medicine.  Here’s an excerpt:

The Ninth Circuit decision represents both a win and a loss for advocates of organ markets. On the one hand, patients can now buy and sell peripheral-blood stem cells derived through apheresis, which the court claims is the method of bone marrow transplantation used in two thirds of U.S. cases — a significant victory. On the other hand, this narrow win was achieved through a statutory interpretation of NOTA, and Congress can always change the law by adding the words “peripheral-blood stem cells.” Moreover, the Ninth Circuit rejected the plaintiffs' broader constitutional theory — that Congress is barred by the Equal Protection Clause from banning the sale of substances with substantial similarity to blood, sperm, or eggs. So unless advocates for the sale of other body parts can find applicable statutory gaps similar to that regarding peripheral-blood stem cells, their claims will probably fail.

The article is here.  The case, here.

HT: Bob Gutman

 

Does Anyone Disclose Salary Information If They Don't Have To?

In the comments, Mark Fenster asks a great question:

It would be interesting to know if any dean in a private law school or in a public which isn't required to disclose salary has chosen to do so, and what kinds of effects that had, especially if previous administrations had not disclosed.

I would also like to know the answer to that.  In fact, this question came up at dinner last night and everyone at the table wanted the answer.  No one knew of any school that had disclosed salary information in the absence of a requirement to do so, everyone wondered whether any such examples existed, but everyone bet that there weren’t any (or at least many). And to be clear, I'm interested in whether this information was disclosed to other faculty -- not necessarily to the general public.

So I volunteered to tap our wise Loungers for more information.  Can anyone shed any light on Mark’s question?  As I mentioned in yesterday’s post, I’ve seen examples of schools that go beyond the technical requirements of transparency, to put that information at everyone’s fingertips.  And I did not think the results were positive. 

But I’d like to hear from others who might have experiences with or examples of non-mandatory salary disclosure.  And if you got a sense of whether the results were positive, negative, or some of both please share that as well.

 

Should Compensation Be Transparent?

The Texas kerfuffle has raised many questions, some of which have already been discussed at length on other law blogs.  But for me, the news brings up a larger question that I’ve been thinking about for a while now: should law school compensation be transparent, at least to other faculty members?  

Some schools – for example, many public schools – have very little choice in the matter of whether to reveal salary information, as state statutes require them to reveal that data in some manner.  For example, Illinois appears to publish all salaries in the Daily Illini, which I assume is a legislative mandate, rather than a choice on the University’s part (Illini insiders should feel free to correct that impression, if erroneous). 

But there appears to be a great deal of variation, even among schools operating under some sort of transparency mandate.  For example, I have seen schools that interpret the requirement to make salaries publicly available to mean that they are in a file in the central library, such that one has to make an affirmative effort to discover them.  I have seen others distribute salary information in a yearly memo to faculty, such that everyone is confronted with everyone else’s salary, whether you want that information or not.  And I have seen some schools following what appears to be the Texas model, under which the reported salary numbers give little useful information about total compensation, because so much compensation comes in the form of benefits that are not required to be reported – children’s tuition, housing, loans, foundation grants and fellowships, etc.

But what I want to address is a different question: assuming flexibility in the matter of whether faculty compensation is transparent to other faculty members, should it be? I’m going to answer that question with a tentative “no” despite the admitted costs of secrecy in compensation information. 

As many Loungers already know, there is a reasonably large body of research on salary transparency.  Although I’ll draw on that for some of this discussion, I also think that academic institutions – with their limited ability to fire nonperformers and the relative lack of professor mobility, as compared to some other occupations and industries – may not be the best fit for some of that research.  Moreover, law schools -- which tend to have less external quality verification, such as grants and peer review – may present different challenges than other academic units.  I’ll leave that question to others with more comparative knowledge. 

Let me begin with some assumptions about the ideal academic salary system.  First, it should be meritocratic, meaning that faculty members are rewarded for excellence in the pursuit of shared institutional goals – for example, scholarship and teaching.  Second, it should be fair, in the sense that faculty are neither rewarded nor penalized for traits, behaviors, and the like, unrelated to those goals.  For example, the system should show no race or gender bias, “squeaky wheels” should not be able to increase their compensation beyond their due through constant complaints to the dean’s office, nor should more unassuming faculty be passed over for deserved compensation.  Third, it should be transparent, in that each faculty member is aware of the total compensation of other faculty members.  This transparency enables verification of features one and two – i.e. that the system is meritocratic and fair. 

