I heard a fascinating story on my drive home from work this evening, and while I don’t have a complete grasp on it, it’s so interesting that I want to blog my scattered thoughts about it. The NPR story was about these taxi medallions that are required to operate a taxi in New York City, and how these medallions, after rising in value for decades, have now ballooned in value from a couple hundred thousand dollars to a million dollars in just a few years. Regular taxi drivers can’t afford them anymore so there’s a company called Medallion Financial that makes loans. I was waiting for the reason the cost of these medallions has gone up so much, but first I got a hilarious mouthful from Medallion Financial’s president:
“We have lent over $5 billion to the taxi industry with zero losses,” he says. “I am not aware of a single bank in the United States that can make a claim like that.”
It’s not that drivers never default on their loans, but rather that medallions are so valuable it’s easy to repossess a medallion from a delinquent borrower and sell it… Murstein’s business is built on an idea that’s become an article of faith: Medallions will never significantly decline in price.
Ohhhhhh boy….. I missed the housing bubble, and I’m still not sure if gold or college costs are bubbles right now, but I think I’ve got this one figured out! When you cover loan defaults by reselling the thing at a higher price, that’s a bubble, and I sure don’t want to be Mr. Murstein when whatever is propping it up comes crashing down.
But what is propping it up, anyway? NPR didn’t really explain it. They hinted at restricted supply, saying “there are exactly 13,237 taxi medallions in New York City, and that number has held more or less constant since the 1930s,” and they got an economist to talk about limited competition, but they didn’t talk about why or how the competition was limited.
So I went to Wikipedia to figure out where the government was intervening, and I learned that things were far, far worse than I ever imagined. Apparently in the 1930’s there were too many cab drivers in New York City, so instead of letting supply and demand sort it out, the city artificially limited the number of drivers by creating a license system with the now famous medallions.
The unfolding history reads like a libertarian handbook on the cascading follies of government intervention. You’ve got incentives that push demand into the black market and further regulation to try to prevent that:
In 1967, New York City ordered all “medallion taxis” be painted yellow to help cut down on unofficial drivers and make official taxicabs more readily recognizable.
You’ve got regulations that are supposed to prevent something but only change the incentives around, such as the mandate for a “partition between the front and back seats” to prevent robberies that simply “made knives less viable and made guns more viable.” And then you have those regulations conflicting with other regulations in a wonderful world of regulations:
Since side curtain airbags became mandatory ‘standard equipment’ in all US sold cars, a conflict has arisen. Since all side curtain airbags are contiguous from the “A” pillar to the “C” pillar, there is a deployment zone intrusion conflict, when there is a partition installed.
You have the justification for new government bureaucracy to manage all these regulations:
The New York City Taxi and Limousine Commission (TLC) was established in 1971 with jurisdiction over the city’s medallion (yellow) taxicabs, livery cabs, “black cars”, commuter vans, paratransit vehicles (ambulettes) and some luxury limousines.
You have this bureaucracy trying to justify itself by continually proposing more regulations that are so costly or absurd that some of them actually get repealed:
In response to complaints about head injuries from impact with the partition, the TLC instituted a requirement for a “Talking Taxi Box”. This was also abandoned after an eight year trial. It annoyed almost everybody who heard it and it certainly annoyed all drivers who had to hear the static announcements 30 – 50 times a day.
You have random regulations that are probably justified by the name of safety but conveniently pad somebody’s business somewhere:
Laws since 1996 require taxis be replaced every 6 years regardless of condition.
And it just doesn’t end…
In May 2007, New York City Mayor Michael Bloomberg proposed a five-year plan to switch New York City’s taxicabs to more fuel-efficient hybrid vehicles as part of an agenda for New York City to reduce greenhouse gas emissions. However, the plan was dropped after Cab companies complained that the cost of maintaining the new hybrid vehicles vastly outweighed the tiny amount of fuel savings they got from going smaller. A bumpier ride and a more cramped cabin were also noted as negatives by passengers…
The TLC has mandated that by the end of January 2008 all taxis should be equipped with a Passenger Information Monitor (PIM) that is a screen in the backseat that can provide entertainment, a live GPS map of location, and be used to pay for rides by swiping a credit card.
