David R. Henderson  

To Address the Top One Percent, Allow Competition

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For lawyers, doctors, and dentists-- three of the most over-represented occupations in the top 1 percent--state-level lobbying from professional associations has blocked efforts to expand the supply of qualified workers who could do many of the "professional" job tasks for less pay. Here are three illustrations:

The most common legal functions--including document preparation--could be performed by licensed legal technicians rather than lawyers, as the Washington State Supreme Court decided in 2012. These workers could perform most lawyer-like tasks for roughly half the cost. Unsurprisingly, legal groups opposed it. A few brave souls from the Washington State Bar Association board resigned in protest, and issued this statement: "The Washington State Bar Association has a long record of opposing efforts that threaten to undermine its monopoly on the delivery of legal services." Proportion of lawyers in the top 1 percent? 15 percent.

Many states allow nurse practitioners to independently provide general and family medical services, freeing up physicians to provide more specialized services. But most larger states do not. Again, typical nurse practitioner salaries are roughly half those of general practitioners with an MD. But, of course, physician lobbies stridently oppose the idea. Proportion of physicians and surgeons in the top 1 percent? 31 percent.

Dental hygienists can perform many of the functions of more far expensive dentists, but regulations vary by state and in all but a few states, it is not possible for hygienists to own and operate their own practice. My analysis shows that just 2 percent of hygienists are self-employed compared to 63 percent of dentists. Proportion of dentists in the top 1 percent? 21 percent.


This is from Jonathan Rothwell, "Make elites compete: Why the 1% earn so much and what to do about it," Brookings, March 25.

I'm working on a paper on inequality for the Association of Private Enterprise Education (APEE) meetings in Las Vegas in early April, and came across Rothwell's piece. Refreshing.


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COMMENTS (13 to date)
GU writes:

The lawyers who do basic legal tasks such as basic document preparation are not the same lawyers that are in the 1%. The labor market is flooded with lawyers, anyone with a pulse can get into a law school these days. While this is a barrier, it really is not much of one. The lawyers in the 1% are either partners at global law firms who provide very sophisticated legal services that only a few firms in the world can provide, or they are plaintiff's lawyers who managed to shakedown a large corporation for millions of dollars in settlement.

Increased competition, due to a higher supply of lawyers, has mostly lead to consumer-favoring adjustments in the corporate legal sector. The market for legal services for individuals is largely unchanged because individuals don't have enough information typically to judge whether a lawyer is competent and whether a lawyer is giving them a good or a bad deal. In other words, corporations that need a lot of legal services every year have become savvy buyers, they know what they're getting and what they should pay for it, and they are now driving a hard bargain with law firms. Individuals possess no such bargaining power and lack information to do the same, so you do not see consumer favoring innovations in that sector.

So I don't see the classic blackboard economic story about increasing supply and having the price decrease for individual consumers in the legal sector really applying here.

B writes:

Fallacy fallacy fallacy.
Just because a large part of the 1% are doctors and lawyers does not
mean that most doctors and lawyers are in the 1%.
The 1% didn't get there on the back of work that legal assistants and
nurse practitioners can do. They're surgeons and high end corporate
lawyers. That kind of work will certainly not be replaced by legal
assistants and nurses.
Furthermore, many of these people are in the 1% not because of their
income as doctors etc., but in outside investments and businesses.
These are often smart people and many of them are very good at using
that to make money outside their official career.
I'm going to be polite here. But this post made me really mad. What is
suggested here is borderline insulting to the intelligence. Letting
nurse practitioners etc. do more work may be a good idea, but it won't
solve this particular problem.

Steve Sedio writes:

There a lot of knowledge workers. Why are most of those in the top 1% in heavily regulated (by government, or by industry)?

Why are executives in certain industries, like finance, much more likely to be in the top 1%?

Multiple barriers to entry create artificial shortages, resulting in higher pay.

The commenters are right, nurse practitioners and legal technicians won't impact the pay. But more people in each field will chip away at each of those barriers, until they fall.

When they do, the market will set the price. And, there will still be those that are in the 1%, because they earned it.

