Baumol's Cost Disease and the Practice of Law

My last three posts have discussed the important topic of LLM degrees. Thanks to those who have read them and commented on them. If you have not seen them, check them out here, here, and here.

The subject of this post (and one or more posts to follow) is somewhat more theoretical than the pros and cons of LLMs, but it is no less important. The current topic is something called "Baumol's cost disease" or the "Baumol effect," and it is something that every lawyer needs to know about, since it affects all of us in the legal profession in important ways. It is no exaggeration to say that Baumol's cost disease is reshaping our profession entirely, in ways large and small. Every lawyer needs to appreciate and understand its implications for our future. This is not hyperbole on my part.

So what is Baumol's cost disease? It is named after William J. Baumol of NYU and Princeton. Baumol's basic observation is that the cost of some services will rise faster than the rate of inflation. That may not sound so earthshattering, but it is. Let me try to explain.

First, the production of many modern goods is heavily automated. That means that worker productivity in these industries is up--way up. So worker wages may be higher, but productivity has increased in many industries at a rate faster than the increased cost of labor. So there is a productivity gain that lowers the cost of making those goods.

A good example of this is the PC industry. My very first computer, which I got in 1988, was an IBM Model 50. It was state of the art, with a 12-inch color screen (the exception in those days), a built-in 20K (not 20 meg) hard drive, and a 3.5 inch disk drive (5.25 floppy disks were still the industry standard then). And it cost a whopping $3,000 dollars! Today, for around $400 I can buy a low-end computer that trounces my dinosaur IBM. And it would come with a large flatscreen monitor, lots of software (my old computer came only with DOS), and a printer too. Even ignoring inflation and the fact that I am comparing a very old apple to a nice shiny new orange, that is an incredible reduction in cost. My inflation-indexed dollar today buys a lot more computing power than in 1988. In other words, the real cost of PCs has gone way, way down.

Other examples abound, and some are even in service industries. Does anyone know of a secretary or office assistant who still knows shorthand, or an attorney who cannot type? There aren't many. Intermediate steps like shorthand or needing someone to type everything for you have been eliminated, and this has freed up workers like office assistants to deal with other tasks that add more value. In other words, they have become more productive.

This is where Baumol's cost disease comes in. Baumol observed in the 1960s that improvements in productivity are not always desired, and for some activities such improvements might be impossible. The original example given was a string quartet: playing it today takes 4 musicians, just as it did hundreds of years ago. In other words, gains in efficiency are not really possible for this task. In other cases, improvements in efficiency might be possible, but are ill-advised. Education is the perfect example here: you perhaps can increase educational efficiency by increasing the number of students in the classroom, but do you want to? And in fact, would increasing the number of students reduce the output--that is, the quality of education?

So we are left with the insight that some activities can experience increases in labor productivity over time, while others cannot or should not. The result is that the cost of some services will not increase as fast as the cost of other services for which there can (or should) be little or no productivity gains.

This means that the cost of services that do not experience productivity improvements will rise at a rate higher than inflation. Remember that the rate of inflation is an average. Some items, such as computers and other electronic components, actually get cheaper to produce over time. Other services, like live music or medical surgery, experience high cost growth. Baumol's cost disease tells us that services that cannot or should not experience productivity gains will grow more expensive more quickly.

This has enormous ramifications for service industries, including the legal profession. I'll discuss some of the ramifications in my next post, but here are some teasers:

• Improvements in attorney efficiency regarding administrative tasks are part (although not all) of what have enabled associate salaries to increase so rapidly in recent years.
• The generally high cost of legal services has led to standardization of legal service packages, which has helped lower the cost of some legal services. For example, form contracts might be used by a law firm to quickly prepare a contract--or the client might even obtain (or develop) its own form and forego using outside counsel altogether.
• The need to improve efficiency wherever possible has contributed to hyper-specialization in legal practices, with fewer general practitioners in many markets.
• Increased standardization of legal services may be creating a greater dichotomy between lawyers that charge large fees to address the most difficult and intractable legal problems, and those that handle more prosaic or ordinary legal matters at far lower rates.