There’s even a list of vehicles that are “approved models”! The New York City government has its hands all over the taxi cab industry and keeps heaping on new requirements and standards at an almost comical rate. And yet I was surprised that the article’s concluding paragraph stated:
According to an April 2011 study by the Chicago Dispatcher, New York City taxis have a relatively low standard fare, charging an estimated $14.10 for a distance of five miles and five minutes wait time (compared to an estimated $18.48 in West Hollywood, CA and $12.87 in Houston, TX).
Is this what we should expect from libertarian economics? If you had told me that the government was artificially limiting the supply of taxis, I would predict the cost of fares to go up as the same number of people were fighting for a reduced number of taxis. Then if you told me that the government was piling requirements on the cab drivers, I would predict the costs to go up even more to cover the increased costs of meeting these requirements.
But wait! I’ve underestimated the government’s involvement once again! The fares are regulated too! Felix Salmon at Reuters argues that this has to happen because:
in order to have a market where prices are set by supply and demand, people need to be able to choose how much they’re willing to pay to take a cab. And you can’t do that when you’re standing on the sidewalk (not in the bike lane, please!) sticking your arm out and trying to hail the first cab to turn up. In order to make that transaction work, the fare schedule has to be set, in advance, by the municipal government.
Felix’s commenters scold him for a classic “lack of imagination,” explaining that plenty of cities don’t regulate fares and that taxis have found ways around the price bargaining issue without creating “utter chaos,” generally by posting fares on the outside of the cab. (Funny how markets can do that sometimes.)
But this doesn’t resolve my confusion. Some people seem to want to write this story off as “Government restricts supply, medallion prices go through the roof.” But isn’t this the exact opposite of what should happen? The medallion is a cost to the driver, not the passenger, and the driver is forbidden from passing those costs on to the passenger! So why aren’t prospective cab drivers saying, “Woah, I have to spend all this money keeping my cab up to code and buying new cabs all the time, and I can’t charge more money to my passengers, and I have to buy this really expensive medallion just to do all that? No thanks!”
And yet the demand for these medallions remains. I understand the self-perpetuating aspect of the bubble… The cab drivers view it as an asset that will serve as a “nest egg” (NPR), and as long as the combination of fares and regulations are such that you can still make a living at it, the belief that the license will always increase in value feeds demand for the license in an endless cycle. But where did that belief come from? Why were enough people competing for the right to be a cab driver to drive the costs up in the first place? Maybe originally the life was attractive enough relative to other occupations that there was more demand for it than the supply of open slots, and this demand increased enough with the population over time to gradually drive up the price of medallions. Ah-ha! Maybe it wasn’t an increase in demand for the taxi cab service, but in increase in demand for the taxi cab job that was somehow more powerful than everything the government was doing to decrease the demand for that job. That’s the best theory I got right now. Eventually people realized that an expected future increase in demand made the job even more valuable, which led to even more demand for it. Thus the current bubble, which Felix rightly argues cannot be explained merely by an increase in demand for the service.
All I know is I certainly wouldn’t want to be in that business. (Maybe that’s why the Wikipedia article says the demographics have changed so much that 82% of NYC taxi drivers are foreign-born immigrants? Poor immigrants…) The demand for one of these limited taxi cab jobs was originally created by the government, and what the government gives, it can take away. Felix points out that the “the mayor can print new medallions.” An NPR commenter suggests a possibility that “the city counsel comes up with some other scheme to regulate the cab industry.” And there’s always the risk of market innovations upending the landscape as well: “When Google’s self-driving cars become widely available and accepted, there will be no more need for taxis or even individual car ownership…” That’s overly optimistic, in my opinion, but these medallion holders are expecting a future increase fueled by nothing but expectations of a future increase that remain vulnerable to the unpredictable actions of both the government and the market. And even if nothing unexpected pricks the bubble, it’s doomed to burst anyway once it reaches an unsustainable size. Eventually the cost will be beyond even the financing that keeps it affordable now (and allows the demand to remain as high as it is). I sure don’t want to be running that company when those loans start going bad on the other side of that bubble, and I’m not sure I want to be needing to hail a cab in New York City, either…