David R. Henderson writes:

@GU and B,
You both make good points. It’s true that a lot of the income of the top 1% is due to specialized skills they have that would not be directly affected by allowing more people to practice.
But they would be indirectly affected by a chain of substitutions. Allow more entry and you get more competition at the low end, which then causes some of the people in that category to compete with those above, etc.
Would you get half of the doctors, say, dropping out of the top 1%? Probably not. But I could certainly picture 15 to 20% of them dropping out. Think of the people from other countries who practiced medicine in their country but get lower end jobs today. Some of them could be very good doctors or dentists.
B, you write that "Just because a large part of the 1% are doctors and lawyers does not mean that most doctors and lawyers are in the 1%.” That point is made in the very piece I quoted from above and, indeed, it’s in the part I quoted.
15% is less than 50%.
31% is less than 50%.
21% is less than 50%.
Also, B, you write:
Furthermore, many of these people are in the 1% not because of their income as doctors etc., but in outside investments and businesses. These are often smart people and many of them are very good at using that to make money outside their official career.
Good point, but it makes it more likely, not less likely, that these people would be subject to competition. Let’s take someone making $400K a year, putting him just barely in the top 1%. Let’s say that $200K is due to outside investments and $200K is due to professional income. If competition brings his income down to, say, $170K, he is out of the top 1%. Granted that this is just the guy on the margin, but the bigger the share of his income due to outside investments, then, for a given total income, the smaller is his professional income and, therefore, given your correct reasoning about specialties, the more likely is he to lose income due to more competition.

jon writes:

I pretty much second everything GU wrote. And to follow up on his post, here is a relevant quote from an article about profits at the Am Law 100 (kind of like Fortune 100 for law firms):

  • The pattern that we saw in the 2014 Am Law 100 of the “super rich” law firms pulling away from the merely “rich” continues.

So despite the fact that law school and the bar exam are becoming less and less of a barrier to entry, and the market is being flooded by attorneys, the profession as a whole isn't seeing any drop in wages. Instead, we are seeing increasing income inequality within the profession, as the top keeps pulling away.

GU writes:
It’s true that a lot of the income of the top 1% is due to specialized skills they have that would not be directly affected by allowing more people to practice. But they would be indirectly affected by a chain of substitutions. Allow more entry and you get more competition at the low end, which then causes some of the people in that category to compete with those above, etc.

I wouldn't say this is impossible, but I think it is highly unlikely in the legal profession. The large corporations, banks, and other highly profitable industries will only hire big law firms to do their legal work. The vast majority of the "big law" firms are over 50 years old; many are more than 100 years old. It's a bit like academia--no one will be passing Harvard, Yale, etc. in prestige anytime soon, in part because those schools had a big head start. Similarly, you will find that many of the "white shoe" law firms date back to the 1800s. The reputational goodwill and prestige that has been built up over the years is almost impossible to replicate by start-ups (it has happened with a few firms like Wachtell and Quinn Emmanuel, but these are exceptions to the rule that also only hire people with top credentials).

So my point is that it doesn't matter how badly someone wants to "compete upwards" against a firm like Cravath, Swaine & Moore; Cravath's clients would simply never even consider the upstart's offer, even if the offer was "we'll do all your work for free."

Outside of routine matters like simple wills, residential real estate closings, and the like, legal services are not widgets. Breaking down barriers to entry could help bring down the cost of these services, but as mentioned, the current providers of these services are not making anywhere close to 1% money. And there is simply no path for a "general practitioner" lawyer who makes $100k a year successfully representing small- and medium-sized businesses in various matters to start competing with the Kirkland & Ellis's of the world. So the 1%er law partners are safe even if the law schools and bar exam are abolished.

It does seem awfully unfair that there are law partners making between $1M - $5M per year. Who is bearing the burden of these rents? It used to be the clients, but they are very savvy now and drive a hard bargain. The burden is now on the associates, who face high billable hour expectations and greatly diminished partnership prospects. Essentially, the current leaders at the big law firms have "pulled up the ladders" on the younger Gen X and older Gen Y lawyers who should be making partner but are not in any great numbers. The partners figured out that they could make more money if they shared less of it.

Whether or not the top lawyers make huge amounts of money is irrelevant to most people in need of legal advice. Eliminate the Bar Assn.'s ability to determine who can 'practice law', and you'll see legal clinics develop, in which paralegals supervised by law school grads do most of the actual work.