Ideally, a law school’s salary system should embody all three of these characteristics: meritocracy, fairness, and transparency.  In my experience, however, real-world law schools rarely embody all three traits.  And having worked under both the transparent and non-transparent systems, my vote (for today anyway) is for the imperfect, but better, non-transparent model. 

What happens when compensation is not transparent?  Well, the fear, supported by some research, is that decision-makers will indulge biases.  Some argue that pay secrecy exacerbates pay inequity and the gender wage gap.  Others argue that salary secrecy can fuel inequity fears, even when wages are being set fairly. 

What happens when compensation is transparent?  In a recent NBER working paper, David Card and his co-authors find that pay transparency reduces aggregate employee utility – below-median workers experience lower job satisfaction while those above report no greater satisfaction.  Fine, but what does this mean in terms of real life around the law school water cooler?  Like most of you, I have seen people obsess nearly to the point of needing medical attention about the one person making $372 more than she is, even if – in the absence of information – this individual would feel perfectly content with her salary. Forget above and below the median – most of us freak out at even the smallest perceived pay inequities.  And unlike the widget factory, where there are concrete and objective measures of quality to point to in defense of salary disparities, law schools have only contested and somewhat subjective measures of quality with which to defend disparate salary structures. 

Now, I don’t mean to overstate the indeterminacy of academic quality here – usually there are some superstars and some non-performers about which almost everyone can agree.  But in between those extremes, salary distinctions have to be defended through a set of contested and subjective criteria about both quality, and the importance of the various aspects of the law school mission.  How much does good teaching offset poor scholarship?  How do we judge scholarly quality?  How much do we rely on objective measures such as citations and downloads?

What is the end result?  My experience – which, of course, is not universal – is that extremely transparent systems lend themselves to lock-step compensation based on easily identifiable criteria, such as seniority.  Because then the dean always has a clear non-discriminatory metric to point to in defense of pay structure, and the rest of us don’t have to argue about difficult things, such as quality.

And this, to me, is not a good place for a law school to be. The system may be fair (nondiscriminatory), but it is not meritocratic.  Nearly everyone feels cheated anyway and the highest performing young folks – i.e. those most likely to be picked off by another school – legitimately so.  It just seems to me to be a recipe for a system under which almost everyone is unhappy, there are few incentives for productivity, the highest quality folks have every reason to try to leave, and those who are geographically constrained for family or other reasons (and who, as long-termers might otherwise be institutional building blocks) feel cheated by the institution and thus are less likely to give back. 

Now, before someone extols the virtues of lock-step systems (long the norm at many law firms, but increasingly under pressure), I agree that there are some arguments in its favor: the reduction of internal conflict and competition and the fostering of a collective sense of purpose.  But law schools are not law firms.  The lesser mobility of academics, the reduced ability to fire non-performers, and the lack of the big “carrot” of partnership profits at the end of the day render the two environments too different to map one compensation system onto the other.

These outcomes aren’t inevitable, of course.  I’m sure it’s possible to craft a compensation system that is fair, meritocratic, and transparent.  But are most law schools inclined to do so?

Size May Matter, But Not The Way You Think

A recent post on GC’s Eye View (“Thoughts on law and business from a General Counsel of a publicly traded company,” apparently in the UK) begins with the provocative observation that the largest accounting firms have 10-15 times the gross revenue of the largest law firms.  PriceWaterhouseCoopers, for example, reported about $29 billion in revenue for fiscal 2011, while Baker & McKenzie reported about $2.3 billion for 2010 (the blog quotes a slightly lower number for Baker’s gross, but you get the idea).

From this, our GC blogger seems to conclude that the Big 4 are much better and more successful firms than the AmLaw Global 100:  “I'm not suggesting revenue is everything,” he says, “but it's a perfectly reasonable measure of how much the rest of the world wants you around.”

Our GC goes on to explore some of the client-relations and marketing reasons the Big 4 have achieved the greater success that he postulates, leaving us interesting material to discuss another day.  Today, however, I want to devote a few words to the post’s bizarre beatification of bigness. 

