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.


David Chowes, New York City

In 1937, the system made sense. A cab license was $15. Now it makes no sense. But, I suspect that we're stuck with it.

[In about 1970, a medallian sold for $6,000. It would have been a better investment than buying Xerox stock in 1948.]

John

A similar sitution existed in Ireland up to a few years ago. Change was brought about when the government went to issue more wheel chair accessable taxi licenses. The Taxi driver / owners group foolishly sued the government. They claimed that the government didn't have the right to issue new licenses. They won but the court ruled that the government didn't have the power to issue any licenses. The taxi maket was deregulated overnight.

The current complaint from taxi drivers is that there are too many taxis etc etc. There were clear winners, the consumer and those new taxi drivers who are now free to ply their trade in a vastly increased taxi market.

MikeM

I wouldn't advocate too hard for putting more low-occupancy vehicles on the NYC streets.

MALajoie

If anyone has ever been to Mongolia, the capital city Ulanbaatar has a fairly interesting "black market" for taxiing - Aside from the regular and well identified official taxis, anyone driving a car in the right direction can embark - and will fight over - someone waiting off the road for an informally tögrög per km fixed fee (thank you Lonely Planet !).
Granted, Ulanbaatar hardly approaches the size of NYC, but for people willing to use multiple taxis to get from one side of town to another, this could be interesting...
I've only been there a couple of times, and not for long each time, but would anyone else have any more detailed information on this system ?

Eric M. Jones

"Corporate medallions, which permit the holder to operate a single cab, were selling for an eye-popping $760,000... the maximum medallion lease fee is currently set at $800 per week, or $40,000 a year."

Do the math: 5.26% ROI? What am I missing? This is like the hotdog vendor question. Are these US dollars or NYC dollars?

science minded driver

You have an interesting point- the real question is of how one gets around it. This is a rhetorical question in the sense that the proof of the pudding is in the eating.

Nick S

One of the major issues with increasing the supply of cabs is the negative externality that cabs have. Past a point, congestion increases exponentially with each added car, so though there will be more cabs available, the actual benefit from each cab decreases.

Frank

Sounds like to me the same arguments should be applied to American patent & copyright system

Brandon Abley

Eric: You're forgetting that the taxi medallion is an investment whose worth is constantly increasing. So much of the value their is in the asset, not cash flow. The story also reported that between 2004-2009, the medallion value increased over 120%. With the lease added to that appreciate, net value of the total investment increased by about 50% (the 120% appreciation more than makes up for the price of investment over five years, and the the lease fees add another 25-30% over 5 years).

hmmm...

So Why doesn't NY do something to plug their budget hole by selling a few more. Don't go nuts, 10-15 new ones per year would pay for a lot of teachers...

CB

"forbidding taxis from refusing undesirable trips" - doesn't really work, as you can see by this - "eight percent of cab rides in New York are to outer-borough destinations."

In other words, taxi drivers often refuse to take people from Manhattan to the outer boroughs.

Also, could you talk a little more about the "black cars" in NYC? These are not "quasi-legal “gypsy” cabs," are they? They have their own license plates and are subject to regulation by NYC's Taxi and Limousine Commission 9http://www.environmentalleader.com/2008/02/29/nyc-black-cars-go-green/). Also, it might be interesting to look at the differences between metered taxi rates vs. agreed upon (often w/some negotiation) rates for black cars, and some of the pros and cons of each system.

Alex

Taxi driving could be a perfect market if deregulated. Low barriers to entry (ok, buy or rent a car, get a driver's license and a GPS) and very easy to respond to demand (go where people are, or go home). Why charge for a license? Register your cab so someone can call the police easily, but beyond that forget it.

Now, the real question is how do we deregulate fare pricing. We don't want to scare tourists or take advantage or rubes, so we need a single price for all cabs at a given time... the question is how do we make that price dynamic. Technologically we can do it (have meter rates update wirelessly), but how is that price decided? Ratio of empty/full cabs? Well... i would report full 100% of the time if i drove a cab.

Bottom line is we need it to be profitable for some people to drive taxis on rainy Saturday nights and no other time. $800/month is a bit too much for that.

Michael Nahas

Taxi Medallions, Rent Stabilization, Political Engineering ... NYC ain't short of nightmares for economists.

michelle

A lot of taxi drivers are absolute saints, as annoying as it might be to find a cab sometimes.

The subway system is pretty good in most of manhattan so instead of waiting forever a lot of people just go with the train.

(whatever people are saying, NY has some of the best taxi drivers in the world)

Grant

I prefer the gypsy cabs in outer boroughs much of the time. Unlike yellow cabbies they know the neighborhoods and can/will tell you the price to your destination before you get there. That way you don't have to worry about the cabbie taking a longer route in order to screw you, which WILL happen when you get a yellow cabbie. I've had yellow cab drivers pretend to not know where they are going and then pretend not to hear me when I tell them to turn just in order to wring a few dollars out of me. It's disgusting. Gypsy drivers are usually friendlier, cheaper, and more reliable.

David

@Alex, in terms of pricing, I think regulating the posting of prices in the same format as currently would be enough. X to start Y per 1/5 mile

I'd love to see more uniform regulation for paid parking in the city, Unless you've parked at a given place you never know what you'll pay, and often it isn't worth the effort to move on (getting on and off the street in NYC is a pain)

Winston

Toronto just killed this market point blank a few years back. People were selling licenses for six-figure sums, and they were mostly held by investors who leased them out. The city just made licenses non-transferable (so no more selling them - bye-bye investment), they die with their owners, and licenses issued from that point on would only be issued to someone who would own and drive the cab themselves.

Avi Rappoport

Right now, the owners make a lot of money for doing nothing, while drivers eat any gas price hikes. Anything that changes that dynamic is good with me.

Herbert

I guess the final sentence sums it up just fine. The medallion system in it's current form is a perfect example of how things work in America.

Philippe

We basically have the same system in Paris (France) though the number of cabs in service is more or less adequate. In the 90s, whoever was in charge of the medallions realized that there were too few cabs and created new ones, *giving them away*. This was a huge gift to the lucky cabbies who could get one for free instead of renting it. Since the system is still in place, they'll be able to retire and sell it at market price (somewhere in the 100-200k$ range).

The fares are regulated, and there are 3 different prices depending of the time of day, and location.