Saturday, November 16, 2013

The Apple-Warehouse Problem

I can't pretend that I've every word of the new "law school is going broke" meme, but I've read enough so I suspect I've picked up the main themes ("They're ripping of the students!" "They're being creamed by the central administration!"  "Paul Campos is an addlepated numbskull!"  "We're all going to die!").  And enough, I think, to take note of an elephant that is absent from the room.'

That is: capital cost.  So far as I can tell, nobody is talking about the cost of capital--plant, the real estate, the physical facility. I haven't any idea why the cost of capital for any particular law school might be, but it's not negative and not zero, and unless we count it, I don't think we have any idea what he cost of law school might be.

Think it through in terms of a private-sector income statement.  You tot up your gross revenues. You subtract cost of inventory, expenses for sales and general administrative and what not and then you stop.  Or at least pause.  If the number so far is negative, you've got to do something, now: raise prices or cut costs.  Otherwise you're better off dead.  

But suppose the number is positive.  Are you done? No, you are not done.  Then you ask: is the surplus  from operations (above) sufficient to lure in the capital I need to make the business go?  If the answer is "yes," then great, we all go to the seashore.  If the answer is no, then we might as well take our ball and bat and go--where? Well I don't know where, exactly, but someplace where the resources may be deployed more profitably.  Back in my newspaper days, I worked in a cavernous old concrete block monstrosity in the Cleveland suburbs.  Community folklore told us it used to be an apple warehouse.  Apparently "newspaper" was thought more productive.

Anyway--I've never once had a conversation with a law school dean about costs (and I've had a few) where the cost of plant even began to figure.  Example, when we took on a new dean here in Palookaville about 20 years ago he carpet-bombed us about the cost of operations.  We learned some interesting stuff (example: "fund-raising" turned out to be "fund-reducing").  We engaged in anguished bleating about  how much  vigorish was being sucked out by the brass hats across the street.

But not one word about the cost of the physical plant.  Strike that: cost of maintenance, okay, we learned about that.  It's part of the home office vig.   Probably even the amount spent on replacement lightbulbs. But nothing about you-know what.

And it's not just us.  A few years later I was talking to Henry Manne, the guy who more or less reinvented George Mason U Law School.  "And we make a profit!" squealed the profit-minded Henry with malicious glee.   But how much to you allocate to real estate?  Henry wiggled very much like a guy who has just been asked a question he'd never thought of before.  Well, he said, the building was abandoned.

Okay, maybe.  But I suspect somebody could have sold it. The question would be--what would Henry have had to pay if he had to buy it?  That's the question that never gets asked.

[And it may happen more than we guess.  I'm told that Cardozo got that nice building on Fifth Avenue at Twelfth Street as  gift. Something about an old surplus textile factory (it's just blocks from the sit of the notorious Triangle Fire).  But they seem to have turned it into  (along with a law school) a nicely profitable real estate example.  Once I heard a third  such story but I can't remember just now--Seattle?]

I suppose I can think of one reason why this issue never arises.  That is: the leadership of the law school is middle management.  Somebody may indeed take their building way to be devoted to what the planners might call a "higher and better use."  Say, computer science.  Okay, fine.  That means that giving it to a law school and denying it to computer sci  is an opportunity cost which isn't being explicitly measured at the law school level.  But I bet they know somewhere up the line. And at a place like NYU, say, plunked down in the middle of hugely expensive and profitable urban real estate, I bet somebody knows pretty exactly.

That's it; there is no real secret message here.  Only that we are not measuring the true cost of law school, and we are almost certainly underestimating.  Oh, and another word about the newspaper in the Cleveland suburbs.  I said that the folklore was that we began life as an apple warehouse.  One of the wise guys drew a D&D-like chart to describe the history of the enterprise. Way over at the beginning--the left end--it said "apple warehouse."  And at the right, the end, it said--yeh, you guessed it.

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