Last year, the University of Chicago established the Coase-Sandor Institute for Law and Economics and is currently developing a joint J.D./Ph.D. in law and economics. Vanderbilt Law School will welcome students to its new Ph.D. program in law and economics in 2014. And this fall, Yale Law School will welcome students to its new Ph.D. program in law. Other major law schools are likely to follow, offering similar doctoral programs in the coming years.

Law is at the core of public policy and indeed is the bedrock of democratic government; thus, doctoral programs in law will require graduates to apply analytical tools that produce original contributions to knowledge about the causes and effects of a vast array of public policies. As a result, these newly minted PhDs will develop powerful, empirically testable findings that could significantly benefit society by maximizing the benefits and reducing the costs of government intervention in our economics lives.

Since the late 1950s and early 1960s, when faculty at Chicago and Harvard first used quantitative methods to analyze whether economic regulations of various industries were having their intended effects of controlling monopoly pricing, scholars have assessed countless public policies. However, we have little knowledge of the quantitative—and even qualitative—effects of many important policies, especially those where lawyers may benefit at the expense of society at large. Those laws and regulations would therefore be ripe for analysis by law doctoral students due to their in-depth knowledge of the legal system and the various roles that lawyers play in it.

For example, lawyers are central to the resolution of intellectual property disputes. Indeed, lawyers are routinely called upon to write patent applications because applicant companies know that the validity of most patents will eventually be determined in a federal court. While lawyers benefit from a patent system that generates demand for their services, there is little evidence on whether the lawyer-rich patent system provides benefits that outweigh its costs.

There’s also America’s expensive liability system. Lawyers are generally paid on a contingency-fee basis, and because the cost of defending a suit is high, defendants often pay the plaintiffs (and their lawyers) to settle before trial. The cost of the U.S. tort system has been estimated by Towers Perrin to be at least two percent of GDP, but there is little evidence on whether the benefits of this system exceed its cost. Thus policymakers have little guidance on how the system should be reformed to reduce its costs without compromising any incentives it may provide for individuals and firms to behave in a socially desirable manner.

Another example: financial regulation reform in the wake of the Great Recession. Highly-paid lawyers representing various interests have engaged intensely with federal regulatory agencies to shape the implementation of the Dodd-Frank Act. Unfortunately, little scholarly knowledge is available to guide how, if at all, financial regulation should be reformed and how best to prevent a repeat of the events that led to the financial crisis. As a result, the merits of the Act are being strongly questioned and certain policymakers and industry executives are calling for its repeal even before it is fully implemented.

Finally, reform of health care has emerged as one of the most important policy issues of our time. And while research has yet to find a “magic bullet” to lower the costs of the health-care delivery system without significantly reducing the quality of care, lawyers are fully engaged in opposing any measures that would limit their fees or impose caps on damages in medical malpractice cases.

Graduates and faculty of the new doctoral programs in law have an opportunity to fill many gaps in our understanding of the effects of policies that are at the center of their expertise and to explain how the symbiotic relationship between private-sector lawyers and policymakers, who often come from legal backgrounds, have adversely affected policy outcomes.

If lawyers are truly a drag on the nation’s growth in the course of influencing and benefiting from inefficient public policies, then doctoral programs in law have come at just the right time.

      

 

 

The problems these firms face today are twofold: Large clients are increasingly using in-house counsel to reduce costs, and the public is increasingly taking the do-it-yourself route given the growing access to a variety of legal services and documents on the Internet. The rational response would be for new, low-cost legal firms to start up, and for incumbents to reduce costs and attract new clients by providing innovative services.

But that is happening only to a limited extent because of state licensing requirements and American Bar Association (ABA) rules. Deregulation could open the market and transform the legal industry for the better.

Regulatory barriers have hamstrung other sectors of the economy in the past until the arrival of deregulation. For example, Interstate Commerce Commission (ICC) regulations raised railroad rates for decades after its inception in 1887. But with the proliferation of motor vehicles, trucks began to capture a large share of rail freight traffic.