With all respect, gross revenue is not “a perfectly reasonable measure of how much the rest of the world wants you around.”  It is a perfectly reasonable measure (subject to the vagaries of Generally Accepted Accounting Principles) of how much money you take in.  By itself, it says regrettably little about how effective, efficient, or successful you are.  General Motors, for example, grossed well over $100 billion per year in the 2000s, lost money hand over fist, and filed Chapter 11 in 2009, a year in which it still had a twelve-figure gross. 

So bigger is not necessarily better.  PWC grossed its $29 billion on the backs of nearly 170,000 employees, nearly 130,000 of whom provide client service, and nearly 8,700 of whom are “partners.”  (See here.)  Baker & McKenzie grossed $2.3 billion on the backs of about 10,000 employees, including about 700 equity partners (and about the same number of nonequity partners), with a total of 3,800 lawyers.  (See here.)  Which one is more profitable?  Which uses its resources more effectively or efficiently?  Would you rather be a partner at PWC or Baker?  From what I’ve told you, you have no idea.  And this leaves aside the fact that Big 4 accounting firms provide a much wider range of services than BigLaw firms, so laying them side by side is a little like comparing a kosher butcher with a supermarket.

But even apples to apples among BigLaw firms, bigger is sometimes just bigger.  Baker & McKenzie has over eight times as many lawyers as Wachtell Lipton, but is roughly one-fourth as profitable (measured by profits per equity partner), and one-fourth as productive (measured by revenue per lawyer).  In response to recent economic conditions, quite a few BigLaw firms reduced their lawyer headcount, had lower gross revenue, and yet increased profits per partner.  Were those firms less successful or well-managed (leaving aside what some might consider their shameful human sacrifices on the altar of profitability)?  In fact, recent studies suggest that large law-firm size (as measured by lawyer headcount) has no statistically significant correlation with profitability, controlling for other factors.

When all is said and done, two of the most intriguing and difficult questions in modern large law-firm economics are when size matters, and why.  Forget about economies of scale:  It’s widely assumed that available economies of scale have been achieved long before reaching the size of the NLJ 250 (the 250 biggest US-based firms by lawyer headcount).  At these sizes, the more relevant force is diseconomies of scale—the simple fact that the bigger and more dispersed your firm is, the more expensive and less efficient it is to manage.  Add the fact that almost all large American firms compensate their partners on a “marginal contribution” basis—that is, in amounts that are calculated to approximate the partner’s contribution to the firm’s profit.  Now sum it up:  Every partner gets out (more or less) the profit she creates; and every time you add a partner and the staff necessary to support her, you increase firm size and thus diseconomies of scale, resulting in a firm that has disproportionately higher costs of operation than before.  There thus is a cost to growth at the same time that each new partner takes out what she adds, so that new partners do not appear to create surplus profit that can benefit the other partners.  And there’s the paradox:  Why should any law firm grow when its economics appear to make it no greater, and in fact less, than the sum of its parts?  And yet many, many larger law firms have grown rapidly and virtually without interruption for the past 40 years up until the Great Recession.

In our recent article (SSRN), Dave McGowan and I suggest that a law partnership’s ability to function as an internal referral network can reciprocally increase the value of every partner’s human capital, and create positive economic returns to growth.  It takes a well-constructed and well-managed partnership to achieve this, and there are many ways in which this explanation of large-firm growth is imperfect.   But it appears to explain the past 40 years of rapid BigLaw growth better than any other theory proposed to date. 

Insert here the obligatory adolescent joke picking up on the post’s title (perhaps "it's not the meeting, it's the emotion").  Chuckle. 

--Bernie

Does the Economics of Law Practice Matter to Law Schools?

I return to the mysteries of law-firm economics after a hiatus to attend to three speaking engagements and complete the academic term (in other words, as an excuse to interrupt grading my Contracts exams).  A belated shout-out to my colleagues Anne Klinefelter and Andrew Chin, and to the editorial board and staff of the North Carolina Law Review, for an exceptionally well conceived and executed Symposium on Social Media (which was one of those speaking engagements)--watch for the Symposium issue of the NC L. Rev. coming this spring for some refreshingly novel and interesting takes on what is elsewhere becoming an overworked topic.  (You won't see a paper from me in that issue.  My topic at the conference, legal ethics in the social media environment, has already been admirably well explored in print and online by others.)