This is just a sampling of some of the enormous implications of Baumol's cost disease for lawyers. I'll have more discussion in my next post.

LLMs Part 3

I am getting a lot of hits to my recent LLM posts (here and here) and a lot of comments too, so clearly a number of people want to know more about the advantages and disadvantages of LLMs. So it seems another LLM-focused post is in order. A comment today to my last post provides a good launching point. That comment, redacted as appropriate, reads as follows:

"Thanks for the very informative blog. You mentioned that you obtained your MA degree abroad in international econ and that it was was a natural fit. I am considering an LLM in international trade law because I would like to specialize in that area of the law and get out of my current field of mass torts litigation. I graduated from University of Pennsylvania undergrad and Temple Law School. . . . While it was relatively easy to find jobs, they were only limited to litigation. You mentioned that you thought that international trade law was one of the areas where a specialty LLM could be useful. Would you also agree that an LLM from a foreign school in international trade law would be 'a natural fit' and thus equally apealling to potential employers? Some specific schools I am looking at are Univ. of Amsterdam, Univ. of Leiden (both in the Netherlands) and London School of Economics."

Let's take this point by point, since it raises a number of issues worth addressing.

1. First, the disclaimer about my masters degree: an MA in international econ was a great fit for me--but this primarily was because I was interested in graduate international economics and wanted to teach someday. I can honestly say that any advantage on the private practice job market was marginal at best. It might have helped more in seeking a governmental position (i.e., with the DOJ in antritrust enforcement, since a lot of the MA was focused on EU competition policy, or with the USTR perhaps), but that is conjecture. And I can also say that it was not directly beneficial to my set of legal skills in private practice--although it was enormously beneficial to have studied abroad when I was dealing with foreign clients, which I did regularly in practice. So what I am trying to emphasize here is that an MA in international econ was a natural fit for me not because it made me significantly more attractive to law firms, but rather because it allowed me to pursue an area of personal interest and improve my prospects on the teaching market.

2. I also said in my previous posts that an LLM in international trade law could be a good way to specialize in that area of law, and as previously noted I have seen people use that approach to great effect.

3. The interesting question posed by the above comment is whether a foreign LLM in international trade law would be as attractive to US legal employers as a US LLM in international trade law. I have cogitated on this question on and off all day. While I have not completely made up my mind on the matter, my initial response is no, a foreign LLM in international trade law would not be as attractive to the average prospective US employer. I am actually somewhat reluctant to say this, since I think there would be enormous academic and personal benefit from a foreign LLM, and living abroad is to my way of thinking a good experience per se. But as a strategic decision to improve your standing in the US legal job market? I think it is a second-best strategy.

I reach this conclusion for several reasons.

First, while it is an international trade law LLM, in many cases--most cases, really--the focus will be on regional law. So an LLM in Europe, for example, generally will focus on domestic country and EU law. In some cases there also may be some level of knowledge about these legal systems that is presumed, which US students are less likely to have. In other cases there are LLM programs geared toward foreign students that do not presuppose such knowledge, but they are still typically geared toward non-US trade law.

In contrast, a US LLM in international trade law is far more likely to give you a grounding in international trade law from a US perspective. And if you are trying to land a job in the US market, that is inherently of more value to US employers. You may take comparative and foreign law courses, but it will not be at the expense of understanding US trade law.

Second--and frankly this is a different way of stating point #1--much of international trade law is comprised of national laws. These laws either implement rules of international regimes like the WTO, or they fall outside such regimes. So on average, it might be better to get a US LLM that is more likely to have such a US trade law focus.

Third, let's not discount the name factor. Imagine you are going into an interview with a US lawyer who went to a US law school, and during the interview you say. "I have strong qualifications, including an LLM from the University of Leiden in the Netherlands." Now pretend instead that you say "I have an LLM from Georgetown." Which is likely to have a more positive connotation for the average US lawyer? Georgetown, of course. You're really trying to play the numbers, and the odds are that Georgetown gets more recognition than foreign LLM programs. Sad perhaps, but true.

