Law Schools Under Fire From Graduates

"Take care when you fight with monsters that you do not become one in the process. And when you gaze into the abyss, the abyss also gazes into you."
~Friedrich Nietzsche

The Wall Street Journal recently reported that graduates of Thomas M. Cooley Law School and New York Law School have filed lawsuits seeking class action status against their respective law schools. As plaintiffs to the lawsuits, the graduates of the defendant schools are seeking $250 million from Cooley and $200 million from NYLS for tuition refunds and various other damages. Furthermore, the plaintiffs want law schools to reform the way they report their graduates' employment numbers.

The three plaintiffs against NYLS and four plaintiffs against Cooley have filed the lawsuits because they claim their respective law schools are engaging in a "systemic, ongoing fraud that is ubiquitous in the legal education industry and threatens to leave a generation of law students in dire financial straits", according to both suits. The lawsuits further allege that the schools have distorted information regarding the employment of post-graduates and that the reported amount of graduates' average salaries is inflated owing to the process by which the schools receive that information from post-graduates.

The lawsuits come amidst a growing national debate regarding the value of a higher education. The debate is getting more and more intense with the question being raised as to whether there is a financial bubble in higher education. As the lawsuits against Cooley and NYLS portend, people are starting to ask why law schools continue to pump out graduates when there are fewer and fewer legal jobs available.

Do law schools have an obligation to decrease their class sizes when there is a "blimp in the backyard" of rampant unemployment for legal professionals? Maybe not, but try telling that to the recent law school graduate who finds herself working at a grocery store stocking shelves for nine bucks an hour while trying to pay off over $100,000 in student loans.

As an adherent of the Austrian school of economic theory, I believe we have to take an honest, serious look at higher education in America. Owing to the pervasive use of student loans and the federal government being involved in higher education, we now have a situation where many young people are graduating from colleges and law schools and are unable to find meaningful work. The easy credit and accessibility of student loans has in effect clouded the value of college degrees.

According to "Essential Economics" by Matthew Bishop, Austrian school economist Friedrich Hayek "argued that the business cycle originated from expanded credit creation by banks, which was followed by firms and people making mistaken capital investments in producing things for which the market turns out to be smaller than expected." Ergo, law schools are continuing to pump out graduates in a dismal labor market thanks to easy credit and perceived future demand by prospective students.

And so, now we have well-trained armies of disgruntled, broke law school graduates who are naturally looking for financial compensation. Why then not sue the law schools themselves? Unfortunately, like the "broken window fallacy", lawyers suing the law schools they attended is not really creating any added productivity and also does not look very good. Production here is really the name of the game, and when we support a system that is counter-productive, everyone will be at a loss. Lawsuits should be a genuine way of seeking financial and just relief; the system does not work as well when citizens view their fellow citizens as possible ATM's thanks to an increase in lawsuits. A fiscally cannibalistic society is going to have trouble growing if it not only consumes the produce of labor, but also the producers of the produce themselves. American society needs to get back to productivity.

Unfortunately, we may never know the actual value of a law degree in today's market. Though a law degree may cost a student over $100,000 in student loans, that law degree may only really be worth $25,000 to $30,000 in the true marketplace. Thanks to easy credit, the value of a law degree appears to be greatly inflated and younger generations are the ones left with the bill for worthless degrees. It seems to be quite a considerable waste of money, time, energy, and human capital.

Maybe if student loans had been left to a free market, banks and financiers could have taken a greater role in dispersing student loans. Banks and financiers could have done their own investigation and research and could have dispersed funds accordingly. In other words, banks and financiers could have gauged the labor markets and not loaned funds to prospective law students who may not have succeeded in the legal marketplace. Now, thanks to federal guarantees and state intervention, it appears we are stuck in a situation where we have a shortage of doctors and a surplus of lawyers. This is nearly like what happened in centrally-planned economies such as the USSR where there would be a surplus of work boots but a shortage of undershirts. Had the free market been allowed to run its course to match worthy students with efficient educational programs, perhaps we would all now be better off.

