This is the next post in my discussion on the unwinding of the current “attorney bubble.” My last article provided an overview of topics which I’ll be discussing and it also explained that quite a few firms are, or about to be, experiencing hard times. The bottom line is that when a bubble goes “boom” a whole lot of people wind up looking like this:
The interesting thing about a bubble, however, is that most people don’t realize that one exists until it does actually burst. As I’ll be discussing in this and my upcoming posts, the legal profession is very much in a bubble and now it’s getting popped just like this:
I’m going to use this post to explain that the profession has, in fact, been in a large bubble and what caused it. My coming articles will discuss why this bubble is bursting, quickly, and what firms will need to do over the next 12-24 months.
This article is going to contain a lot of discussion involving two of my favorite topics – economics and math. Let’s get to it.
Are lawyers and the legal profession in a bubble?
A bubble exists when a market is priced or sized to an extent that is not justified by its economic future. During a bubble people tend to come up with interesting ways to justify the situation. Just think of the “dot.com” boom when investors, and the general public, honestly believed that the internet was going to put companies such as Wal Mart out of business within a year or two. Investors poured billions into tech startups out of an assumption that the entire world was going to move online almost instantaneously. Next, think of the housing bubble of ten years ago when people came up with all kinds of interesting justifications to explain why home prices were going up so fast. Those are classic examples of bubbles. The first example is one where internet companies sprouted up out of a belief that “demand would be there” but the demand then didn’t materialize as fast as many thought it would. The second example involved a belief that houses prices would go in near perpetuity. Both of these assumptions, obviously, were wrong.
Bubbles can be “fueled” by something or they can simply be the result of irrational mania. They can also be result of both. The housing bubble, for example, was fueled by investor demand for sub prime mortgages and cheap access to money (low interest rates). As investor demand dried up, and interest rates rose, the whole house of cards fell down. Likewise, the dot.com bubble was fueled by easy access to capital, a 1997 tax act that spurred investing, and a belief that the internet would mature faster than it did.
Now let’s look at whether the profession is in a bubble and what fueled it.
There is a “bubble” of attorneys in the United States
Given that a bubble is a market, which is not justified by it’s future economic conditions, let’s figure out if the legal profession is one. In 1980 the United States only had 574, 810 lawyers. At the time the country had a population of 226,545, 805 people. So, in other words, attorneys made up roughly .25 percent of the population. By 2017, the number of lawyers in the U.S. had grown to 1,335,963 while the number of people in the country had grown to 326,965,015. This means that, in 2017, attorneys made up roughly .41 percent of the population. In relative terms that’s a 64 percent increase in the lawyers’ share of the overall population. The demand for legal services did not increase by 64 percent during this time. That’s why, from 1988 to 2012, it has been reported the average solo practitioner’s income dropped from an inflation adjusted $70,747 to $49,130. These stats show that attorneys have been growing their ranks in a way not justified by future economic conditions – which is the definition of a bubble.
Further proof of the fact that the legal profession is larger than what economic conditions justify is the number of legal-related jobs in the U.S. The “legal services sector” is measured by the Bureau of Labor. It includes everyone who works in law firms (lawyers, legal assistants, paralegals, etc.). In January of 1993 (the earliest year for which data is available), the legal services sector employed 924,000 people. The country only had 846,036 lawyers at that time. So, in other words, the legal services sector was roughly 78,000 people larger than the attorney population. By 2017, however, things had changed. By December of 2017 the legal services sector employed 1,128,200 people. Again, the attorney population was 1,335,963 by that time. So by the end of ’17 the number of attorneys was actually larger than the entire legal services sector by roughly 208,000 lawyers. One measure of the demand for legal services is the extent to which jobs are being created in the field. The fact that job creation has not kept up with lawyer production means that the system has been producing lawyers in excess of what was justified by future economic conditions – that’s a bubble which is no different than building houses more quickly than they will be purchased.
The cause of the United States’ “attorney bubble”
Now that we’ve established that the attorney population has reached bubble proportions, let’s look at why this happened. There were three main factors in the creation of this bursting beast. The rise in the use of automobiles, the “war on drugs,” and an opening of law schools that reached mania proportions. Let’s take a look at each of these. As to each of these points, I’m not raising the issue as to whether these things are good for society, I’m simply talking about how they fueled the growth of our attorney population.
It’s important to remember that car ownership wasn’t “a thing” until the twentieth century had progressed. In 1921, as a country, Americans only drove roughly 55 million miles. It took until 1960 for that number to hit 719 million miles. So the total increased 664 million miles over 39 years. From 1960 to 1980 (twenty years), however, the number of miles driven in our country increased to 1,527,300,000. So it only took another twenty years to increase by roughly another 808 million miles. From 1960 to 1980 the number of auto deaths in the U.S. increased from 36,399 to 51,091. The increase in auto accidents led to the creation of the modern car accident firm – which fueled the need for lawyers (on both the Plaintiff and the insurance defense side).