Then trucks were included under the ICC’s regulatory umbrella in 1935, to prevent railroads’ freight market share from continuing to erode. But by raising trucking rates, the ICC induced some shippers to buy and operate their own trucks, exacerbating rail’s woes. Similarly, Civil Aeronautics Board regulations elevated airline fares, and by the late 1950s—when interstate highway travel was possible—the high fares limited the percentage of seats filled with paying passengers.

The deregulation of transportation that began during the late 1970s enabled motor, air and rail carriers to reduce costs and, particularly in the case of railroads and airlines, to regain market share by offering consumers lower prices and better service.

How have regulations caused the demise of long-established “white-shoe” law firms? Much legal work is performed by associates, who in most states must graduate from a law school accredited by the ABA and pass a state bar examination. This form of licensing significantly limits the flow of new legal practitioners. It also means would-be lawyers must make a substantial upfront educational investment in money and time that must be recouped in high salaries later.

Such salaries can be and are paid because licensing limits competition in the legal profession, and because partners derive much of their own inflated earnings from associates’ work.

But when law firms are under pressure to reduce costs, it is difficult for the partners to significantly reduce their reliance on associates without severely affecting their ability to serve clients. Efforts to outsource some tasks have met with only limited success.

While law firms can and do get bank loans, ABA regulations prohibit banks, private-equity firms or other corporations from owning or having an ownership stake in a law firm. This limits a law firm’s financing options and raises its capital costs. Dewey’s collapse has been attributed to the firm being highly leveraged and unable to attract investment from businesses outside the legal profession.

Law firms are aware of the value that professional business managers can add to their operations. But regulations that prohibit the ownership of law firms by nonlawyers prevent those firms from fully realizing the value of managerial skills and oversight that professional management could bring.

Finally, because regulations prevent corporations from providing legal services other than their own legal counsel, a law firm today cannot realize efficiencies or make more money by merging with a firm outside the legal profession to provide financial and accounting services, for example, along with legal services.

Eliminating regulations on who may provide legal services and who may own and operate a law firm could result in substantial efficiencies. Deregulated firms and new legal entities could reduce costs by hiring a variety of people to provide legal services—some who have completed three years of law school and some who have not.

Such firms would be better positioned to explore the substitution of capital for labor—for example, by accelerating the use of sophisticated Web searches as a substitute for manual document searches, and by using other information technology to ensure that corporate clients comply with government regulations.

New firms not necessarily owned by lawyers would bring new ideas, new technologies, new talents, and new operating procedures into the practice of law. This process has certainly happened elsewhere, the way Freddie Laker and Southwest Airlines brought new operating efficiencies to the airline industry, or the way satellite and cable brought a multitude of new programming to a once-stagnant television industry controlled by three broadcast networks.

As legal fees fell and services improved and expanded, many corporate clients would begin to downsize their internal legal departments. They would go back to relying principally on outside legal help, much as shippers have returned to deregulated for-hire trucking companies and less-regulated railroads. American businesses would reap the economies of specialization and technical progress that a rejuvenated legal-services industry could provide.

      

 

 

Is there really an excess supply of lawyers? The Senate Judiciary Committee is investigating the subject while the New York Law School and the Thomas Cooley Law School in Michigan are being hit with class action suits claiming that they fraudulently inflated employment statistics to lure prospective students. But the solution proffered by many in the legal community—to put new limits on entry into the legal profession—is not the answer and will make the problem worse over the long term.

The reality is that many more people could offer various forms of legal services today at far lower prices if the American Bar Association (ABA) did not artificially restrict the number of lawyers through its accreditation of law schools—most states require individuals to graduate from such a school to take their bar exam—and by inducing states to bar legal services by non-lawyer-owned entities. It would be better to deregulate the provision of legal services. This would lower prices for clients and lead to more jobs.

Occupational licensing limits competition and raises the cost of legal services. But those higher costs are not justified when the services provided by lawyers do not require three years of law school and passing a particular test. One example is LegalZoom.com, an online company which sells simple legal documents—documents that should not require pricey lawyers to prepare—like do-it-yourself wills, uncontested divorce documents, patent applications and the like.