Fourth, part of the benefit of an LLM is also being able to relocate to the job market of your choice. Imagine that you want to practice international trade law in NYC. Do you go to NYU, or Paris? While at NYU you can interview, and possibly even clerk at a firm. You also can develop relationships with professors who can give you good and meaningful letters of recommendation. Lawyers at firms in NYC will know who these professors are (or at least know the law school), and this means these recommendations will carry more weight. These advantages are not as readily available if you are studying abroad.

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Can you tell that I am somewhat uncomfortable giving this advice? As a dedicated internationalist and someone who has lived and studied abroad, I think studying abroad is an absolutely fabulous thing to do. So I would really like to say, "Yes, I think an LLM in international trade law from abroad is every bit as useful in the US market as a US LLM." But I don't think I can say that right now, given the current state of the US job market. There will be exceptions, of course. Imagine that the lawyer you are interviewing with is Dutch! You will be in like Flint--but these are exceptions.

So that is my general advice. Now the question is, when can you break this general rule? Here are some thoughts.

First, you might be able to break this rule when the particular firms you are interested in either have a lot of foreign lawyers in the US or do a lot of business in a particular region of the world. In such cases, a foreign LLM might be just as good, or in some cases even better. There are a number of blue-chip firms out there that fit this bill, including my old firm, Baker & McKenzie. Just do your homework carefully beforehand.

Second, you might break this rule if a US law school has an LLM program that includes study abroad. You could kill two birds with one stone with that approach--US training, and fun abroad.

Third, some foreign programs have cache in the US market. Most people know Oxford and Cambridge, for example.

I am sure there are people out there who disagree with me on this subject, and I am ready and quite willing to be convinced I am wrong on this one. But this is how I see matters right now. Any comments/questions/rants in response are welcome!

Letourneau Eden LLP

If you are interested, check out our new law firm website - www.lelaw.ca. Let me know if you have any comments or suggestions. Thanks!

LLM Redux

In a post on July 5, 2006, I set forth my views on the pros and cons of LLM degrees. My post was aimed primarily at law students and lawyers who were considering LLMs as a way to improve their marketability for practicing law.

For a discussion of LLMs as means of improving your chances of teaching law, there is an excellent online post by Professor Brad Wendel of Cornell Law School. Professor Wendel's post, which is about the law school hiring process generally, has a good discussion of the LLM degree's potential merits (or lack thereof) in the academic career context. It is also an interesting peek inside the legal academy's ivory tower. I too recently went through the law school hiring process, and I find myself in agreement with much of what Wendel says. If anything, the law school hiring process is even more challenging than his post suggests.

The Pros and Cons of LLMs

I've had several people ask me recently to comment on the merits of LLM degrees, and I think that's an excellent idea. Should you consider one? What are the possible reasons for pursuing an LLM, and what are the real advantages of the degree? This post sets forth my thoughts on the matter.

First, for those who may not know, an LLM is a postgraduate law degree--a law master's degree. In the United States it is typically a one-year course of study at a law school. In some programs you focus your studies on a particular area of law, but often you do not have to.

Second, I should note that my comments are geared toward US JD holders or students who are considering LLMs. Many LLM students in the US are foreign students with law degrees from home country institutions. The advantages of LLMs to them are very different from the advantages for US law students. These advantages include gaining exposure to the US legal system (and thus making themselves more marketable in their home countries); establishing US professional references; and being able to sit for the bar and gain admission to practice in some US jurisdictions like New York. But for US lawyers and JD candidates, the calculus is different. The following are some factors I think should be considered in deciding whether an LLM is for you.

