Buying A Law Degree At The Height Of The Bubble

The past few years have brought us the Tech Stock bubble that crashed the stock market and the housing bubble that almost crashed our entire economic system.  We are still recovering from the housing bubble and are likely to be doing so for the next several years.  Unfortunately, the same principles that led to the tech bubble and the housing bubble are currently at work in the field of law - and may cause the value of your law degree to "crash."  Analysis and what you can do about it after the fold.

At heart, both the tech bubble and the housing bubble were based on the failure of the market to adequately estimate and understand risk and to fail to appreciate supply and demand.

With regard to tech stocks, the prevailing attitude was that the value of the stocks would continue to go up and up forever.  Valuation of the stocks became decoupled from actual economic activity.  For example, investors stopped asking "where are all the people who are supposed to be buying the products and services to support the lofty valuations of the stocks - where are the customers?  Where is the money?"  In the mind of the investors, it was all going to be great - a brand new world where corporate fundamentals no longer chained down the valuations of stocks.

However, despite all of the investor's hopes and dreams (myself included) eventually the companies realized that they can't pay their employees with profits that they were not earning.  To put it another way, no matter how great the investors thought the idea should be, if the customer base was not there, then the business was not sustainable.

Similarly, with the housing bubble, again investors began to believe that the value of housing would continue to go up and up forever.  Again, the valuation of housing became decoupled from all reasonable economic bases, such as the cost of renting and the average income of the housing area.  Again, investors failed to ask themselves "where are all the buyers that are going to buy the house from me at an even more inflated price?"  Again, despite the homebuyer's hopes and dreams, the market eventually realized that the housing values were unsupportable, people stopped buying, valuations fell a little, banks became even more nervous and stopped making loans, and valuations fell a lot.  (I managed to avoid most of this bubble.)

At the institutional level, banks chopped up local real estate portfolios and traded them among themselves in an attempt to diversify away location risk.  Their belief was that any one or two specific cities in the US might be vulnerable to decline, but at the same time some other cities were probably growing.  Consequently, if their risk portfolio of real estate investments was diversified over all locations, then their risk should be greatly reduced.  Sounds like a good plan, but they were faced with a situation wherein substantially ALL regions of the country experienced a decline - so their risk diversification was ineffective.  The banks simply misunderstood the risk.

In summary, in both situations, you have investors or purchasers wrongfully believing that their purchase will always continue to increase in value.  Often this belief was based in part on investors ignoring the fundamental numbers and believing that "for me it will be different."  Also, they believed that because someone bought at 50 and sold at 75, that they should be able to buy at 100 and sell at 150, regardless of whether customers were actually buying the goods.  The failed to understand - or ignored - the risks, they did not do the math of supply and demand, and they ended up much poorer for it.

Let's take a look at law school in this context.  "Everybody knows" that law school is "always a good investment," just like stocks or real estate, right?  (.....  Right???)  No need to calculate the actual numbers, just buy, buy, BUY!  In this regard, law schools are like stock brokers or real estate agents - they make money regardless of whether your investment bankrupts you.

So let's take a look at some real numbers and try to estimate the market opportunity.  It appears that in the glory days of yesteryear, supply and demand were somewhat in equilibrium, possibly with supply somewhat exceeding demand.  This meant that for an average attorney, they could look forward to a starting salary, most likely in the $60K-70K range.  However, about 25%-30% of students ended up unemployed or underemployed.

However, this year has seen massive layoffs - if you want to get a feeling for just how frequent these layoffs are, read Above The Law.  Law students competing for half (HALF!) as many job openings as last year in the worst recruiting season IN OVER 50 YEARS!  Even in Intellectual Property, which is commonly regarded as one of the most reliable specialties, there are hiring events where 350 students register and only 9 firms are even interested in seeing anyone.  This would be inconceivable even just one year ago.

Clearly, demand for new layers has fallen off a cliff.  Nor will demand be returning soon because demand tracks the economy and the most recent economic indicators are that we will be in for a jobless recovery and reduced spending.

On the supply side - official overall numbers for 2010 don't seem to be in yet, but individual law school enrollment numbers seem to be way, way up. In some cases to the highest level in 25 years.  This is often what happens when the economy takes a nosedive.  The reflexive response is just to stay in school longer.  However, law students are training for a career with declining demand - and too many students are making the decision to go to law school at the same time.  The increased numbers are going to swamp the available demand.  Also, new law schools continue to open - 16 more law schools  (almost a 10% increase) from 2000-2008 - further exacerbating the oversupply.

Further, when demand does pick up, more experienced lawyers will be preferred over new grads - and there are a lot of lawyers with several years of experience who were laid off and are still looking.  New grads are going to find themselves waiting in line.

Thus, in light of all of the above, I submit that if you were to go to law school now, then you are investing in a law degree during a tremendous bubble.  Supply and demand are very far apart right now - farther than I have ever seen.  This makes it far less likely that you will be able to take the law degree that you will pay $200K for and be able to use it to make a profit.

Flat demand + More Law Schools = Trouble.

So what to do?  Remember that the tech bubble and the housing bubble did not last forever, and after the bubbles burst there was great opportunity to be had.  If you want to use a stock market analogy, then the market for law school is too hot so you should go to cash.  To use a housing analogy, housing valuations are silly, so sell and rent a place until they come down.  More specifically, I am not necessarily saying that you should never go to law school - I am just saying that RIGHT NOW is the worst time in 50 years to do it.  However, it won't be that way forever.  I am not saying that everything will be rosy in a few years, but it is likely to be better than it is now.

Consequently, if you are considering going to law school, I would recommend delaying your entry for at least a couple of years.  If you enroll in the fall of 2011, then you will graduate in the spring of 2014 - and by that time supply and demand should be more in synch.  In the meantime, you will have sat out the worst market in 50 years, and most likely the market will over-correct and law school will become disfavored.  Then, when the supply of law students diminishes, go to law school and take advantage of a favorable supply-demand equation.  Don't bury yourself in the rotten supply-demand equation that exists now.

You may even want to use your time productively by becoming a paralegal, which could give you a leg up in the recruiting process later.

Similarly, if you are currently in law school, finish up the semester, get high grades, and then pause in your legal education until the market improves.  To be blunt, when you find yourself in a hole, stop digging.  Would you rather be $50K in debt with a job that pays $40K-$60K/year (a paralegal, for example) or $200K in debt with a job that only pays $40K-$60K/year - or no job at all.

Just wait a few years - the law schools will still be there - they will still be eager to take your money - and the fundamental economics of the law degree will most likely be much, much better.  The same thing went for buying stocks in 2001 and buying houses in 2007 - people were worried about missing their opportunities and it looked like easy money.  Their greed and desperation caused them to fail to estimate supply/demand and risk correctly.  Unfortunately, they found out too late that the truth was different from their fantasy - don't let the same thing happen to you.