The competition supplied by new legal-service providers, who may or may not have some type of law degree and may even work for a non-lawyer-owned firm, will not only lead to aggressive price competition but also a search for more efficient methods to serve clients.

Every other U.S. industry that has been deregulated, from trucking to telephones, has lowered prices for consumers without sacrificing quality. For example, most regulated large airlines used to operate with large numbers of empty seats, particularly on longer routes. Once deregulation allowed Southwest Airlines, a smaller regional carrier, and other new carriers to offer service on any route, airline fares declined dramatically and the industry operated with far fewer empty seats and more employees. Deregulation of wireless, cellular telephone services and the entry of new carriers has led to the lowest wireless rates in the developed world and stimulated huge expenditures and associated employment in constructing new networks.

Entry by new firms—sometimes from other industries—spurs innovation. The legal industry will be no different. Ford, Honda and Toyota moved into motor vehicle production from bicycle, motorcycle and farm-equipment production, respectively. More recently, Apple moved from computers into mobile telephones (the iPhone), putting enormous competitive pressure on industry giants such as Nokia, Motorola and Research in Motion (Blackberry). The resulting innovations improved quality and lowered prices while also expanding employment.

Allowing accounting firms, management consulting firms, insurance agencies, investment banks and other entities to offer legal services would undoubtedly generate innovations in such services and would force existing law firms to change their way of doing business and to lower prices.

Entry deregulation would also expand individuals’ options for preparing for a career in legal services, including attending vocational and online schools and taking apprenticeships without acquiring formal legal education. Established law schools would face pressure to reduce tuition and shorten the time to obtain a degree, which would substantially reduce the debt incurred by those who choose to go to those schools.

Supporters of occupational licensing to restrict the number of lawyers in the U.S. are wrong to assert that deregulation would unleash a wave of unscrupulous or incompetent new entrants into the profession. Large companies seeking advice in complex financial deals would still look to established lawyers, most of whom would probably be trained at traditional law schools but may work for a corporation instead of a law firm.

Others, seeking simpler legal services such as a simple divorce or will, would have an expanded choice of legal-service providers, which they would choose only after consulting the Internet or some other modern channel of information about a provider’s track record. Just as the medical field has created physician assistants to deal with less serious cases, the legal profession can delegate simple tasks.

The track record of deregulation naysayers is hardly impressive—after all, some predicted in 1977 that airline deregulation would lead to a United Airlines monopoly. And while we cannot predict all the effects of legal services deregulation, we are confident that those services would be more responsive to consumers and that there would be more jobs in the legal profession.

      

 

 

Clifford Winston, Robert Crandall, and Vikram Maheshri argue that these increased costs cannot be economically justified. They create significant social costs, hamper innovation, misallocate the nation’s labor resources, and create socially perverse incentives. In the end, attorneys support inefficient policies that preserve and enhance their own wealth, to the detriment of the general population.

To fix this situation, the authors propose a novel solution: deregulation of the legal profession. Lowering the barriers to entry will force lawyers to compete more intensely with each other and to face competition from nonlawyers and firms that are not owned and managed by lawyers. The book provides a much-needed analysis of why legal costs are so high and how they can be reduced without sacrificing the quality of legal services.

      

 

 

“The trouble with law is lawyers,” famous civil rights lawyer Clarence Darrow once said of his profession.

Lawyers have been derided since the dawn of time, for many reasons. What most people don’t realize is that lawyers have cleverly created many restrictions on their industry’s size and services through their governing organization, the American Bar Association (ABA).

Thus, the solution to the “trouble with lawyers” is counter-intuitive: we may need more of them — or, at least, we must spur more competition among them by busting the lawyer monopoly!

ABA occupational licensing requirements have allowed lawyers to create a club with a limited membership that is able to raise prices to consumers, which is how top lawyers can get away with charging upwards of $1000 per hour for their time.

In addition to licensing rules, the ABA accredits law schools, keeping the number of slots available artificially low. In turn, all but a few states today require would-be lawyers to graduate from those ABA-accredited law schools, and all but one state require would-be lawyers to pass the bar exam. In its natural lawyer-like way, the ABA also uses a very loose interpretation of terms to prevent non-lawyers from selling such services as simple, standard-form wills.

