Eric Talley on Deregulating Lawyers: Comments From a Knee-jerk Skeptic

totmauthor —  19 September 2011

I have spent the last few days reading the recent study by Clifford Winston, Robert W. Crandall, and Vikram Maheshri, entitled “First Thing We Do: Let’s Deregulate All the Lawyers” (Brookings Institution, 2011, $19.95).  In it, the authors marshal a variety of empirical methods to argue that the current practice of state bar admission and licensing of attorneys imposes an inefficient barrier to entry that keeps incomes high and reduces access to needed legal services (particularly among the poor). Moreover, the authors argue that the oligopoly rents enjoyed by practicing lawyers have grown further as the federal bureaucracy has grown, essentially feeding a legal / regulatory beast that that artificially increases the demand for lawyers, exacerbating the oligopoly problem.  Given these observations, the authors conclude that the current practice of law is severely afflicted by anticompetitive barriers to entry, regulatory capture, and artificially inflated prices.  In response, they advocate a good old school form of deregulation of the legal industry, allowing free (or nearly free) entry into the profession.  Although they are open to keeping state bar exams around (primarily as certification devices), bar membership should not be – in their view – a necessary condition to the practice of law.

I found this monograph to be the strongest sustained case made to date questioning the status quo for the practice of law (and especially bar membership).  It is a serious, interesting and commendable treatment, and I would recommend it highly to anyone interested in the topic. (I make this recommendation notwithstanding the fact that the monograph can apparently only be ordered in hard-bound form at a price of $19.95 – an ironic barrier to entry given the nature of their public policy enterprise).

As intriguing as the study is as a thought experiment, it also has a high bar to surpass if it is to be taken seriously as a policy recommendation.  The step of deregulating the practice of law is a substantial institutional reform, and as such imposes non-trivial transition costs on lawyers, judges, clients, law schools, and policy makers. These transition costs may, of course, be worth bearing if we have strong reasons to believe, on a priori grounds, that the current licensing structure is inefficient.  But it seems to me that the case must be made for why the likely benefits of substantial reform would justify these costs.  Ultimately, I was not fully persuaded that Winston et al. had carried its burden of demonstrating the desirability of the wholesale overhaul of the legal profession, or that the existing institutional structure reflects unadulterated rent seeking.  I offer a couple of principal reasons for my conclusion below.

First, as with all proposed policy reforms, timing is critical; and the timing of this study could not be much worse.   As I read it, I imagined myself endeavoring (with a straight face, and without a chicken wire screen) to convince my students – many of whom are searching for jobs in the midst of the largest hiring downturn for new lawyers in more than two decades – that the biggest problem with the legal profession is a shortage of lawyers.  Even though some have argued that the official unemployment rate among practicing lawyers is comparatively low (see, for example, here), such numbers are notoriously difficult to interpret (e.g., they do not pick up “discouraged” lawyers who, unable to find work, move into different professions).  In any event, it would seem that the current political climate is unlikely to be friendly to Winston et al.’s reform proposal, absent at least a clear demonstration of its benefits.

Perhaps a more substantive reason for my skepticism is more technical, and has to do with how the authors demonstrate their core claims.  The principal means the authors use for making their case is a series of regressions, in which they regress various human capital measures (education, experience, race, gender, geographic location), as well as sixteen different occupational category variables, on individuals’ (logged) annual earnings.  They find that the wage “premium” associated with work as a lawyer is significant, and has increased from 25% to 50% (relative to the omitted occupational categories) between 1975 and 2004.  They interpret this wage premium associated with the practice of law to be a marker of anti-competitive barriers to entry.

This interpretation may be correct, but it is not the only plausible one.  In particular, wage regressions run an appreciable risk (and the authors acknowledge this) that observed occupational premia may mask a large amount of unobserved heterogeneity in something other than entry barriers – such as value-creating skill attributes.  It is quite plausible that such skill based differentiators are in play here, reflecting the need for lawyers (at least conscientious ones) to develop expertise in fields such as accounting, finance, and tax.  While the authors attempt to do what they can to control for these (unobserved) skill sets, their efforts are not altogether convincing.  (For example, in an effort to discount the role of ability-based drivers of the wage premium, the authors show that the increased earnings premium for lawyers has not been accompanied by rising LSAT scores; it’s hard to know what to make of this, given that the LSAT is a normalized test, and it doesn’t endeavor to test the mastery of specialized skills).

