May 14, 2004
Taken for a ride?
The Economist Magazine, April 22, 2004
Higher fares for an unfair racket
IF A city goes to the bother of regulating its taxi industry, it should presumably have the interest of residents at heart. How then, to explain the system in New York? It benefits neither passengers nor drivers. Instead, most of the proceeds flow to a third group of “medallion-holders”—the people who own the aluminium badges that give a taxi the right to pick up passengers on the street. The going rate for a medallion is now about $300,000, so they are usually owned by investment companies, investors or partnerships rather than the driver.
These monopoly franchise rights were granted back in the Depression, when the notion of using rationing to fight deflation seemed like a good idea. In 1937, 11,787 cab licences were handed out at $10 each. Remarkably, no more medallions were handed out until 1996 when the city, desperate for money (again), sold off another 400. Since then, flogging off new medallions has become a nice little earner; over the past two weeks, the city has been auctioning off 300 of the things—and 600 more will be sold over the next two years.
The city has budgeted $65m in revenues annually from these auctions, but the true figure may be closer to $100m. The value of the medallions has risen thanks to the city's helpful decision to raise fares by 27% just before the auction. Since most of the costs in the cab trade are fixed, most of the extra money will go straight to the medallion-holders' pockets.
The auction is arguably just a consumption tax—and an inefficient one at that, because the city splits the bulk of the proceeds with the medallion-holders. Meanwhile, the city's preoccupation with boosting medallion prices helps to explain a lot of things: why New York has relatively few cabs; why they are getting ever costlier; why only poor immigrants are prepared to be drivers; and why no one looks after the cabs.
To be fair, the new fare structure is supposed to help fix some of the worst problems, notably the absence of cabs during the early evening rush hour. Typically, just as demand begins to pick up, the streets are gridlocked with off-duty cabs driven by a day-driver rushing to hand over the car to a night-driver by 5pm (the idea being that each driver should have one busy period during his shift). The fare structure has now been fiddled with to bring the handover closer to 4pm. If the fare could now be weighted less towards the pick-up point, and was higher per mile, drivers might be less inclined to fake engine trouble to avoid leaving central Manhattan.
The city says the drivers earn $13 an hour. Drivers put the figure at half that level, and add that they have to pay their lease fees to medallion-owners upfront. Evidence of the unattractiveness of the job can be found outside any cab garage, where numerous taxis are available for lease with no takers.
The city hopes that the drivers' income will rise to $20 an hour under the new fare structure. The chances are that most of this will be eaten up by higher lease prices. Most drivers have little bargaining power; having no credit histories, they cannot buy medallions themselves. Meanwhile, the share price of Medallion Financial, the biggest company in the industry, has doubled in the past year.
The Frontier Centre for Public Policy
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