Auto accidents created a large number of legal jobs in the U.S. and they were part of the fuel that created the current attorney bubble. This is shown by the fact that, in 2005, vehicle collisions accounted for 35 percent of all civil trials. As I’ll explain in a later article, this fuel is being taken away, quickly, in 2018. This is one reason why the bubble is ‘a burstin’.
Another source of demand for legal services, which helped fuel the attorney bubble, was the “war on drugs.” President Nixon started the “war” in 1971. By the 1980’s the number of drug arrests in the country had risen by 126 percent. From 1986 to 2011 the national prison population increased from 300,000 to more than two million. A substantial portion of these arrests were for possessing relatively small amounts of marijuana. In 2011, there were more arrests related to marijuana (mostly cases involving simple possession) then there were for all other violent crimes combined. To say that the war on drugs (particularly marijuana) has provided extreme fuel for the feeding of the attorney bubble would be an understatement. Just think of all those prosecutors, public defenders, and private attorney jobs that were created. Again, this fuel is quickly being taken away and the bubble is going “boom,” as I’ll explain in a coming article.
What’s the third form of fuel that fed the attorney bubble? The answer is law school creation. For the reasons explained above, the demand for legal services quickly grew in the 1970’s and 1980’s. The system simply wasn’t producing enough attorneys to meet this demand. In 1960 the country only had 285,933 attorneys and by 1970 this number had only grown to 326,842. From 1920 to 1969 the U.S. only opened 46 law schools. But of course, we had to meet all that demand that was being created by car accidents and the war on drugs. This is why 81 law schools opened between 1970 and 2012. Remember in the 2000’s how we kept building houses as if demand could never go down? Well, from 1970 to 2012 we kept opening law schools as if the demand for legal services would never go down. As I’ll explain in my coming articles, the demand for legal services, which fueled the law school bubble, and in turn the attorney bubble, is disappearing right quick.
Is there an attorney “bubble?” The answer is:
Why attorneys must recognize that their business is operating in a bubble
So why is it important to recognize that law firms are operating in a very large bubble? The reason is simple – just think of the bubbles you’ve experienced in your life time. Bubbles don’t unwind gradually. They explode in a violent fashion. Remember how fast the world went to hell from 2007-08? Remember the dot.com bust? The NASDAQ lost 78 percent of its value in less than two years. I speak to a lot of attorneys who actually recognize that they’re in a bubble but are convinced that it will take many moons for it to correct – they’re wrong. The attorney landscape is going to look very different over the next 12-24 months now that the bubble’s fuel is being taken away.
The first step in surviving a bubble burst is to recognize that the bubble exists. Once you recognize that then the next step is to realize that you need to make immediate changes. I’ll be discussing these changes in my upcoming articles.
What evidence do you see of an attorney bubble? Please chime in through the comment form below.
1 – Dot-com bubble – accessed on April 12, 2018 at https://en.wikipedia.org/wiki/Dot-com_bubble
2 – ABA National Lawyer Population Survery – accessed on April 12, 2018 at https://www.americanbar.org/content/dam/aba/administrative/market_research/Total%20National%20Lawyer%20Population%201878-2017.authcheckdam.pdf
3 – Demography of the United States – accessed on April 12, 2018 at https://en.wikipedia.org/wiki/Demography_of_the_United_States
4 – See citation no. 2
5 – United States Census Population Clock – accessed on April 12, 2018 at https://www.census.gov/popclock/
6 – The Fall and Rise of Lawyers – accessed on April 12, 2018 at https://www.cnn.com/2015/05/22/opinions/barton-rise-and-fall-of-lawyers/
7- Bureau of Labor Statistics – February 4, 1994 employment summary accessed on April 12, 2018 at https://www.bls.gov/news.release/history/empsit_020494.txt
8 – See citation no. 2
9 – Bureau of Labor Statistics – January 5, 2018 employment summary accessed on April 12, 2018 at https://www.bls.gov/news.release/archives/empsit_01052018.htm
10 – Motor vehicle fatality rate in U.S. by year – accessed on April 12, 2018 at https://en.wikipedia.org/wiki/Motor_vehicle_fatality_rate_in_U.S._by_year
11 – See citation no. 10
12 – See citation no. 10
13 – Self-driving cars will disrupt more than the auto industry. Here are the winners and losers – accessed on April 12, 2018 at https://www.cnbc.com/2017/05/03/self-driving-cars-will-disrupt-10-industries-commentary.html
14 – War on drugs – accessed on April 12, 2018 at https://en.wikipedia.org/wiki/War_on_drugs#Arrests_and_incarceration
15 – United States incarceration rate – accessed on April 12, 2018 at https://en.wikipedia.org/wiki/United_States_incarceration_rate
16 – The Injustice of Marijuana Arrests – accessed on April 12, 2018 at https://www.nytimes.com/2014/07/29/opinion/high-time-the-injustice-of-marijuana-arrests.html
17 – See citation no. 2
18 – See citation no. 2
19 – List of law schools in the United States – accessed on April 12, 2018 at https://en.wikipedia.org/wiki/List_of_law_schools_in_the_United_States
20 – See citation no. 19