A related reason to be skeptical of Winston et al.’s wage regressions comes from observing wage premia for other occupations over the same time period, particularly economists. Like lawyers, professional economists have enjoyed a substantial wage premium since the mid 1970s.  This is significant, since economists are not subject to state licensure, professional exams, or other institutional barriers to entry. Even more interesting is the fact that economists’ wage premium is nearly identical, both in size and trajectory, to that of lawyers during the same period. What could explain this freakish similarity?

The authors posit that there is a likely relationship between economists’ and lawyers’ wage premia.  In particular, they speculate that economists have enjoyed substantially greater private sector consulting opportunities (centered specifically in litigation consulting), essentially taking a piece of the anticompetitive surplus enjoyed by lawyers.  That doesn’t cohere with a classic monopoly story very well, at least to me.  Why in the world would lawyers, having secured their oligopoly, willingly share the fruits of that status with anyone (least of all economists)? And why haven’t they evidently shared their rents to the same degree with others who have hitched their wagons to the law firm gravy train (such as legal secretaries, law firm couriers, law firm custodial staff, etc.)?  I’d posit that a much more likely scenario is that unobserved quality differences are bidding up the price of both good lawyers and good economists – such as expertise in valuation, finance, and accounting.  Particularly in business law and litigation, it is extremely common for lawyers and economists to work side by side navigating technical terrain.

This is not to say that Winston et al. are necessarily wrong in their conclusions, or that legal practice is not in need of reforms (particularly in the financing and ownership structure of law firms).  Rather, I’m still on the fence about whether this monograph makes a sufficiently strong case for the wholesale deregulation of the legal profession.  Even so, it is an interesting and thought-provoking read.

9 responses to Eric Talley on Deregulating Lawyers: Comments From a Knee-jerk Skeptic

  1. 

    Eric–Whether or not there’s a shortage of lawyers depends upon where you stand. I would imagine that a large number of Berkeley students are looking for jobs at big firms in places like LA, San Francisco and New York. Stand on the street corner at 57th and Avenue of the Americas, and it does look like the world is full of lawyers and the market is overflowing.

    Walk over to Broadway and then a hundred blocks north, and you’ll find “document processing” offices that help people file for divorce or bankruptcy because they can’t afford an attorney. Small businesses that probably should be organized as limited liability entities remain unstructured because they can’t afford legal advice. Pro bono legal services are stretched trying to provide immigration, housing and other legal services. The trouble is, it’s hard to come up with a business model that meets the needs of these people, pays for an expensive law school degree, and simultaneously meets the ethical requirements for lawyers.

    • 

      Guest — you have a perfectly fair point, and indeed I stand intermittently in *both* places to which you refer. I have some students who have been trying (unsuccessfully) to get high paying jobs at big market establishment firms. I have other students who have been trying (also unsuccessfully) to get low paying public interest jobs much like the ones you describe. But to your main point, I’m prepared to concede for argument’s sake (if not more) that there is a demand for public interest lawyers that goes unmet, and that this is a bad thing socially. The symposium’s animating theme isn’t really about that, however, but rather about whether the requirement of a JD and/or bar passage is the *causal reason* for that unmet need. And there, I guess I’m not so sure I’m convinced….

      • 

        Eric — Actually, I don’t think we’re standing in quite the same place. You pretty much give the game away by saying that the unmet demand is for “public interest lawyers.” I’ve never met a small businessman in need of tax advice, or a woman who wanted to get divorced, who cared whether her lawyer was working in the public interest. They just wanted their problem solved at a price they could afford. That you consider this to be a demand for “public interest lawyers” isn’t a reflection of the needs of clients, but the needs of your students.

        I think the fact that there’s an unmet need is a pretty established fact. We can establish the fact that a JD/bar passage requirement is at least a but-for cause merely by observing that others have attempted to meet that need and been shut down by the bar. In most cases, the bar didn’t have to (and usually couldn’t) show that the services provided didn’t actually meet the needs of clients.

