Law School: The Recessionary Countercyle? Dark Thoughts from the Dismal Science on a Dreary Day in DC

by Kenneth Anderson

Of course law school associate deans and admissions people are focused on the internals of this data, but even in the midst of crashing law school endowments, lowered giving, and so on, can we assume at least that law school itself is counter-cyclical to the economy overall?  When the economy tanks, students and recent grads take refuge in professional schools?  The Wall Street Journal had an interesting article on this phenomenon on October 13, 2008, mostly discussing business school applications, but with this comment about law school applications and LSATs:

Other graduate schools are also expecting increases in applicants. There were 28,939 Law School Admission Tests, or LSATs, administered last June, up 15.3% from a year ago, according to the Law School Admission Council, a membership association of 212 law schools. Kaplan Test Prep & Admissions is seeing an increase this year in registration for practice LSAT and Graduate Record Examination tests, as well as graduate-admissions seminars and workshops.

If you go back to the LSAC data page from which the 15.3% increase for June 2008 is drawn, and look to the total LSATs administered, percentage change year on year, you will see that indeed LSATs run counter-cyclical to the economy.  The biggest annual gains are:  

  • 1988-89 (18.2%), 
  • 1990-91 (10%); 
  • 2001-02 (23.1%); 
  • 2003-04 (10.4%).  

Most of the other years show negatives or very modest increases.  The biggest jumps are essentially in economic downturns.

How should we describe the student decision?  The students are typically deciding to double down on debt in the downturn by going to law school.  But really, the undergraduate education (as represented by debt) was the payment of a premium on an option in the job market.  It did not pay off, so the students are now doubling down and and borrowing more money in order to pay the premium on a second bet, this time in professional school.  The opportunity cost, not just in lost wages but in recession-diminished long term opportunities, has just dropped, making the payoff down the road potentially greater, but the risks as well as the genuine uncertainties greater, too.  In effect, students are leveraging into the downturn.  But then there is the question of whether the downturn will see an upturn in lawyer employment and its effects on the distribution of lawyer income: my guess is an increase in the number of lawyers employed as regulatory activities increase but that the distribution of lawyer incomes will register a greater “bi-humpedness”: returns to lawyers on investment in becoming lawyers, I would guess, will fall on average and more so in the second tier “hump.”  But who knows?  I’m guessing.

From the standpoint of the schools, I wonder if it is accurate to suggest that the law schools that benefit most from the counter-cyclical upturn in applications are the mid to lower ranked schools, rather than the top schools.  The top schools, after all, benefit from fantastic amounts of alumni giving and the growth of endowment portfolios in the good times, but lose a chunk of that in the bad.  The mid to lower ranked schools, by contrast, do not have those levels of donation or endowment – and are that much more dependent upon tuition – which is supported or at least not eroded by the downturn.  Presumably the recession cuts into the rate of tuition increases, but I’m not sure whether that is really so much true past the first bad year.  A further question I have no idea how to answer is the effect of the credit squeeze on the availability of federal loan money and, in turn, the general credit effects, if any, on the ability of law schools to keep an upward tuition path.  Since the arguments and data – which I am not going to dig out here – are decent that a high percentage of any governmental educational subsidy finds its way back to schools in the form of tuition and fee increases, then possibly direct but also indirect – through, for example, squeezes on federal loan guarantee programs – cutbacks in federal subsidy could put dampening pressure on tuition increases.  On the other hand, student loan programs are such an enormous and politically popular program, it is hard to see them not being fully funded, directly or indirectly.

Finally, many law schools, including my own, have sizable foreign student programs – LLMs, SJDs, other kinds of fellowship programs aimed at attracting students from abroad.  Visa restrictions have cut into those programs and, as more schools have got on the bandwagon, they have become much more competitive among the schools than they used to be.  Many schools look to foreign students as an important and increasing revenue stream as the baby boomlet gradually tapers off.  

But the current recession is headed worldwide as we speak.  Europe, Latin America, the oil extraction countries, and now Asia – as US demand slumps – are all feeling the pinch.  Over the years since I started teaching, I could pretty much track changes in the global economy and fortunes of the dollar by where my foreign students come from: in the last couple of years, an increasing number from Western Europe, from France and Spain.  In a genuinely global recession, however, will those student flows dwindle, at least for a couple of years?  Or instead will they, like their American counterparts, decide to double down on the professional school bet and leverage into the downturn with an American degree?

http://opiniojuris.org/2008/10/25/law-school-the-recessionary-countercyle-dark-thoughts-from-the-dismal-science-on-a-dreary-day-in-dc/

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