It hasn’t always been this way. Abraham Lincoln, who neither attended college or law school, practiced law for nearly 25 years, and he turned out to be a good lawyer and a great president. Clarence Darrow also did not graduate from either college or law school, and he is regarded as one of the greatest criminal defense lawyers in American history. But neither Lincoln nor Darrow, nor countless other great legal minds of the past, would likely be allowed to practice today.

While the supply of lawyers has been constrained, the demand for lawyers in the public and private sector has experienced continual growth, thanks in part to government policies that require private firms to retain legal counsel or encourage them to engage in litigation. Many of those policies are drafted and administered by lawyers themselves in Congress and the Executive Branch.

For example, environmental standards governing pollution are determined by teams of lawyers in various administrative agencies and by additional private-sector lawyers. The demand for lawyers to write patent applications and to adjudicate the resulting patent conflicts increased dramatically following the establishment in 1982 of a new U.S. Court of Appeals for intellectual property disputes. State laws, such as consumer protection acts, which in practice have greatly expanded the scope of consumer litigation beyond well-established avenues of consumer protection, have also increased the demand for lawyers. And government policy has done little to stem the excessive growth in the past few decades of liability suits, particularly class-action suits that largely benefit lawyers.

Clearly this supply and demand mismatch has caused wage distortions. With $200 billion spent on lawyers every year in America, the cost to consumers from those inflated prices is in the tens of billions of dollars. Regulations that impede competition and restrict operations have also curtailed potential innovations in legal products and services, such as publications of legal analyses, contracts, and software codes, which could assist middle-income consumers. One firm, LegalZoom.com, which sells simple legal documents like do-it-yourself wills, uncontested divorce documents, patent applications and the like — documents that should not require pricey lawyers to prepare — has just been accused of illegally practicing law in the state of Missouri in a class-action lawsuit. Do LegalZoom and firms like it represent more of a threat to consumers or lawyers?

Let’s open up the legal field. Non-lawyers and LegalZoom-type companies should be allowed to provide simple services, just as physician’s assistants are capable of stitching up a wound so that doctors can focus on more complicated cases. And private corporations that have been prevented from competing with law firms should be allowed to establish their own legal services divisions to offer advice along with, for example, financial and accounting services.

The price of a lawyer can indeed be reduced without sacrificing the quality of legal services. The argument that occupational licensing protects consumers from being harmed by unlicensed practitioners is weak during an era where information is so readily disseminated. A lawyer-specific Angie’s List or other places on the internet could easily give consumers information about a practitioner’s track record, level of experience, education, and certification, allowing potential customers to quickly and efficiently determine that individual’s competence. Instead, today’s licensure requirements may create only the perception of quality, thus increasing the demand for credentialed lawyers even in situations where the credential does not add value.

The states could lead the way in a lawyer revolution. A few have already had the audacity to rebuff the ABA and have started to make it easier to enter into the legal services industry. If some states formally eliminate the licensure requirement, and if they express their support for all types of businesses to offer legal services, then the potential benefits to consumers of deregulating lawyers would become transparent and eventually spread nationally. Lawyers themselves, the subject of jabs over millennia — from the Bible to Shakespeare to Will Rogers — may even gain from an improved reputation with the public.

      

 

 

During the 2008-09 recession, total private nonresidential capital spending declined by more than 18 percent, but spending by telcos, cable operators, and wireless firms on broadband remained steady, declining by a bare 3 percent. The massive investments made in mobile and wired Internet capacity by the major network providers has sustained hundreds of thousands of jobs over the past six years, and we project that capital investment in broadband over the next few years would create approximately 509,000 jobs relative to a world without such investment.

The impacts of the recent investments in broadband networks have been startling. Because of the intense, facilities-based competition among broadband providers, most U.S. households now have a choice of at least three broadband technologies and even more suppliers in most service areas. That has had the effect of driving down the price and dramatically increasing the speed of broadband access for the average household. It was not that long ago when a high-speed “Ethernet connection” to the Internet was the sole province of government, large corporations, and major academic institutions.

