Confusing Cause and Effect for the Law School Bubble

Steven J. Harper has an essay on the popping of the law school bubble.

The lawyer bubble began to form when vital institutions—law schools and the American Bar Association—abdicated their responsibilities in favor of misguided metrics and insularity. Law-school deans are supposed to be the profession’s gatekeepers, but far too many have ceded independent judgment in an effort to satisfy the mindless criteria underlying law-school rankings, especially U.S. News & World Report’s annual list.

Those rankings didn’t exist until 1987; now they rule the law-school world for both students and administrators. Flawed methodology infects each category—quality assessment, selectivity, placement, and resources. But with the acquiescence of the ABA, deans inflate their schools’ rankings with incomplete and misleading information and encourage prospective students to pursue dreams that, for most of them, are impossible, all in the name of increasing applications, enrollments, and tuition revenues.

In the 1990s, the U.S. News law-school rankings began to gain in popularity and became a key element in the competition for new students. Meanwhile, as applications to first-year classes rose generally, universities increasingly saw law schools as profit centers worth expanding. Recently the Maryland Department of Legislative Services concluded that the University of Baltimore School of Law sent 31 percent of its 2010 revenue back into the general university budget. For private schools, these data are difficult to uncover, but the University of Baltimore report corroborates a widely held view that universities in general impose a “tax” amounting to between 20 and 25 percent of their law schools’ gross revenues.

When U.S. News published its first law-school rankings, in 1987, total law-school enrollment in the 175 ABA-accredited institutions had remained about 120,000 for a decade. Since then, 25 more law schools have come on line, and enrollments have steadily risen, to more than 145,000. By 2010, there were more than 1.2 million lawyers in the United States—almost four for every 1,000 citizens. In Britain, the comparable number is about 2.5; in Germany, it’s slightly more than 1.5.

I think he is right about the supply-side dynamics of universities seeing law schools as profit centers. Universities are incredibly mismanaged with very short term time horizons for their leadership, so finding a profit center and milking it is pretty much what you’d expect. That makes sense to me.

The criticism about the influence of rankings, however, seems to me to miss the point. Let’s stipulate that we all hate rankings and they measure stupid things. But I think that Harper confuses cause and effect on the importance of rankings. Why have rankings become so important? Because students consider them important. Why do students consider rankings important? Because the legal job market considers rankings important. Everything else being equal, graduating from a higher-ranked school offers greater job prospects than graduating from a lower-ranked school (leaving aside geographic issues like wanting to go to an in-state school and practice in-state). So students look to rankings as correlated with job prospects. To be sure, rankings provide pretty weak evidence of quality, but in the land of the blind (selecting law schools) they are the one-eyed man.

The issue, it seems, is that there is a zero-sum prisoners dilemma at work, in which it is rational for each individual applicant to weigh the rankings (assuming they are correlated with job prospects) even if that gives rise to an overall system which is suboptimal. The catch is that rankings are inherently relative and positional in nature, so that all the expenditures and everything else that occurs are just affecting relative positioning rather than absolute increases in quality (whether measured as quality of education or quality of increased job prospects). But this is a problem in higher education generally, not unique to law schools. Universities today compete substantially on the basis of “prestige” or status, which is inherently zero-sum and thus leads to costly rent-seeking activity. This can be distinguished from market competition, which is positive-sum.

To be sure, rankings can exacerbate this rent-seeking dynamic. But they are a reflection of the underlying dynamic, not the cause. And their importance is driven by the emphasis that consumers place on those rankings, an emphasis that is actually individually rational.