  2. 

    Eric Talley suggests that we need to estimate the costs of moving to an unregulated legal-services market and compare these costs with the present value of the benefits of a more competitive market. Given that the former are likely to be transitional while the latter are permanent, I doubt that such an exercise, if it could be excecuted, would result in a conclusion that deregulation is not worth the cost. But we cannot know how an unregulated market would develop. In other industries, deregulation has led to benefits that no one could have anticipated because regulation had restricted innovation. I see no reason why we should not see similar innovation in legal services once new types of organizations are allowewd to enter with or without practicioners who have passed a state bar exam. As for the current jobs climate, the perceived excess supply of lawyers exists at current legal fees and wages. Entry would drive these fees down, thereby expanding the size of the market. Finally, the lack of entry barriers into the economic profession will solve any problem of excess returns to economists. Without deregulation, we cannot say the same for legal services.

  3. 

    I don’t really understand how removing the various barriers to entry many identify, like the need for a degree, is likely to lead to more jobs for lawyers. As Eric notes those who do have the credentials are having difficulty finding jobs. I doubt these students would relish the prospect of increased competition for work from non-lawyers. Driving down the cost of legals services is obviously a boon to the consumers of legal services IF what they receive when they pay for those services is in fact competent legal representation. It seems difficult to ensure that this is the case in the present regime – with attendance at an accredited law school, passage of character and fitness review, passage of the bar — it seems likely to be worse with no regulation at all. Certainly if firms, corporately owned or otherwise, are forced to charge a lower price for the product it makes it less attractive to hire people with real expertise. At least in the short run deregulation is almost certainly going to result in fewer good paying jobs, even if there is some offset in more low paying ones (for which law graduates will presumably have an advantage but not necessarily). If one’s immediate concern is the job market for law students deregulation would seem like the least promising place to start and the critique above strikes me as correct.

  4. 

    I haven’t read the Winston study. I do wonder if their framework would work if the market already has a glut of lawyers but nonetheless bars entry. How do we expect such an entry barrier to affect social surplus? Perhaps it would not be in legal fees, but in convenience. I could not ask my accountant for legal advice; I’d have to go separately and see a lawyer, even tho he’d be quite cheap. I find myself confused— I suspect this woudl benefit from formal modelling.

  5. 

    The post worries about the transition costs. Just because something causes an upheaval in a market, with radically changed prices, doesn’t mean there are “real” transition costs. Electric lighting comes in, and the market value of the gas lamp factory falls to zero, but that is just a price change— the the factory is just as good, physically, as ever. There is no real cost. Where would the real cost be to allowing the entry of lots of new lawyers? (as is happening in Japan now).

    Perhaps an easier thought experiment: if we allowed 100,000 foreign doctors to immigrate, doctor’s salaries would plummet. What real cost would be incurred?

    • 

      Eric – a fair point to raise about transition costs — simple price changes alone shouldn’t be a welfare economics concern. But such price changes (and the institutional reform that attends them) can catalyze a number of nonrecurring “real” economic costs that bear on the desirability of deregulation. For example, to realize this type of aspired to reform, each state would have to amend its laws/regs regarding admission to practice (or at least the sanctions from unauthorized practice); doing so would invariably raise questions of the domain of the reforms (e.g., just deregulate simple document / form execution, or also deregulate advice / advocacy / negotiation, etc). This set of questions, in turn, would invite strategic lobbying by various factions with a stake in the ultimate equilibrium — here the prospective “simple” price/wage change may play amplify the expense of the lobbying arms race. Post deregulation (whatever form it ultimately takes), the reduced role of regulation would likely give rise to a larger role for litigation on the margin, and accordingly litigation would bear added cost — not only in terms of more crowded dockets but also possibly through the task of crafting / changing appropriate legal doctrines to deal with attorney malpractice / negligence under the new regime for lay-lawyers; here again, one might expect that the stakes here could similarly lead to an arms race by interested parties to affect the resulting judicial doctrines. Liability insurers might also have to spend resources in an effort to understand and adapt to the new equilibrium and re-engineer their malpractice liability policies accordingly (this would be true, by the way, even if they refused to insure non-admitted entrants). And so on…

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