Tuesday, February 26, 2013

The (Bad) Economics of Legal Practice

I've been kicking around some reactions to a discussion a while back at LGM about the realities of simply "hanging out a shingle" if you're an unemployed lawyer, but a more recent post Paul Campos provides a somber economic context for would-be law firm start-ups:
In 1989, legal services accounted for approximately $157 billion, in 2005 dollars, of US GDP. In 2011 that same figure (again in 2005 dollars) was $156 billion. Over this time GDP increased by 68% in constant dollars, which means that, as a share of the economy, the legal sector shrank by approximately 41% over the past two decades....

The most striking contrast between the situation in law and medicine is, that while economic demand for legal services has, relatively speaking, been contracting radically (note to law school administrators: economic demand = people having enough money to pay for something they’re willing to use that money to pay for), that for medical services has gone through the roof. Between 1980 and 2008, the proportion of American GDP devoted to the health care sector increased by an astounding 77.8%.
The legal industry had a bit of a boom in the late 1980's, followed by a recession in the early 1990's. It may be that 1989 was a peak year, which would make it a weaker point of reference for comparison. But the gist of Campos's statistic is consistent with my own experiences, and what I hear when I talk to (very) small firm and solo lawyers - more lawyers are completing for work, from a pool of clients who are less and less able to pay for those services. In the community where I practiced, in the late 1980's pretty much anybody could come up with a retainer for a lawyer for a divorce or misdemeanor case. By the late 1990's they were borrowing from friends and family or maxing out the cash advances on their credit cards. These days, according to the lawyers I've spoken with, a typical prospective client has no savings and no remaining credit, and their extended family is equally tapped out. And a lot of the clients who can still afford to pay a retainer are bargain hunting.

It's not that you can't do it... and if you're of the mindset that "the time to start a business is during a recession", the legal industry is largely in recession. But in states like Michigan, for small, local firms and solos serving "ordinary people", that recession has been the 20+ year process suggested by Campos's statistic. Getting started in an environment where you have to both get clients who might prefer somebody more experienced or (perhaps and) cheaper, and where even after (and perhaps because) you've proved your skill you'll have a difficult time getting referrals worth taking from other lawyers in the community? How much of an uphill battle are you prepared to wage? And, frankly, love of the law doesn't pay the bills - if you have that much entrepreneurial spirit, why not direct it at something that is likely to return a greater value?

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