Sorta like what happens in university dental schools, where a practicing dentist supervises the dental students work. Prices to the consumers at those dental school clinics are much lower than at a private dental practice...and often the quality of the work is higher too.

I experienced something like that with the lawyers who represented me in a couple of legal business disputes. They used me as a paralegal, in effect. I learned to write interrogatories and document requests, because, as they put it to me, the more work I could do myself, the fewer billable hours I had to pay them.

Of course, the more I did for myself, the fewer hours of expense they had too. So, the textbook supply/demand/price model DOES WORK. I've seen it.

Essentially, the current leaders at the big law firms have "pulled up the ladders" on the younger Gen X and older Gen Y lawyers who should be making partner but are not in any great numbers. The partners figured out that they could make more money if they shared less of it.
Which they can only do if there are barriers to those younger lawyers starting their own firms. You need to think on the margin, GU.

The younger lawyer who isn't making partner, only needs to see an opportunity to improve his/her prospects by using the experience gained at the top firms in a new location. Anything public policy can do to smooth the path to competition, AT THE MARGIN, ought to be done.

Same for medicine. Your average RN knows a lot about how patients respond to various treatments, because they see more of it than do the doctors.

I just happen to have had a friend whose office in Finley, Kumble, Wagner was a few doors away from Hugh Carey and Bob Wagner. One of her clients was Carl Icahn. That didn't protect the firm from competition (and poor management);

The firm's precipitous demise is believed to have been caused by infighting among its partners and excessive debt incurred by the firm's famous practice of paying exorbitant salaries to prominent and well-connected attorneys to entice them to join the firm as partners, including former United States Senators Joseph Tydings, Paul Laxalt, and Russell B. Long,[2][4] as well as by its rapid expansion, including the addition of firm offices in cities around the United States and the United Kingdom. By the time it folded, the firm had debts in excess of $60 million.

Nancy H Weres, MD writes:

[Comment removed. Please consult our comment policies and check your email for explanation.--Econlib Ed.]

Cliff writes:

Yeah the impact on law would be tiny, the impact on doctors would be quite substantial. The AMA is much more effective at restricting competition than the ABA. Can you imagine something like LegalZoom in the medical marketplace? "The bar" is a very low bar. There are a ton of lawyers working for peanuts already.

GU writes:
Which they can only do if there are barriers to those younger lawyers starting their own firms. You need to think on the margin, GU. The younger lawyer who isn't making partner, only needs to see an opportunity to improve his/her prospects by using the experience gained at the top firms in a new location. Anything public policy can do to smooth the path to competition, AT THE MARGIN, ought to be done.

There are very few regulatory barriers for existing lawyers to start their own firm--your comment is puzzling. In the context of representing large and wealthy clients--the context to which my "pulling up the ladders" comment was referring--the barriers to establishing one's own firm are reputational and simple conservatism/intertia. Hiring a well-known firm ensures a certain baseline level of competency and gives the in-house lawyer "cover my behind insurance" if things don't work out as planned.

Here's how the sales pitch to a Fortune 500 company by a youngish lawyer passed over for partnership would go:

"Lawyer: Hello General Counsel of [Fortune 500 company], I have worked for 8 years as an associate at [Biglaw firm], and recently started my own law firm. I know that you normally hire well-established large law firms with great reputations to handle your legal needs where millions or billions of dollars are at stake, but why don't you hire me instead? I'll do it for cheaper.

G.C.: so what happens if the case/deal/etc. doesn't work out? How do I explain to my boss that I entrusted our venerable company's legal needs to a young no-name attorney?

Lawyer: ?????

G.C.: I'd rather pay an established firm more money to do it right, and if things go south, they'll bend over backwards to make it right, and I'll have a great excuse because who could blame me for hiring Prestigious Law Firm? Good luck with your law firm Lawyer."

This is why young lawyers at large law firms can't effectively combat the "pulling up the ladders" problem. It has very little to do with government policy.

That's not the only sales pitch possible, GU. The young lawyer with years of experience doing work for a Fortune 500 (or 100) company as an associate at a big law firm, can also go to work as an in-house counsel for that client firm.

Not to mention that the young lawyer can switch to a firm that offers him a partnership in the expectation that he has developed a relationship with clients that can be exploited.

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