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

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.