Analyzing Moody's New Report On Law Schools

Earlier this week, Moody's Investors Service issued a report entitled Law Schools Challenged to Adapt to Fundamental Changes in the Legal Industry.  They offer three crucial take-aways:

1. "Fundamental shift in the legal industry contributes to shrinking applicant pool and heightened competition."
2. "New tuition pricing strategies [read: transparent price cuts and discounting] provide short term solutions but don't alter cost structure."
3. "Business model changes will be essential for long-term sustainability, particularly for standalone law schools and those without strong brands."

I found a few of their comments particularly interesting.  First, Moody's is not completelysold on what they note is the Brooklyn/LaVerne/Penn State/Iowa approach: the use of transparent price cuts and discounting as a survival strategy.  They worry both that  the price cuts could tamp down revenue too much and that there are serious reputational dangers to cost cutting.  "Many students still associate price with quality."  

Perhaps this is a virtue of the Penn State "scholarship" strategy - as compared to the Brooklyn/LaVerne/Iowa sticker cut strategy.  In any case, I think that price cuts at public (or apparently public) schools like Iowa and Penn State are less dangerous reputationally because  many consumers may associate low price with generous legislators - rather than poor quality.

I also appreciated the fact that, unlike the WSJ,  they ignored outside ranking organizations and instead clustered law schools into four groups, based on job placement.  For this purpose, Moody's used the number of students in JD or JD advantage jobs, full or part-time, long or short-term.  (We can infer they included school-funded positions.)    Using this method,  the top quartile of schools (including all the super-elites) placed at least  84.1% of grads; the second quartile placed between 78% and 84%; the third quartile placed between 71% and 77%; and the lowest quartile placed less than 71% of graduates.  

Finally, the report points out what we already know: standalones are under extra pressure.  Moody's has downgraded Vermont and New York Law in the last year.  It suggests that these (and other schools) will need to diversify offerings.  It also notes that new partnerships and affiliations are on the rise.  Thus we have been treated to the WMU Thomas M. Cooley Law School.  Moody's points out that large, wealthy schools can "withstand enrollment challenges for a much longer period" - but does not opine on the bigger question: what will the smaller, poorer universities do?

The most important aspect of this report is that it will land on the desks of these university presidents who will now approach their law school problem with a fresh,  objective analysis.  I wonder what a similar Moody's report will look like five years from now.

Update: I have posted the list of schools in the first quartile here and the second through fourth quartiles here.

H/T WSJ Law Blog.

Comments

[Ben Barros]

For point one, they add only this statement: "The current decline in demand reflects a fundamental shift in
the legal field, rather than the typical cyclical rise and fall in demand." Any lawyer or law student should notice that there is no support whatsoever offered for this statement. It may or may not be correct. My view is that it likely is not correct. But I've never seen anyone offer any actual evidence in support of it. There are a lot of just-so stories out there, but no evidence.

[Chip]

A lot of the report is probably not all that shocking for anyone who has been following this news for a while. The most interesting statement, I thought, was that students associate sticker price with quality, and therefore price cuts won't work in the long run. I think that has perhaps historically been true. But I wonder if it is true any more, either at law schools over the last three years or so, or more generally at any higher ed institution these days? Anecdotally, I think the opposite is true at this point, but I have no data. I wonder if the Moody's folks really looked at it in the present circumstances or just trumpeted a truism from the past.

[JillyfromPhilly]

The first bullet point in the Report:

"Fundamental shift in the legal industry contributes to shrinking applicant pool and heightened competition. The current decline in demand reflects a fundamental shift in the legal field, rather than the typical cyclical rise and fall in demand."

Either Moody's has joined the scam blogger movement or law school apologists may want to rethink their blame the recession argument.

If there has been a fundamental shift in the legal field, how much value should prospective law school applicants place on the Simkovic and McIntyre study based on pre-2008 graduates?

[Ben Barros]

Jilly, see my comment above. I'll re-think things when someone actually provides some evidence. My impression is that Moody's is just buying the Henderson et al. argument without any analysis.

[terry malloy]

I've been saying it for years now:

When the bond rating agencies get involved, you're toast. When institutional investors can't hold your debt due to its rating, things get dire very quickly.

Bond ratings agencies close the barn door after the horse leaves. (see, e.g., the mortgage crisis "these deals could have been created by cows")

[ZDT]

Well, I hope we can at least agree that the authors of the Moody report, unlike Simkovic, are probably not self-interested.

[JillyfromPhilly]

Ben,

How is this for evidence?

"For more than thirty years, the percentage of the American economy devoted to legal services has been shrinking. In 1978 the legal sector accounted for 2.01 percent of the nation's GDP: by 2009 that figure had shrunk to 1.37 percent-a 32 percent decrease."

