March 3, 2013
Higher Education
Higher Education is Still a Very Good Investment-Becker
Posner gives an excellent discussion of the economics of legal education. Although many reforms seem eminently desirable, such as reducing law school programs from three to two years, I am optimistic that the demand for lawyers will pick up again once the American economy returns to long-term growth levels. The US remains a litigious society, and the number of laws and regulations to be litigated are increasing, not decreasing.
Some reputable individuals are claiming that the advantages of a college education more generally are greatly overblown, and that many of the students who now go through 4 years of college are wasting their time, and their own and their parent's money. Yet an examination of the evidence shows conclusively that for average college graduates, their education is a much better deal even after 4 years of slow growth of the American economy than it was a few decades ago.
Tuition and fees for college education in general, as for law schools, have grown sharply since 1980: more than doubling in real terms for 4-year private colleges and universities, and also for 2-year private colleges, and public colleges and universities. Private schools have greatly increased their scholarships and other financial support over this time period, so the net increase in tuition is somewhat less. But no question the growth in tuition has still been substantial.
However, even at elite private universities and colleges, tuition is only about half the total cost of a college education. The remainder of the costs is the earnings foregone resulting from being in school rather than working after finishing high school. These costs have hardly grown at all since the earnings of high school graduates have been rather flat in real terms. Therefore, the total cost of a college education has grown by about 50% since 1980, still a lot, but much less than the growth in tuition.
Offsetting this increase in costs has been the sizable growth in financial gains from getting at least 4 years of higher education (as well as gains in health, marriage, and other dimensions that I will not discuss). The earnings of the average person with at least this much education have grown during past 30 years from being about 40% higher than those of the average high school graduate to being over 80% higher. This sizable growth in this earnings advantage implies that a 4-year college education has remained a good deal for the average student. Indeed, it has even become a better deal. By that I mean that the average lifetime financial gain from going to a 4-year college program has grown significantly, even after subtracting the increase in net tuition, and that the rate of return on such an education has not decreased over time.
Some critics of higher education have mentioned the growth in the unemployment of men and women with a higher education during the financial crisis and recession. The unemployment rate of persons with a bachelor's degree or higher has grown, from about 2% in 2008 to just under 4% at the end of 2012. However, its growth has been less than that of persons with lesser education. For example, the unemployment rate of high school graduates grew from 5% in 2008 to over 10% in 2010, and fell back to 8.3% by end of 2012. In fact, the unemployment rate of persons with at least a bachelor's degree is even now less than were the unemployment rates of persons with lesser education before the crisis struck.
Persons with less than four years of college do not earn much more than high school graduates, and their unemployment rates are only a little lower than that of high school graduates. Therefore, starting but dropping out of college is not a good deal financially. Yet about half of all men and women who start college fail to get a 4-year bachelor degree, and that is a real problem.
Four years of college education remains on the average a very good investment for students who can manage to pay the higher tuition costs that schools now charge, even net of higher scholarships and other grants. The aim of the federally subsidized student loan program is to help students who cannot afford the costs of higher education, but many college graduates do not earn a lot, and have large interest and principal repayments on their student loans. As a result, many of them default on their loans, although the biggest defaulters are those who went to two-year college programs, especially proprietary schools.
This is not the place to go into details about ways to make student loans less onerous for persons who are not earning a lot. One possibility is to make interest rates contingent on earnings, so that higher earners are charged more per dollar of loan than lower earners. This has the risk of mainly attracting individuals who do not expect to be earning a lot, but a well-designed loan program may be able to fix this "adverse selection" problem.
Finding a more efficient student loan program may help increase the number of students who take advantage of the large financial, health,marriage, and other gains from 4 years of college education. Increasing the number of these students should be a major goal of American higher education policy.
Some Economics of Higher Education—Posner
A recent public statement signed by a number of law professors makes a variety of criticisms and suggestions regarding law school education, but there may be implications for higher education generally.