Factor #1: An LLM can be a way to "shop yourself up." If you have a JD from a national law school, then hurray for you. That helps make you more marketable. But if you went to a regional school, an LLM is a way to improve your cache on the market. "I have a JD from Regional State University" generally will carry less weight than "I have an LLM from Harvard/UVA/Chicago." Not that regional schools are bad--many offer superb education. But like it or not, school rankings matter. And because LLM students typically are in class with JD candidates, you are proving, in essence, that you can run with the pack at a national law school. That is definitely worth something.

On the other hand, if you went to a regional school and have good job prospects, an LLM may not be worth the time and expense. Most US lawyers, in fact, do not have LLMs.

Factor #2: Less competitive admissions. It may be easier to get admitted to a given law school as an LLM student than as a JD student. Partly that is because there generally are fewer applicants--but I also think it must have something to do with the fact that LLM applicants' GPAs and LSAT scores are irrelevant for the US News and World Report rankings. So while you may not have been accepted to a particular school as a JD student, you might be able to get in and prove your mettle as an LLM candidate.

Factor #3: "Shopping yourself up," continued: national versus regional law schools. The standard wisdom (stated above) is that the more highly ranked the law school is, the better. Generally, that is true. But what if you want to practice in a particular region of the country? In that case, an LLM from a respected regional powerhouse may serve you as well as an LLM from a truly national school--and be far less expensive, too. My alma mater, Northwestern, is a wonderful law school, but it is not cheap. If you want to practice law in the Deep South, an LLM from Alabama, for example--which is a top-tier school according to US News and World Report--might serve you just as well.

Factor #4: LLMs as a way to get established in a new market. This is really a corollary to factor #3, above. If you are from a law school in, say, the Northwest, and you want to move to another area of the country to practice law, an LLM is a way to go about this. You have a year to develop local contacts, obtain local references from professors at the law school, look for a job, and meet fellow law students who will be your practicing peers in that market. And it shows your determination to relocate--since you've already done it. That last factor should not be underestimated, since firms are typically reluctant to hire new associates whom they think will not stick around.

I am not suggesting that pursuing an LLM is the best way to relocate, and it is certainly not the cheapest. But I have seen this approach used successfully.

Factor #5: An LLM can be a segue into a specialty area of law. The traditional wisdom was that an LLM was useful for someone who wanted to practice tax law, since that field is so complex. That remains true, but with the continued hyper-specialization of law practice, there are other fields in which an LLM can be useful as well. International trade law and environmental law come to mind. An LLM gives you a year to focus on courses in such areas of law. In fact, I have known lawyers who, after practicing for a while, used LLMs as a way to retool and recast themselves as specialty lawyers. That can be a bold move to make--especially if you are doing OK already in practice--but if you are dissatisfied with the direction of your career it is a way to break out of the rut.

Factor #6: An LLM can help you transition from practice to teaching. In order to land a tenure-track teaching job at a US law school, you generally need to have another postgraduate degree besides your JD. Take it from someone who just recently went through the process. Some law schools want candidates with JDs and PhDs, but you want at least an LLM or equivalent degree (a master's degree in something else). Non-tenure-track jobs at law schools may be somewhat less competitive, but there too, an LLM can give you a leg up in terms of credentials.

In addition, pursuing an LLM gives you a year out of the work force in which you can write and publish law review articles. Landing a law teaching job virtually requires an established record of scholarly publication, and it is easier to write when you are in an academic environment than when you are practicing law 14 hours a day. Again, take it from me: I have done it both ways.

A word of caution: I cannot over-emphasize how challenging and competitive the law teaching market is. If you are thinking about this as a career move an LLM may be part of your strategy, but it is not the only part, and certainly is no guarantee of success.

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These are by no means the only factors to consider, and I would be very interested in hearing any thoughts others might have on the matter. Ultimately, I think LLMs can offer enormous potential benefits, but for many the costs will exceed the benefits. The above factors certainly suggest to me that LLMs are most advantageous in fairly narrowly defined circumstances.

