CAGR for Dummies

Friday, July 26, 2013

There seems to have been a spasm an unusual concentration of articles recently advancing the theory (I generalize) that all is well in BigLaw and that in fact even the universally acknowledged cost/benefit mismatch of a JD degree is mistaken.

Regular readers know that I’m the last person to be apocalyptic about the legal industry writ large, but I also would like to believe I apply rigor in analysis and tough love in attitude, so when sloppy happy talk comes front and center I feel compelled to respond.

Law schools first:

I haven’t really entered the “Law school NPV—positive or negative?” debate and I don’t plan to start. It’s of enormous import on many levels, from the tragic human toll to the socioeconomic policy questions it raises, but it’s simply a bit far afield for me to give it the attention it deserves. And I’m not going to do a half-baked job. Still, for the yin and yang of this debate, I refer you to (first pro and then con):

The Economic Value of a Law Degreethe abstract of which reads in haec verba:

Abstract:

This is a powerpoint presentation of “The Economic Value of a Law Degree” that was originally presented at the American Law & Economics Association Conference on May 18, 2013.

The full article is available here: http://ssrn.com/abstract=2250585.

Legal academics and journalists have marshaled statistics purporting to show that enrolling in law school is irrational. We investigate the economic value of a law degree and find the opposite: given current tuition levels, the median and even 25th percentile annual earnings premiums justify enrollment. For most law school graduates, the net present value of a law degree typically exceeds its cost by hundreds of thousands of dollars.

We improve upon previous studies by tracking lifetime earnings of a large sample of law degree holders.Previous studies focused on starting salaries, generic professional degree holders, or the subset of law degree holders who practice law. We also include unemployment and disability risk rather than assume continuous full time employment.After controlling for observable ability sorting, we find that a law degree is associated with a 60 percent median increase in monthly earnings and 50 percent increase in median hourly wages. The mean annual earnings premium of a law degree is approximately $53,300 in 2012 dollars. The law degree earnings premium is cyclical and recent years are within historic norms.

[And the "money quote"—Bruce]: We estimate the mean pre-tax lifetime value of a law degree as approximately $1,000,000.

And to: Why the “Million Dollar Law Degree” Study Fails, by Brian Tamanaha, which concludes:

FINAL WORDS

For [the authors'] study to have predictive value, they must establish two points: 1) that their 16-year slice is sufficiently representative of law grad earnings over time to be considered a “historic norm”; and 2) that the next generation of law grad earnings will resemble the earnings period captured in their study. They did not make either argument—indeed they assumed away the first—and the weight of evidence is against them on both.

Full disclosure: I side resoundingly with Tamanaha (and it’s not because he drops my name in the good company of Bill Henderson, Richard Susskind, and Steven Harper).


 

Now, on to the matter closer to hand for Adam Smith, Esq.: Whether BigLaw is “alive, well, and rich” or whether there may be reason to snap to attention and kill the attitude of comfortable complacency.

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