Legal Profession in Crisis? Law School Bubble, Weak Job Market Signal Precarious Changes

Recent news stories suggest that the legal profession is reacting to the fact that the law school bubble has popped. I have previously discussed how the law school bubble is a subset of the higher education bubble. In this way, unlike a bubble in real estate, dot-coms, or tulips, the law school bubble is especially precarious owing to the fact that the bubble itself is intertwined with the court system and the rule of law in civil society.

On the Freakonomics blog on Wednesday, Stephen Dubner linked to an article from the New York Times discussing how new lawyers in New York will have to perform 50 hours of pro bono work in order to be admitted to the bar. Per the New York Times, New York's Chief Judge Jonathan Lippman said "the move was intended to provide about a half-million hours of badly needed legal services to those with urgent problems, like foreclosure and domestic violence". The measure may be controversial owing to issues of "whether mandatory pro bono service is the right solution and because it could hit the pocketbooks of young lawyers at a time when they are struggling to find jobs."

Regarding the measure, Pro Bono Institute president Esther Lardent said, "I worry about poor people with lawyers who don't want to be there." Freakonomics' Dubner commented that he "wouldn't be surprised if the new measure produces a few unintended consequences" such as discouraging attorneys from applying to the New York bar and/or spurring possible deceptive legal practices with respect to assisting citizens in need of legal service. An important dimension to the issue is the fact that it appears to lay an additional burden on young attorneys attempting to make their way in a weak labor market with significant debt burdens. The measure could be seen a move in the right direction for providing citizens in need with legal aid, but one cannot help but notice economic issues with the theoretical idea that mandating pro bono work for struggling, indebted law school graduates will bring about the desired results.

The New York bar pro bono move comes at a time when the legal profession finds itself in a precarious situation. Marketplace's Amy Scott reported Tuesday that the job market is leading to a decline in law school enrollment. In discussing the University of California Hastings College of Law, Scott's report suggested that enrolling too many students would be "irresponsible" in light of the weak legal labor market.

According to UC Hastings law school dean Frank Wu, enrolling more students "would mean taking far too many students who would really have a risk of not being able to find a job." Per Law School Transparency co-founder Kyle McEntee, a handful of law schools are cutting class sizes. McEntee: "I think in two years, we're going to see a lot more schools cutting enrollments, not because they it's the right thing to do, but because they have to." On the topic of UC Hastings law school's situation, commenters on the Inside the Law School Scam blog discussed issues related to professor layoffs and students struggling with loan debt. From the blog: "What's going on at Hastings is merely a preview of coming attractions all across the nation."

Changes in law school enrollment come with the backdrop of an apparent law school bubble that an economist might argue has the potential to level and/or compromise the entire American legal profession. According to the Atlantic's Jordan Weissmann, there is reason to believe that the law school bubble has finally popped. In late March, Weissmann argued that a significant drop in the number of Law School Admission Tests (LSATs) administered in the past admissions cycle signaled that the law school bubble is bursting. Weissmann: "[T]he legal industry is stagnating, and suffers from a severe overabundance of young graduates, many of whom applied to law schools under the false pretenses that their degree would be an express ticket to a six figure salary. Instead, many graduates are now contending with six figures of crushing debt and murky career prospects."

Unfortunately, the drop in the number of LSATs administered does not end there. On April 18, 2012, the National Law Journal reported that "[t]he Law School Admission Council, which administers the [LSAT], has raised the testing fee from $139 to $160". From the article: "A significant decline in LSAT test takers in recent years prompted the increase for the 2012-13 testing cycle." In addition to raising the LSAT fee, the LSAC also increased the price to applicants of "using the council's Credential Assembly Service, a centralized system that allows law school applicants to easily apply to a number of schools" -- the cost "is going from $124 to $155 -- a 20 percent increase. Past increases have ranged from zero to 3 percent." Discussing the issue of the LSAT fee increase, a post from the LSAT Blog read, "In a shrinking market, both LSAC and law schools are in desperate need of more law school applicants to stay afloat. Law schools, in particular, are looking to maintain their admission standards and keep the tuition dollars coming in."