Stay Tuned for LLM Post

Happy July 4th to everyone. For anyone checking, I have promised a post on the pros and cons of pursuing an LLM degree. I have not forgotten. I will try to have the post up tomorrow. Best regards, Greg

Canadian Law School: Black Letter Law

A reader of my book sent me an email last week. I thought it would be worthwhile to provide the answer to that email, as it may be useful to everyone.

Original email question:

"I have a question I've been mulling over. I have an uncle who attends law school in the United States and he suggests that a big part of law school success is 'mastering the black letter law.' Distressingly, he found that the black letter law was not taught in law school (at least not explicitly), and that students must learn it on their own. In particular, he recommends notes from BARBRI Bar exam preparation lectures as a good source for 'black letter law.' Do you think this is good advice for Canadian law students? What IS the black letter law? Is BarBri a good source for learning Canadian law (aren't Canadian and American laws pretty different?)."

Answer:

Thank you for the email. I really appreciate it. The "Black Letter Law" debate is a good one, and one that I have heard for quite a few years now. Some people live by it. It's not discussed much at all by Canadian law professors, from my experience. From my experience, it's application of the law that you learn in class that is most important. Being able to disect a problem into its issues, sub issues and sub issues. You will find that Getting to Maybe is invaluable, and I recommend that you read it before classes begin.

I know law students who have had terrible memories. They can't remember dates, names, case names, etc. However, they have received A's in their classes because they are able to take a step back, take a breath and begin dissecting a hypothetical problem, keeping all of the sub issues in mind, returning to them and fleshing them out. They are able to get the big points out of the way quickly, and then are able to get bonus points for dissecting the minutiae. Read Getting to Maybe. Take every opportunity that you have to discuss exam preparation and application of law with your professors. Get to know the professors well. I wish someone had given me that advice early on, because it is very good advice.

Find your strengths early on. Stay on top of your material, but don't become so engrossed in it that you can't see the forest through the trees. Find other students (especially upper year students) that are proving to be successful, and find ways of accessing their knowledge and experience. Write me during the course of your law school experience when you have questions, and I will do my best to answer them, or to point you towards a resource that may help.

Thanks again, and good luck in your new career. You've made a great choice.Find your strengths early on. Stay on top of your material, but don't become so engrossed in it that you can't see the forest through the trees. Find other students (especially upper year students) that are proving to be successful, and find ways of accessing their knowledge and experience. Write me during the course of your law school experience when you have questions, and I will do my best to answer them, or to point you towards a resource that may help.

Thanks again, and good luck in your new career. You've made a great choice.

ed note: BLACK LETTER LAW - The principles of law which are generally known and free from doubt or dispute. Also see http://en.wikipedia.org/wiki/Black_letter_law

Radio Show for So, You Want to be a Lawyer, eh?

I am pleased to announce that I will be interviewed on a radio show next week. Friday July 14, 2006 from 8pm to 9 pm. The show will be heard on The New 940 AM in Montreal. The show is called "Sidebar with Dino Mazzone". Tune in if you are interested in applying for law school, you have been accepted into law school, are in law school, or are about to embark on your legal career. Dino will be interviewing me about my book, and taking calls throughout the hour.

From the New 940 AM website: "Sidebar is a new legal show on The New 940Montreal. Host Dino Mazzone is a media commentator, politician and a practicing lawyer. Mazzone will bring-on experts on legal issues important to Montrealers and won't hesitate from commenting on the legal stories making news. To speak to Dino on-the-air call 514-790-0006."

You can listen live by clicking the listen live link on the New 940 AM website.

The Birth of a Law Practice

I have been giving birth to my new law practice. It's a longer and more arduous labour than previously anticipated. Added to that, I am taking care of my three children while my wife is away for a month becoming a yoga instructor.

Currently, I am in the process of renovating an old building that I bought to house one of our new offices. I am busy ordering phone lines, computers, desks, filing cabinets, insurance, stationary, etc., etc. The list seems endless right now. Will it all be worth it? Oh yeah. Seeing my name on the letterhead provides a significant amount of pride. I won't lie.

I am looking forward to being finished the "building" phase, and getting on to true client development and service.