See: The Crisis of the American Law School, by Paul Campos

[Barry]

Ben?

[Barry]

Ben: " But I've never seen anyone offer any actual evidence in support of it. There are a lot of just-so stories out there, but no evidence."

The last plot I saw showed the separation of GDP growth vs. growth in legal services as starting in 1991. This is now almost a quarter-century old phenomenon.

Ben Barros, a law professor, professes ignorance. I think that anything else he states should be seen in that light.

[EIC]

Jilly - That data spun another way: In 1978 the legal sector accounted for $128 billion, by 2009 that figure had grown to $200 Billion, a 56% increase. (in inflation-adjusted 2009 dollars).

[Barry]

EIC, that's a 1.4% increase (compounded over 31 years). The USD has been growing at what? - 2%? 2.5%?

The legal sector is growing more slowly than the overall US economy, and has been for decades.

BTW, assuming no productivity growth, that a 56% increase = a 56% increase in the number of lawyer jobs over 31 years, it's clear that law schools are waaaaaaaaaaaaaaaaaaay overproducing, and have been for quite a while.

[Ben Barros]

Jilly, 2009 was the middle of a very deep recession. You wouldn't pick that as an endpoint if you were trying to prove that it is structure and not cycle. Plus, what EIC says. Barry, if it a quarter-century old phenomenon, then we should have been seeing a quarter century of job declines. That's not what we saw. Instead we saw employment stats that basically follow the economy, as you would expect if the cyclical position is correct. Saying that it is a quarter-century long phenomenon undercuts the idea that the poor job market of the last few years is the result of structural change. So thanks for supporting my position.

[EIC]

Barry - I'll just quote myself from above "in inflation adjusted 2009 dollars."

[Brian Tamanaha]

Ben,

Bernie Burke provides ample data showing the shift is structural: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2309497

"What's New About the New Normal: The Evolving Market for New Lawyers in the 21st Century"

Brian

[JillyfromPhilly]

EIC,

Does it really matter that GDP increased in real dollars over 31 years when it's relative worth to the overall economy has declined substantially?

Ben,

The recession ended in June 2009. Please feel free to direct us toward a post recession year where growth in the legal sector mirrored or surpassed that of the overall economy. Even better would be a year where the legal sector grew at such a rate that it absorbed the thousands upon thousands of unemployed/underemployed law graduates from prior classes that are drowning in debt.

I would also be interested in statistics that show the percentage of legal service spending that went to large law firms in 1978 vs. today. My guess is that a substantially greater percentage of money is currently directed to large law firms than 10, 20, 30 years ago. That would leave non-biglaw lawyers with a substantially smaller share of a substantially smaller pot (in relative terms) than their predecessors, which would be consistent with a lot of the "just-so stories out there."

[JillyfromPhilly]

Edit

That should read: Does it really matter that legal sector spending has grown in real dollars over 31 years when it's relative worth to the overall economy has declined substantially?

[EIC]

Jilly - I see no reason to care more about the legal field's "relative worth to the overall economy" than about actual spending on legal services. Measuring GDP share is useful sometimes (especially when comparing fields and making macro-level inferences), but if you're primarily interested in the health of one sector, looking at spending in that sector is almost certainly more insightful.

Don't get me wrong - I think there are plenty of challenges facing the legal profession - I just don't think pointing out the decrease in proportion of GDP spending related to the legal field is particularly useful. In fact it obscures the fact that, during the time period you mentioned, the field enjoyed slow and steady real dollar growth in expenditures.

[Ben Barros]

Jilly, okay, the end of a recession is an even worse endpoint to pick. Plus, even though we have been technically out of a recession, job growth has been relatively weak throughout the economy. Could you elaborate on the big law point you are making? Even the percentage for big law has increased, it could be because the big firms are just bigger now. More broadly, is there anything else you (or anyone else) can point to? These comment threads can get snarky, and I don't mean the question that way. I don't see any evidence out there, but am very interested to see any evidence that anyone can point to. Especially anything more fine-grained than percentage of GDP.

[Former Editor]

Ben,

Jim Leipold's remarks in the NLJ article in April ("We're not going back to 2006 anytime soon") seem to provide some support that we are looking at systemic change rather than a cyclical downturn which will return the market to where it was in a few years. I'm not sure how much weight you want to give NALP's executive director, but I'm willing to assume he based his opinion on more than just so stories.

[anon]

Ben:
You say "if it a quarter-century old phenomenon, then we should have been seeing a quarter century of job declines. That's not what we saw. Instead we saw employment stats that basically follow the economy, as you would expect if the cyclical position is correct."

Over the past twenty five years, has the percent of law grads finding LTFT JD required work fluctuated in keeping with changes in the growth, GDP, etc.? Do you have a quick cite on that?