I want to stress how much these issues of practice economics actually matter to legal educators.  Virtually all of our students attend law school with the general aim of practicing law.  A great many end up in private law firms, large or small, or (usually a bit later in their careers) in corporate law departments.  The demand for lawyers in such positions (that is, for individual and corporate legal services) fundamentally affects our students' prospects for gainful employment. 

A bit more specifically, the overall demand for such services affects the overall availability of legal employment, and the distribution of that demand across different categories of work affects the availability of different kinds of legal jobs.  Thus when, as now, there is a significant contraction in at least one portion of the private sector--and here I'm referring to the large number of BigLaw layoffs in 2009 and 2010, and the contemporaneous and continuing substantial reduction in the rates of new hiring at larger firms--recent graduates with strong conventional qualifications who previously filled those BigLaw positions are now competing, and vigorously, for positions in smaller firms and government for which there was previously less such competition.

Put somewhat differently, there are fewer law jobs for recent graduates, and appreciably fewer such jobs at the higher end of the pay scale.  It's hardly rocket science to suggest that this affects the economic value of a law degree:  From behind the proverbial veil of ignorance, a student's chances of securing a job that supports the cost of three years' tuition, living expenses and forgone income and work experience are substantially less today than they were five years ago. 

This is by no means the whole story, of course.  Some prospective law students have far brighter economic prospects ex ante than others.  And economics is certainly not the only reason why people consider law school (though we have empirical data confirming the common-sense apprehension that a substantial number do weigh it as a substantial factor in their decision). 

But if the economic value of a law degree is falling overall (and I suggest to you that it is irresponsible to imagine otherwise), in a rational market you can expect fewer people to pay the rising cost to obtain it.  It is far too early to say "I told you so," but there have been double-digit decreases in law-school applications across the board this year over last (though we must bear in mind that last year saw record increases in law-school applications and LSAT administrations as college seniors confronted a horrific job market with an effort to settle into a three-year holding pattern). 

This is having some obvious effects on the legal academy.  The ability of law schools to continue to charge high tuitions--and continue to pay their faculties salaries far higher than those typical in the arts and sciences--depends on making the end product (the law degree) worth it.  Since many universities share in their law schools' economic surpluses, the universities care too.  Legal employers have been complaining  about the utility of the education with which their entry-level employees arrive for well over a generation, but for the first time in memory it would be fair to say that many law schools are listening, and questioning their mission.

One thing I am NOT suggesting is that legal employers know exactly what they need, and how we could be supplying it.  I'll try to explore in future posts why things are nowhere near this simple.  But that leaves everything up for grabs:  What questions should we be asking, and how should we be seeking the answers?  This is an obviously difficult inquiry, and I will try to suggest in future posts that it's even harder than it seems.  But make no mistake:  we are near the front end of a period that I believe will prove to be the most fraught with rapid change that the American legal profession has ever seen.

What a great time to be a part of things!

--Bernie

Die, Penny, Die!

HT: Alex Tabarrok.

 

Secrets of a Sperm Stealer?

A resident of Allegheny County, New York is suing a fertility clinic and medical lab in Texas on the grounds that the clinic used his stolen sperm to inseminate his girlfriend.  (For a copy of the complaint, see here.) Jamie Pressil alleges that "[d]ue to the unexpected birth of his children caused by Defendants, Pressil suffered severe mental anguish and incurred economic harm due to substantial child support payments.  

The factual background is a bit murky, but the alleged basic storyline appears to be this: Mr. Pressil's former girlfriend and domestic partner, Ms. Anetria Burnett, supposedly secreted Mr. Pressil's used condoms to a fertility clinic, which then used Mr. Pressil's sperm to inseminate Ms. Burnett.  Ms. Burnett subsequently gave birth to twins. Mr. Pressil took a DNA test that proved he was the father and then began paying child support of $800 per month. Related news reports are here, here, and here. 

The clinic reportedly has a copy of a consent form allegedly signed by Mr. Pressil, as well as the results from bloodwork allegedly performed on Mr. Pressil around the time of Ms. Burnett's insemination.  The costs of the fertility services were charged to Mr. Pressil's credit card.  See news stories here and here.