We last examined the economic impact of broadband on the economy and on employment in 2001 and 2003. As it turns out, many of our previous predictions were too pessimistic. We underestimated the growth of broadband – its reach, the applications that it made possible, and the reductions in price of access in the first decade of the 21st century. The increasing availability, improved speed, and lower price of high-speed Internet services that has resulted from the continuing massive investment in broadband infrastructure has had a predictable effect on household subscriptions. The Pew organization’s household surveys show that the share of households subscribing to broadband Internet services has risen from 47 percent in 2007 to nearly 65 percent at the end of 2009, substantially above our 2003 estimate.

The indirect benefits of broadband are perhaps even more significant: Smart young programmers creating new “apps” for smartphones; academic institutions utilizing ever faster broadband to enhance the educational experience; health care personnel being able to deliver world-class medical services to underserved regions domestically and globally; and, businesses being able to order, manufacture, market and distribute their products from anywhere to anywhere. We could not have anticipated many of these developments in 2003; we surely cannot foresee all of the benefits of continuing improvements in broadband services that will occur in the next few years as network companies continue to upgrade their infrastructure.

Despite these impressive benefits, some are proposing that the U.S. radically change course by requiring network providers to share their lines with competitors or by barring network providers from offering differentiated services to content providers. These proposals derive from a debate over the prospective sources of innovation in a world of rapid development of graphics-intensive web pages and new mobile broadband applications. Some argue, without empirical support, that the most important source of innovation will be at the “edge of the network” by content providers. In contrast, there is a clear track record of job and wealth creation associated with investment in broadband access technologies in the network itslef, suggesting that investment at the “core of the network” by network providers is equally, if not more important.

To ensure the steady increase in broadband’s reach, capabilities, and services that we have seen over the past seven years, the FCC should proceed with a minimum of government interference as it moves through the process of creating a National Broadband Policy. To do otherwise would risk a reduction in the incentives for investment in the nation’s broadband infrastructure and the hundreds of thousands of jobs that such investment supports.

      

 

 

Microeconomics is the study of how firms and consumers make decisions in markets and how the government tries to address conditions that lead to “bad” decisions. And it has not suffered any serious intellectual setbacks from the current Great Recession. Indeed, the causes and cures of this recession are more about microeconomics than about macroeconomics.

Microeconomists’ theoretical and empirical contributions have taught us that market failures do exist but that the government rarely, if ever, can be counted on to correct those failures efficiently. Nothing in the last two years has undermined microeconomic analyses that influenced the deregulation of the airline, trucking, railroad, natural gas, crude oil, telecommunications and cable television markets. These deregulatory successes have not been compromised by the market failures that originated in the financial sector and are at the heart of the Krugman lament. But even if Krugman could uncover a theory that integrates irrational exuberance in financial markets with macroeconomic performance, it would hardly guarantee improved performance of government regulators. Nor would it enhance our considerable knowledge of how markets correct after sharp downturns.

The market failure that generated the current crisis is by now well-known: the rapid growth of subprime mortgages and the failure of many homebuyers and investors to understand and properly weight credit risks. Unfortunately, banks and rating agencies underestimated the probability of a major decline in housing prices and believed that they could measure the interrelatedness of credit risks. Financial firms, consumers and regulators did not adequately account for outliers–very low-probability events–that turned out to be important, leading to a wave of financial institution failures that caused great pain to the real economy.

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After more than three decades of denial about their long-term decline, Detroit’s car companies must now face the facts. A bailout will not revive them. Moreover, the leading alternative that has been proposed by others — bankruptcy — will not re-energize these companies sufficiently to reverse their decline.

In our judgment, based on experience elsewhere in American industry, the most constructive role the government can play at this point is to provide a short-term infusion of capital with strict repayment rules that will essentially require the auto makers to sell off their assets to other, successful companies.

Why is such a dramatic step necessary? For the unavoidable reality that the fundamental problem the auto makers face is not their pension, health-care or other legacy costs. It is that they are not making cars and trucks that enough Americans want to buy. And this has been true to some degree since the first energy shock hit the U.S. in the early 1970s.

