Law School Economics 101: Part I: Clearing the Ground

 
Goaded by sensationalist stories in the popular press, the blogosphere has largely described the business of legal education as a scam. Among the allegations are that law schools are “cash cows” for their universities, transferring large sums of tuition dollars to their central administrations at the expense of student education. It’s time to set the record straight. In so doing, I address only private law schools. I don’t know enough about state law schools (all of which have public financial records) to comment.

I don’t deny that there are some law schools that may overpay their universities, even at student expense. But I suspect they are few and far between. Law school applicants are quite sophisticated consumers these days, and they readily compare the educational offerings of law schools they’re considering. Law schools that are regularly looted by their universities show it in their programming, their student-faculty ratios, their library collections and services, and in basic student services like career counseling. Any student worthy of admission to a good law school has the intelligence and information to evaluate all of these. Ultimately, they judge law schools by the services they provide.

It is no answer to say that law schools (at least private law schools) don’t necessarily disclose their budgets. Neither does the company that makes Snickers bars; you buy a Snickers bar because you think it’s a fairly-priced quality treat. In the same way, law schools don’t need to disclose their budgets in order for students to be able to evaluate their offerings. That doesn’t mean that we engage in deception or fraud.

At the same time that budgetary disclosure is unnecessary for applicant evaluation of law schools, misleading or fraudulent disclosures regarding student selectivity or job placement outcomes are wrong. These are matters that no applicant can judge if not properly disclosed, and they are a reasonable, although incomplete, proxy for law school quality. While the press has revealed a few bad stories, most of us are straightforward and honest. And of course we have every incentive to be honest. The most important asset a law school has is its reputation. Revealed dishonesty destroys that precious and hard-won quality.

Now, there are law schools (I once taught at one) at which, for a time, the university may take more than what we normally consider its fair share from the law school. But this also does not necessarily suggest a scam. When this occurs, it often is in order to support other needs of the university that make it (and thus the law school) stronger. Good university presidents can and do ensure that after a law school makes an unusually large contribution to the university community, it is recompensed over time. The result can be (and was in my case) a higher quality university, better undergraduates, and a far more appealing campus. Whether or not these improvements result in an immediate increase in the law school’s rankings, they do help to ensure a steady flow of high quality students and thus the security of the law school’s reputation and financial future.

Much of the hoopla has involved stand-alone law schools where there are allegations that the schools are enriched by overcharging students for poor services and poor job prospects. It is usually, although not always, the case, that stand-alone law schools tend to be ranked in the lower tiers. But that of course is apparent to students, as should be the quality of their faculties (which still can be quite high), students, and, assuming honesty, job placement history. Even if the latter is not fully-disclosed, I doubt that most law students applying to third and fourth tier law schools are naïve about their prospects after graduation, whether in a good economy or a bad one. And in fact some of these schools are a mainstay of the local bar in their city or region, and job prospects (aided by strong alumni networks) are just fine for students who want to practice there.

But the bigger question is the incentives these schools have to lie, cheat, or steal. Leaving aside a few bad examples (which in at least one case involved a marginal law school that undoubtedly is fighting for survival), stand-alone law schools (at least those that are not proprietary – that is, operated “for-profit,”) are non-profit institutions that, by law, cannot distribute their money – and, by the way, they have nobody to whom to distribute their money (there are no owners or shareholders). By law, the school's revenues must stay within the school. So what is the incentive to “steal” from students? Well, perhaps the president or dean of such a school (who typically are the same person) will be more highly compensated than peer deans at university law schools but, in my examination of this question, not so disproportionately so as to suggest the need to defraud students. And I suppose with presidential responsibilities, they have to do a little more work than the rest of us (hard as it is for us deans to imagine).

Is the faculty overcompensated? There’s a fairly easy way to check. Each non-profit institution is required by the IRS to file a Form 990. You can find them here: http://foundationcenter.org/findfunders/990finder/. These forms give you the names and salaries of the “key employees” and up to the five highest compensated employees at a not-for-profit institution. In a university, it is possible that nobody at the law school reaches that level. (There are, after all, university presidents, provosts, medical faculty, football coaches, and the like.) But at a stand-alone law school, only the law school administration and faculty will be reported, so you can see how much the highest-paid make. The 2009-2010 average annual salary of a law school full professor was just over $134,000. http://chronicle.com/article/Chart-Average-Faculty/64500/. The Chronicle of Higher Education publishes this information every year, as do blogs like Brian Leiter's. http://leiterlawschool.typepad.com/leiter/2010/06/average-faculty-salaries-across-disciplines.html.

Now, I have to remind you that $134,000 for a full professor is the average and, in my experience, is very low. Averages in the middle to high $100Ks and, on occasion, the low $200Ks, are more common among the best private law schools, especially those of national stature or realistic aspiration to national stature and located in urban areas. Sometimes individual faculty members can earn considerably more. But rarely is this by a factor of more than 1.5, and those salaries are paid quite selectively. Nonetheless, given the opportunity costs of most law professors (big law firms, big money), one would hardly consider this to be lavish compensation for the hard work they do, and the notion that law schools systematically would bilk students to “enrich” these professors is almost laughable.

So where is the incentive to “steal” from students? There doesn’t appear to be any. If law school is expensive, the reason is that it is very expensive to run a law school. So, in my next posting, I will present a “Case” study in Part II of Law School Economics 101.