The tuition puzzle

This is the first of what will probably be several posts about the extraordinary increases in law school tuition over the past half century (In this as in so many other respects, law school is merely a particularly extreme version of something that has happened all across higher education in America).

First, some numbers:

Law School Transparency has done a nice job graphing what has happened to law school tuition since 1985, in both current and inflation-adjusted dollars. Private law school tuition has gone from just over $16K to just under $42K in 2013 dollars. Public resident tuition has gone up even more sharply, from $4,300 to $23,000, again in constant inflation-adjusted dollars.

These numbers are startling enough, but they obscure the extent to which by the mid-1980s tuition had already skyrocketed over the course of the previous 25 years. LST is using data the ABA posts on its web site, which only go back to 1985. Looking back to 1960, private law school tuition averaged around $7000 in 2013 dollars, while public law school tuition was perhaps a third of that, i.e., essentially nominal (These estimates are based on Harvard’s and Michigan’s law school tuition at the time. They assume that tuition at HLS was around 20% higher than at the average private law school, which has been the norm over the past three decades, and that Michigan’s resident tuition was typical of state law school resident tuition. If anything this latter estimate probably overstates public law school resident tuition in the 1960s).

This is, in the context of normal economic activity, a remarkable situation. People often speak these days of a “tuition bubble,” but a classic price bubble involves a sharp short-term run-up in prices, followed by an even more sudden collapse when the bubble bursts. For example, the US housing market was relatively stable between 1970 and 2000, with median home prices staying between $150,000 and $180,000 in real terms. The housing bubble featured a five-year run up, during which the median price rose by nearly 70%, before falling back to pre-bubble levels just three years after the peak.

By contrast, the law school (and to a somewhat lesser extent, the higher ed) tuition “bubble” has now featured more than 50 years of basically continual real price increases, with essentially no retrenchment. This has led to prices rising in real terms not by 70% in the short term, but rather by 500% for private law schools and 900% for public law schools — and in the long and continuous term.

Is there anything else in the contemporary economy that has featured similar sustained price increases? The only examples I can think of are the ownership interests in certain professional sports teams, some extreme high end luxury goods —paintings by famous artists and the like — and of course health care, in regard to which spending per American increased by 7.6 times in real terms between 1960 and 2009.

The markets in NBA teams and Klimt paintings involve a few dozen extremely rich buyers, whose behavior can be explained readily enough by concepts such as the declining marginal utility of income and the perverse attractions of Veblen goods. The market for law degrees involves more than 100,000 people at any one time, while that for higher education in general involves more than ten million simultaneous purchasers. Why are Americans willing to pay literally five or ten times as much, in real terms, as people paid two and three and five decades ago for essentially the same thing?

In the case of health care, the answers are by now well known, involving the profound distortions created by third party payment systems, in the context of the purchase of a good that often doesn’t allow for any meaningful price competition. Indeed it’s now universally acknowledged by disinterested observers that the American medical system is a textbook example of massive market dysfunction, leading to severe overpayment for a good that is provided by the medical systems of every other developed economy for a small fraction of the price, with little or no loss of quality.

In the case of higher education in general, and law school in particular, the answers are not as well understood, in part because until very recently the American higher education establishment had done a masterful job of selling the idea that higher ed was a “great investment” at almost literally any price. Only in the last few years has that idea begun to be questioned in any serious and sustained way.

In subsequent posts I’m going to look at some of the factors that have produced this increasingly destructive social situation.