Here are the key assertions in the statement:
"Over the last three decades, the price of a legal education has increased approximately three times faster than the average household income. With the help of the federal student loan fund, some ninety percent of law students borrow to finance their legal education and the average debt now exceeds $100,000. More than one third of current students will graduate with debt above $120,000…The price of legal education has risen as the job market for lawyers has declined. Over one third of law graduates in 2011 did not obtain jobs as lawyers; the median starting salary of the class was $60,000…A graduate who earns the median salary cannot afford to make the monthly loan payments on the average debt. Thousands of law students are forced to enter Income Based Repayment (IBR), a federal debt relief program that allows reduced monthly payments, but with significant negative consequences for debtors and taxpayers…The price of legal education substantially affects access to the profession. The out-of-pocket cost of obtaining a law degree ranges from $150,000 to $200,000 or more for many law students…A recent report found only half as many entry level job openings as individuals passing the bar. Most knowledgeable observers believe that the situation is unlikely to improve even if the economy fully rebounds. More employers are relying on paralegals, technology and contract attorneys to do work previously performed by recent graduates, and cash-strapped public sector agencies are facing pressure to curtail legal expenditures…Law schools are themselves in an increasingly difficult financial position. After years of uninterrupted increases in enrollment and tuition, they now face a sharp decline in applicants. As it becomes harder for law schools to fill classes with quality students, all but the wealthiest institutions will face pressure to cut expenses. Yet at the same time, preoccupation with the annual ranking of schools by U.S. News and World Reports gives schools a perverse incentive to spend more in areas rewarded by the U.S. News formula. Two examples are expenditures per student and faculty-student ratios, which have risen dramatically in the decades since the rankings went into effect. Schools also have incentives to provide merit scholarships to attract students with high median GPA and LSAT scores, even though these applicants are unlikely to have the greatest financial need. Schools can do better in the rankings if they spend more in ways that could enhance the school's reputation. The combination of rising costs, declining applicants, and perverse incentives puts the financial survival of some schools in question…Legal education cannot continue on the current trajectory. As a profession committed to serving the public good, we must find ways to alter the economics of legal education. Possible changes include reducing the undergraduate education required for admission to three years; awarding the basic professional degree after two years, while leaving the third year as an elective or an internship; providing some training through apprenticeship; reducing expensive accreditation requirements to allow greater diversity among law schools; building on the burgeoning promises of internet-distance education; changing the economic relationship between law schools and universities; altering the influence of current ranking formulas;*** ***and modifying the federal student loan program…"
If legal education were an entirely private activity, neither regulated nor subsidized by government, an economist would describe the situation as one in which a fall in demand required sellers to move down their maginal cost curve in order to charge a price that covered their marginal cost; that is, their demand curve would intersect their marginal cost curve at a lower point, implying a lower price (and also lower output). The demand for legal education is a derived demand from the demand for lawyers; if the demand for lawyers drops, so does the demand for legal education. If law schools fail to make a price adjustment, applications will plummet.
But they can lower price only if they reduce their costs. The problem is that by reducing costs, they reduce demand, because the perceived (though not real) value of a legal education is dependent on those costs as refracted through the lens of U.S. News & World Reports, which publishes a highly influential ranking of law schools. That magazine gives weight in its rankings to factors that actually bear no relation to the quality of a legal education, including the faculty-student ratio (important in some types of education but not in legal education) and the law school's expenditures per student. In addition, accreditation of a law school depends on such additionally irrelevant factors as the size of a law school's library even though all research relevant to the study of law by students can be conducted online.
The factors valued by U.S. News & World Reports are costly, but the federal loan program enabled the law schools to raise tuition, in part it seems because many law school applicants, inexperienced in financial matters and afflicted with the overconfidence of youth, underestimated the cost of a legal education. They are beginning to wise up and as a result the number of applicants to law school has plummeted—by about 50 percent in the last decade.
The obvious solution for the law schools is to reduce the size of their faculties and/or reduce faculty salaries. Although most law faculty are tenured, and so their salaries cannot be reduced, they can be laid off for economic reasons and, in lieu of being laid off, can agree to a salary cut. Law professors tend to be paid very generous salaries, especially relative to the amount of work demanded of them compared to the sweatshop hours of practicing lawyers and the intense competitiveness and resulting employment uncertainty in the law firm market nowadays. And law professors derive greater utility from their academic careers, quite apart from working conditios, than they would as practicing lawyers.
If law schools were permitted to cartelize, they might well embrace the downsizing that I have described as a solution to their economic dilemma. But they are not permitted to cartelize, and this creates hesitancy. The first law school to downsize will attract unwanted attention and, if none or only a few follow suit within a short time, its rankings in U.S. News and World Reports will nosedive. Law schools also have to worry about the possible adverse reactions of the accreditation authorities. Then too there is the hope that if enough law schools do take substantial measures to balance supply and demand, the law schools that do not will benefit, for example in being able to attract more of the affluent applicants to law school plus the applicants (often the same people as the affluent) who by virtue of native ability or a superior college education are likely to do well even in a very challenging legal marketplace.
What seems plain, however, is that the law school market is not in equilibrium; that it will move, quickly or slowly (probably the latter), to a new equilibrium; and that the new equilibrium is likely to involve smaller faculties and student bodies, a lower ratio of faculty to students, cheaper methods of instruction such as online, lower tuition, and perhaps looser (or no) accreditation standards, a reduction in the length of law school from the present three, to two, years, and the elimination of federal loans to law students.
The concerns flagged by the law professors' statement that I quoted at the beginning of this piece are mirrored elsewhere in higher education in the United States. College and university tuitions have soared in general and many graduates are unable to find jobs in the fields that they thought their education was preparing them for. Students who do stay the full four years of college appear to obtain little economic advantage from college. U.S. News and World Reports' rankings are influential in other branches of higher education besides law, in particular its rankings of colleges, exerting pressure on colleges and universities to increase tuition, and increasing the dependence of students on federal loans. Reforms similar to those proposed for legal education may be necessary for other branches of higher education as well.