In 1970, General Motors, Ford and Chrysler made about 90% of the new cars sold in the U.S. Today their share is closer to 40%. Their market share of light trucks has also declined, but less precipitously thanks to a 25% tariff on many imported light trucks.

How could a federal bailout or a bankruptcy reorganization change that? Pension and health-care liabilities have been a hindrance, but they haven’t blocked product innovation.

Bankruptcy has allowed some industries to turn themselves around. A decade ago more than 40% of the steel industry’s capacity was reorganized in bankruptcy. The result was the rationalization of capacity and new labor agreements that allowed three large players — U.S. Steel, Severstal and Mittal — to create a more efficient steel industry.

But this change occurred only after a dramatic restructuring of the industry in the face of fierce competition from new “minimills.” By the time the larger companies — Bethlehem, LTV, Weirton and others — collapsed into bankruptcy, they had already shed a vast amount of uneconomic capacity and ceded the production of certain types of products to the minimills.

Thus, the operations that Mittal, U.S. Steel and Severstal bought out of bankruptcy were the most efficient remnants and were devoted principally to making products used in motor vehicles, appliances and (to a lesser extent) construction. They did not have to build new blast or steel furnaces or revamp product lines. They simply had to rewrite labor agreements.

Similarly, the airline industry weathered a round of bankruptcies following 9/11. The problem then was overcapacity relative to what the changing market would bear. But economic recovery and lower labor costs negotiated in bankruptcy allowed most airlines to rebound because they did not have to face multiple carriers that offered better service and cheaper fares.

Detroit faces very different problems. It has had a persistent product-line problem that may be even more severe than its labor problems, and in any event will not be solved by getting UAW wage rates in line with those at the U.S. plants of Toyota, Honda, BMW and Nissan by 2010. The gaps between U.S. and foreign competitors simply have become too large to make up by reducing labor costs or rationalizing capacity. Even if the overall economy rebounds and gives Detroit auto makers some breathing room to emerge from bankruptcy, they will likely face similar — if not more severe — problems in the next recession.

In the end, the capital and labor of these companies need to be reallocated into better hands. To this end, we suggest that assistance of some form — short-term financing or government purchase of equity — be granted under the condition that the Detroit Three restructure their labor relations so as to be able to sell some or all of their major assets. 

There are a number of potential buyers for these assets. Toyota’s market cap is $100 billion and Volkswagen’s market cap is $110 billion. Either could bid for these assets. Honda, Nissan and even U.S. companies in related sectors, such as Caterpillar or John Deere, are possible buyers.

Members of Congress need to accept that the best possible outcome is a fundamental change in direction for the American automotive industry — a change that includes making Detroit’s facilities more attractive to successful companies. A joint venture between GM and Renault-Nissan was briefly discussed last year, and Daimler-Benz’s majority ownership of Chrysler was abandoned this year. Both failed because the Detroit-based operations could not improve their labor relations measurably and otherwise restructure sufficiently to be competitive.

By establishing firm mileposts for asset divestitures from which the companies could repay government funds, taxpayers could be reasonably assured that their money is well spent. But if Congress enacts a bailout without our conditions, the U.S. taxpayer will likely be on the line not only for additional support in the next recession, but likely on a regular basis for the foreseeable future.

We do not generally support government assistance to failing companies. But we think that our proposal will cost taxpayers less and, in the long run, be more beneficial to labor and the overall economy than either a straight bailout or

      

 

 

Secretary Peters has more than 20 years of experience in transportation, having served in state government before joining the Bush Administration in 2001. She served as Administrator of the Federal Highway Administration for four years before becoming Transportation Secretary in 2006. In that role she has focused on fighting congestion across all modes of transportation, improving safety and addressing the strains on traditional sources of transportation funding.

Michael O’ Hanlon, Senior Fellow and Director of Opportunity 08, provided introductory remarks. A panel discussion featuring Brookings experts Pietro Nivola, Rob Puentes, Robert Crandall, Clifford Winston and Jason Bordoff, followed.

Opportunity 08 aims to help presidential candidates and the public focus on critical issues facing the nation, providing ideas, policy forums and information on a broad range of domestic and foreign policy questions.