Taxi Cab Owners and Regulators Created Uber

The number of cars for hire didn’t rise with demand. What would you expect?

Bloomberg, May 4, 2018

On this day May 4, 2011, Uber NYC launched. It filled an enormous, artificial void that was created by the Taxi and Limousine Commission at the behest of the Yellow Cab medallion owners.

In New York, Uber has been thrust back into the news after several Yellow Cab driver suicides (read this or listen to this) and indebtedness and families of survivors are blaming the stress of competing with smartphone ride-hailing services. The New York City Council is looking to limit or perhaps even reverse the expansion of app-based rides.

This is a terrible idea.

This is because it was market forces — plain, pure and simple — that created the demand for ride services like Uber, Lyft and others. Indeed, these companies might not have achieved the wild success they found in New York but for the combination of the TLC’s aggressive incompetence and the medallion owners’ unbridled greed. Since the 1970s, these two groups have made taxi service in New York abysmal while enriching themselves. They did this by keeping the number of taxi medallions at an artificially low number and ignoring demand, much to the eternal dismay of anyone trying to hail a cab.

A little history: The TLC was created in 1971 to “wrest control of taxi industry regulation away from the [New York City] Police Department,” according to Biju Mathew, author of “Taxi!: Cabs and Capitalism in New York City.” This change took curbside ride-hailing from bad to worse and the TLC began a rich epoch of corruption and failure, marked by indictments and convictions.

I blame the artificially low numbers of medallions for almost all of New York’s taxi industry’s woes. The credit for that — and for creating a market opportunity for Uber — belongs to the TLC and the medallion owners. Consider, the number of licensed cabs was about 16,900 in 1937, when the city’s population was more than 1 million lower than it is today. Today, there are fewer medallions than 80 years ago. There have been only about 1,800 new medallions issued since 1996.

It is an artificially created monopoly, and monopolies tend to lead to terrible economic behaviors. Just consider one aspect of the appalling level of service on offer. In New York, many taxi drivers change shifts between 5 p.m. and 6 p.m., abandoning the city in the midst of rush hour, returning to the outer boroughs or even New Jersey for driver changes. Let a single drop of rain fall and it is almost impossible — no, it is impossible — to find a cab. The cars are often in bad shape, devoid of shock absorbers, and back seats that make me want a shower afterward. Yellow Cabs also have been known to illegally refuse to pick up the hails of African-Americans. Unlike London, where drivers have an almost tour guide-like knowledge of their city, New York cab drivers are often utterly ignorant of the city where they work.

All of these failings would be much less likely to take place in a competitive market. We know this is an artificial monopoly because of the price behavior of medallions after market competition began: prices for medallions peaked shortly after Uber came to town, but before it had much of an impact. Bloomberg Businessweek reported that medallion prices, which peaked at $1.3 million in 2013, were already sliding, falling below $900,000 in 2013. Just two years later 2015, prices had fallen another 40 percent.

And it got worse: By 2016, the lowest reported price was $250,000. Last year, medallions sold for as little as $241,000. They are still falling. Axios noted a recent transaction that went for just 8 percent of the peak value, or about $100,000. Other cities, such as Chicago, have seen similar declines in medallion prices.

This surely has meant some hardship for those who bought near the peak and have watched the value of their investment collapse. Among those hurt is President Donald Trump’s attorney and fixer Michael Cohen, who owes $282,000s in back taxes on his medallions. But let’s be real: this is what happens in markets — there are winners and losers.

Unless government intervenes in the market, there’s likely no reason why demand for Uber services will decline. Last year was the first time more people used Uber in New York than city cabs. In July 2017, Uber had 289,000 average daily rides versus 277,000 for medallion taxis.

This story, in a nutshell, is a classic example of regulatory capture. The TLC, by serving the interests of the industry it regulated rather than customers of the taxi industry, allowed an enormous gap between supply and demand to open. It was into this void that ride hailing apps like Uber and Lyft rushed, exploiting powerful market forces. No one should be surprised these services exploded in popularity; it is living testimony to the reality that trying to thwart market forces for decades eventually has huge repercussions. Even the courts understood this, with one Queens (New York) County judge telling medallion owners to “Compete with Uber or die.”

Of course there are other elements to this sad tale — epic greed and corruption, rent extraction and economic ignorance. But the bottom line is that the parties concerned made a giant mess of this, and now they are left to harvest their rotting crop.