Unfree Enterprise

Lately, the lot of the New York cabbie has improved a bit. But there are still some major systemic obstacles that keep drivers and their passengers from getting the conditions and service they deserve. One crucial issue is that the system for licensing cabs seems less a product of American capitalism and more like something straight out of a Soviet Five Year Plan.

It is probably noncontroversial to assert that New York’s economy and society have developed considerably since the Great Depression. Yet the number of licenses to operate cabs in New York has actually shrunk since 1937. That was the first year a city permit (or “medallion”) was required to provide taxi service (i.e. respond to street hails). Many cities across the U.S., such as Chicago and Boston, have similar systems which cap the number of cabs.

In New York, the ever-spiraling demand for taxi service, coupled with draconian limits on supply, has had predictable results. Corporate medallions, which permit the holder to operate a single cab, were selling for an eye-popping $760,000 in September. USA Today recently noted that medallion prices have risen 126 percent since 2004; Andrew Murstein, president of a firm that invests in medallions, reports that “it’s an industry that has always gone up. It has outperformed every index you can think of — the Dow, Nasdaq, gold, you name it.”

In addition to the appreciation of the medallions themselves, owners realize a handsome income from leasing the permits to the people who actually drive the twelve-hour shifts.

Excluding other services they might perform, like driving or leasing cabs, what do medallion holders actually contribute? Uh, yeah, umm, can I phone a friend?

Primarily, medallion owners extract unearned “rents” from the pockets of drivers and passengers. The limits on medallions also make it hard to find cabs in many places. It is true that the Taxi and Limousine Commission tries to protect passengers by regulating fares and forbidding taxis from refusing undesirable trips. It also tries to protect cabbies by capping the rates they pay to lease medallions from the owners. But the maximum medallion lease fee is currently set at $800 per week, or $40,000 a year, which seems like quite a financial burden for cabbies who often take home considerably less than that.

(Also, the market has a funny way of working around such ham-handed attempts to micromanage it. New York City Council Member David Yassky recently issued a report which demonstrates medallion owners are circumventing the lease price cap through questionable means, like heavily overcharging for the rent on the cabs themselves.)

What to do about this? There is some scholarly debate over whether complete taxi deregulation is a panacea. Proponents, backed by basic microeconomic theory, believe better, cheaper, and higher-quality service would result, with the circumstances of both drivers and passengers considerably improved.

However, some fear that lifting the caps entirely would bring a flood of new entrants into the industry that would drive down fares and/or occupancy rates. This would erode gains to drivers (at least existing drivers), though at the same time it would have benefits for passengers.

But even absent total deregulation, a more incremental step could be taken. Medallion prices are a great guide to the current level of supply and demand, and right now they indicate that many new medallions could be issued without the sky falling in. One option for cabbies if the Manhattan market is truly saturated: expand service in the outer boroughs. Excluding airport trips, only eight percent of cab rides in New York are to outer-borough destinations. As a result, service there has largely been left to quasi-legal “gypsy” cabs.

More medallions on the market would drive down medallion prices and hence leasing rates, helping out most drivers. It would also give them a better chance of someday buying their own medallion. It would put more cabs on the street (better service) and it would also create lots of new jobs.

Another option for reform of the system would be a program to gradually transfer corporate medallion ownership to owner-drivers. This would at least ensure that those doing the work reap the rewards.

In all, it is probably safe to say that a system which caps the supply of a highly in-demand service (creating a thriving black market), and then empowers an unproductive class of investors to squeeze rents from both workers and customers, and then institutes price controls to limit gouging of customers, and then institutes more price controls to try to prevent gouging of employees, is enough to give most economists hives.

At the very least the medallion system deserves some serious scrutiny and some kind of reform.

Unfortunately, given the billions that politically powerful medallion owners have invested in the current system, the chances of this happening are probably about as good as the chance of finding a cab on a rainy night in Staten Island.