The law school bubble has been developing for some time. In January 2010, the Los Angeles Times' Mark Greenbaum warned that even in light of new law schools opening, the number of new positions for attorneys is about 30,000 per year while the number of new law school graduates is about 45,000 each year. This means that there are roughly 45,000 law school graduates vying for 30,000 new jobs every year.

In October 2010, Debra Cassen Weiss discussed how two professors have predicted that "law school applications will eventually drop and the number of law schools will likely contract" in the near future. Weiss: "The profs' predictions are part of a larger article analyzing 'two seemingly contradictory observations' ... On the one hand, firms are getting bigger. On the other, they seem more prone to rapid collapse." As I've previously written, if the law school bubble is a textbook financial bubble, our current situation portends not only that a rising number of law schools will close, but also that there may be a rising number of professor layoffs at law schools -- effectively flooding an already-weak legal job market. Such developments suggest that underlying problems in the law school bubble will spill over into the entire legal profession.

Looking forward, recent news regarding law schools portends serious issues and deeper problems. On April 26, 2012, the ABA Journal reported that former law school dean Nancy Rapoport suggested that "Congress should reconsider existing bankruptcy laws that make discharging student loan debt nearly impossible and some law school closings are on the horizon." Rapoport: "You've got this sort-of class of law students who have up to $200,000 or more in nondischargeable debt, many of them can't find work at all." Even further, many of those graduates are "looking at this huge disconnect. Not only can they not make their loan payments, they can't make their rent." Rapoport went so far as to express support "for Congress to amend existing laws in ways that propose viable solutions to the student loan debt problem without creating future economic challenges that could occur if a mass amount of over-burdened carriers are able to easily discharge government loans". In light of current economic issues with the legal industry, Rapoport expects that some of the law schools "not at the top of the rankings" will close: "The issue is going to be which ones." Interestingly, aside from hypothetical changes to bankruptcy law, the legal humor website Bitter Lawyer recently satirized the idea that the American Bar Association and law schools should come together to set up a tuition refund plan "to ease law student debt and to prop up an ailing attorney job market".

Whereas it may be easy for an observer to sit back and see the law school bubble as being a localized socio-economic problem in one sector of the economy, the bursting of the law school bubble may have negative implications for American society in terms of litigation, education, bureaucracy, legal services, and the rule of law. One can only ponder the precise implications of American society's having an army of hungry, perhaps embittered, indebted lawyers looking for work unleashed into the marketplace; the key words here are "looking for work". Some recent law school graduates have gone so far as to sue their former law schools. As I've previously discussed, a system where citizens view their fellow citizens as possible ATMs owing to an increase in litigation would be counterproductive. Such developments could hinder economic growth and foster societal distrust. Thus, as the years go by, law schools continue to churn out attorneys in a job market where graduates (per Greenbaum's 2010 figures) effectively have a 66 percent chance of securing a legal job -- leaving one to wonder what will become of the other 33 percent.

One may want to say that the law school bubble is simply a localized problem in the education sector, but the implications of the law school bubble are indeed precarious -- perhaps portending the tearing of the social fabric of American society. For those who understand what we are looking at in terms of the law school bubble and the laws of economics, the predicament is a mess; akin to issues with the real estate bubble, it's a bit like watching a train wreck in slow motion. The law school bubble extends beyond the legal sector into the social fabric. The idea that the doors to law school and the legal profession would be open for one generation but closed for another may be societally distressing -- perhaps leading into societal questions of how necessary lawyers are at all. It would appear that there is a strong need for reform in not only higher education, but also the legal profession. In looking forward to what the legal profession will be like in five to ten years, there remain more questions than answers.

Traders taking note of the law school bubble can take a look at stocks like Kaplan Inc. parent Washington Post Co. WPO, LexisNexis parent Reed Elsevier ENL, and West parent Thomson Reuters Corporation TRI.