In a separate action, Mr. Pressil has been charged with assaulting Ms. Burnett in 2010 (see news story here).

No doubt, there are several factual issues to be resolved.  But if the clinic did in fact use the sperm without Mr. Pressil's consent, might the clinic have violated Mr. Pressil's constitutional rights (assuming one could show state action)?  Glenn Cohen has suggested a constitutional right not to become a parent in his Stanford Law Review article, The Constitution and the Rights Not to Procreate.  And if Ms. Burnett did take Mr. Pressil's discarded condoms, did she steal his "property"?  Does it matter how and where the condom was discarded?  Does any "theft" only become legally significant if stolen sperm is "converted" into children?

N and Salary Reporting

The ABA Journal website put up an article yesterday (November 21, 2011), ABA Committee Readies Law School Placement, Salary Questionnaire, at its early December 2011 meeting, the Council of the Section on Legal Education and Admission to the Bar will consider competing job-placement reporting proposals. One issue is how salary data should be reported. The problem with salary data is that the selection bias.  As I discussed in So You Want To Be a Rock 'n Roll Star? and Go To Law, even the national NALP salary surveys over-report salaries. Students with jobs are more likely to report job status, but are more likely to report salaries if they have high-paying jobs.

In a November 8, 2011 Memorandum to the Council, Reporting of law School Placement Data, the ABA Questionnaire Committee suggests: reporting only state-wide salary information, by job category:

* * * We do not propose reporting school specific salary data. Rather we will use NALP salary information which will be aggregated on a state-wide basis for each field (if available) on our Placement Data Summary. This will avoid the problem of upward scaling of salary information at the law school level due to the fact some of the school’s graduates do not report their salary information and those who do report tend to be those at higher salary levels. The aggregated state-wide approach collects salary data from graduates of all ABA-approved law schools employed in a state in any particular job category. (Emphasis added.)

As reported last week (ABA Committee Appears Poised to Approve New Law School Disclosure Requirements), the Standards Review Committee proposes that each law school make its placement data, including salary information, available on-line.  Under the SRC proposal, schools would also have to disclose the number of graduates reporting salaries.

By definition, the number of graduates reporting salary for any given school are lower than the number from all schools, and thus more unreliable. The lower numbers of school-level salary reports will make it hard to break reported salaries into job categories. So far as I can tell, the SRC does not propose that each school report salaries by category, or even show the distribution of salary reports by category. (See update below.)

But state-level salaries ignore differences among cities, as well as the difference between urban, suburban and rural  salaries.

Update: A member of the Standards Review Committee told me that the SRC proposal would require law schools to provide full-time salary information by category whenever at least 5 persons have reported a salary in that category: (i) number of persons reporting salary; and (ii) 25th, 50th & 75th percentiles of salaries.

The information would be organized according to

• Employment "status"--Bar passage required, JD preferred, other professional, and non-professional, and
• Employment type--law firms, by size of firm, business & industry, government, judicial clerkships, academia, and unknown.

Occupy Chapel Hill (Post Office)

A picture of the Occupy Chapel Hill movement, which is occupying the space in front of the Chapel Hill Post Office.

Friðrik Már Baldursson on “Iceland’s programme with the IMF 2008–11”

During the global crisis, Iceland was hit by the biggest banking crisis any country has ever suffered. Over at VOX, Friðrik Már Baldursson reviews the role of the IMF in Iceland’s recovery.  He argues that the IMF program, though not perfectly designed, was successful -- Iceland re-entered the capital markets less than three years after the crisis.

I’ve blogged about Friðrik here at the Lounge before: he is the dean of the school of business at Reykjavik University and was my host during a recent trip to Iceland to discuss banking reform and the political process.

Society of Socio-Economists Annual Meeting

The Missing Link: Possible ABA Placement Benchmarks

Sunday afternoon (11/06/2011), Prof. Ralph Brill (Chicago Kent) sent out an e-mail over the lawprof list about a proposed revisions to the ABA Standards that would add job placement benchmarks to the ABA Standards. Brill said that the Council of the Section of Legal Education and Admission to the Bar was consider to consider the proposal at its December meeting. He also gave a link to the list of the members of the Council. 