The issues of law school, student loans, and a higher education bubble make up only one piece of a greater socio-economic quagmire. Going forward, we are most likely going to need radical solutions to a radical problem. One possible solution would be to simply liquidate or privatize law schools to help make up for losses in student loans. But this may be impractical as cutting jobs for professors and staff would lead to greater unemployment and would only add to the distress of an already fiscally-disoriented populace. Nevertheless, as the benefits of inflated prices have passed from students to the law schools themselves, federal and state governments may begin to look to the law schools to make up for the financial difference.

Another possible solution is the route of the plaintiffs against defendants Cooley and NYLU. We could simply allow the issue to be resolved in the courts. However, we have to wonder how much the courts and society in general would sympathize with recent law graduates. And what happens when most, if not all, law schools are sued by recent graduates for their alleged practices? Does the price of a law school education skyrocket even higher to make up for the legal costs in a manner similar to cigarette prices? At some point, someone is going to have to face up to these past costs and this mountain of student loan debt. And if there is a bubble, at some point it will burst.

Another possible solution would be for state governments to attempt to softly land the cost of law school by requiring less schooling for potential lawyers and possibly phasing out law schools altogether. There was a point in time in the past where a law school education was not necessary to become an attorney, and this may be returning. In the state of Ohio, Gov. John Kasich has ordered four-year universities to prepare "pathways" to three-year degrees to lessen the amount of time students spend in college. A similar process could be adapted for law schools. In the alternative, state governments could completely remove the requirement of law school training and move towards an apprenticeship requirement. But would this only encourage many others to get law licenses as getting a law license would be easier? Would this only increase the pool of attorneys looking for work?

Another possible solution would be to institute some sort of "student loan bailout" given the gross and ugly nature of this higher education quagmire. Many law students are now sitting on a big pile of debt with no hope for upward career mobility. I would normally say that individuals should bear the risks they take on with investments, but in the case of law schools, if law schools really did manipulate information as advertised, then law students appear to be victims of a pyramid scheme of sorts. As such, perhaps a student loan bailout would be just.

If demand for a law degree falls off a cliff in the near future, we could be in for an even greater mess as the investment in a legal education loses credibility. As the marketplace bends towards making a legal education appear to be futile, this could have an adverse effect on future commerce and could make for a serious societal crisis. If the value of a law school education collapses, what does this say about our legal system and justice as a whole? The legal system is a self-regulating profession. If a majority of lawyers lose faith in the legal system, what effect will this have on the greater society's faith in the legal system?

We need to find a viable solution to the higher education issue sooner than later. Law school issues make up only one piece of a bigger pie, but it's a critical piece of the pie, having far-reaching societal implications. No matter what solution our government and our society agree upon, it is important that we maintain a level of credibility and integrity in our education system. This includes maintaining a level of credibility and integrity in law schools and our legal system.

In short, we need to get people working, and we need to allow people to be productive. We can do this by allowing the free market to run its course -- in particular, with higher education. Perhaps with time, the free market can work to correct some apparent imbalances in our legal, societal, and financial systems. But until that point, all that many recent law graduates have to show for all their time and labor is a big, burdensome pile of debt. Law schools and American higher education can do better than this. As for the future of American law schools, let's let the market decide.

ACTION ITEMS:

Bullish:
Traders who believe that higher education has taken some hits lately in the news, but will remain stable might want to consider the following trades:

• Go long on McGraw-Hill Companies, Inc. MHP.

• Go long on the PowerShares DB US Dollar Index Bullish UUP.

Bearish:
Traders who believe that a law degree is going to be worthless in a few years and that many law schools will have to close their doors may consider an alternate positions:

• Short Thomson-Reuters Corporation (USA) TRI.

• Also short Reed Elsevier NV (ADR) ENL.

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