Don't try to find the proposal on the ABA website. Brill provided a link to the proposal on the ABA server, but that link no longer works.  I know that it did work, because I downloaded the proposal at about 12:30 CST on Monday (11/09/2011). But, when I checked the URL at about 7:00 pm on Tuesday (11/08/2011), I got the bad link message. Given that the link had worked earlier, the message seemed particularly ironic:

Our Apologies

This page is not available.

So.  The proposal was there.  Now it's not.  I suppose there could be many explanations:

• When I downloaded the pdf, my browser deleted it from the server.
• There is a bad spot on the hard drive.
• Oops! We didn't want the public to know about that before the meeting.
• The Council got some heat about proposing new Interpretations of the Standards without going through the usual process. Presumably, the Council planned to give notice, and an opportunity to comment, before it adopted the proposal. But what about the ongoing review by Standards Review Committee?

Perhaps the oddest thing in all of this is that, so far as I can tell, the blog-o-sphere has not weighed in on this.

Law Schools: Reform Them? Or Regulate Them?

Some thoughts here, penned by Washington and Lee law professor Ben Spencer.

Welcome to the Blogosphere

In recent days we've been joined in the blogosphere by The National Law Journal's Law School Review (A Forum On Legal Education).

From Karen Sloan's initial post dated October 27:

Welcome to The National Law Journal's Law School Review, which is an online forum examining the current state and future of legal education. We want to address the question, "Are law schools in crisis?" If the answer is yes, what are the most pressing problems and how should educators and regulators address them? If the answer is no, what is it that law schools are doing right? Is this enough to ensure their future viability? We have assembled a panel of experts to share their thoughts on the subject (see the roll call of contributors on the right), and we hope to create a robust dialogue and exchange of ideas.

The list of contributors includes William Henderson, Brian Tamanaha, Michael Olivas, and others. 

You'll find the home page link here.

Hey, Maybe Aliens Will Buy Europe!

Via Kindred Winecoff, at IPE@UNC.

  

War And Dishonor Revisited: Greece Edition

 In light of the decision taken last week in Brussels to impose a 50% (nominal) haircut on that portion of the Greek debt stock still left in the hands of private creditors, the post below, from April 2010, makes for interesting reading. 

April 26, 2010

The Greek Bailout: War Versus Dishonor

 As I noted in my last post on this topic, this week will be an important one for the European monetary union.  So I asked the Lounge’s informal counsel of sovereign debt experts for their views on what sorts of questions we should be asking now that Greece has asked for aid, and the market still appears unappeased.  Mitu Gulati (Duke) started us off by asking some pointed questions about the terms of the Greek bond contracts, arguing that, when times are good no one cares about the contracts.  But, he says, things look bad enough now that these issues should matter to debtholders (and to Greece).  Below, Lee C. Buchheit, a partner based in the New York office of Cleary Gottlieb Steen & Hamilton LLP, joins the fray:

At this point, it is worth asking how the "no debt restructuring" scenario is supposed to play out.

Is the theory that Greece will draw down on the EU/IMF bailout money to cover maturing debt obligations and budget deficits while the fiscal adjustment takes hold and, at some point in the not-too-distant future, the markets will be prepared to resume lending at moderate coupons?

If so, a couple of observations:

The bailout fund will need to be larger than EUR 45 billion.  Once the country starts suckling on the bailout fund, it may be some time before it can be weaned.

The market's nostrils are visibly flaring with the whiff of debt restructuring on the air.   They will not, I suspect, be easily or quickly persuaded that the crisis has passed.

The worst case scenario here is one in which the bailout money is exhausted in an effort to "brass it out" (as the English say), only to find that a debt restructuring cannot in the end be avoided.   Why?  Because those resources might have been used in some creative way to facilitate the debt restructuring (remember Brady Bonds?), or at the very least to backstop the local deposit insurance scheme or recapitalize local banks that are adversely affected by the restructuring.   A sovereign debt restructuring with no fresh money behind it is both a harder and an uglier thing to complete.

This then is the dilemma of the moment.   Should the bailout money be spent paying maturing debt obligations in full and on time until it is exhausted, or should it be husbanded and used to support a debt restructuring of some kind?

One is reminded of Winston Churchill's verdict on Neville Chamberlin's policies in 1939:

"You were given the choice between war and dishonor.  You chose dishonor and now you will have war".

-- Lee C. Buchheit