Undermining Cartels

I was reading an article on how Uber was undermining the taxi medallion in New York City.  One could tell there was a certain amount of glee it the author’s voice as the story unwound.  I suspect the author may be a frequent user of taxicab services not only in New York city but world wide.  Of course we have all read about Uber’s inroads to the “ride sharing” business even it is a paid taxi service.  But is Uber’s manner of “competition” really productive in the long run?  It is one thing for government, local, state or federal to regulate a common carrier business for the “good of the public” and another to create cartels and monopolies where none are beneficial.  A taxi business is predicated upon two constraints.  The first is public transportation, meaning busses, cable cars, trolleys, subway trains, and the like.  Busses are the most flexible form of transportation since bus routes are not set in concrete, literally.  All other public transportation run by public utilities or by a government agency are monopolies by definition.  The amount of money spent on determining the best routes for static lines, meaning unchangeable geographically, has accumulated into the trillions.

Most modern cities are laid out like a tic-tac-toe game, large grids where diagonal movement is difficult and taking public transportation often means traveling greater distances for longer periods of time.  Even bus routes tend to travel wither east-west or north-south directions.  This is why financial districts are concentrated into smaller areas that use vertical construction to concentrate the businesses and workers.  Here parking commands a stiff premium since what tspace the automobile consumes subtracts from the space where business can be conducted.  Of course one can excavate a hundred feet into the earth (well, that depends of the strata below the buildings) and use such space for parking.  Or one could put the parking on the top floors.  But the use of ramps that allow the vehicle to drive to a floor where a space is available consumes space that would otherwise be used more productively.  One could use elevators to life vehicles to the proper floor and eliminate some of the wasted space.  The other problem is the number of vehicles that occupy the streets during commute times.

The other problem is that those vehicles used for the commute to the financial district will greatly occupy or even overload the streets before the start of business and directly after the close of business.  Between the open and close of each business day the streets may be used sparingly.  A bus is about fifty feet long and may be able to carry as many as a hundred passengers where the average automobile is about eighteen feet in length and may only carry one person.  Busses are more efficient at carrying people.  But there is a penalty for capacity and that is convenience.  We would prefer to arrive close to the start of work and not an hour before.  Not even a half hour before.  and even having to wait fifteen minutes for many is a chore.  And of course, any talk of public transportation cannot be had without mentioning that as a business model, it loses a lot of money.  Indeed, the public riders are subsidized by public taxes as are the union employees.  Of course with electronic communications being what they are, there is really no need to concentrate business operations into one sector of the city.  Why not disperse the businesses around the city, that would eliminate a great deal of over crowding of the streets with automotive traffic.  This would disperse services and perhaps allow more efficiency to the system.

Well, what about the taxis, isn’t that were all this started?  Of course, it is the exception handling system.  If both public and private transportation systems are inconvenient to a few, then the taxi offers the exception, for a price.  Taxi services are bound only by the grids they traverse and by the traffic conditions they encounter.  for this service they will extract a premium, all things being equal.  But all things are not equal and that is the problem.  Back in 1999 I drove downtown London.  The experience was a pain in the rear end but I could drive the streets with the rental car I hired.  In 2005 there was no way I could do a repeat of that experience.  Seven years had passed and the traffic was very bad.  We took one of those London cabs the city is so famous for, and the time it took us to travel a little over one hundred yards was very long.  the meter ran up to ten pounds and we got out and walked the many blocks we needed to connect with the tube.

Now London does not issue medallions.  If you want to be a cab driver you have all the opportunity in the world to join their ranks.  But there is one slight catch.  You must know every street in London and that covers a very large area.  But one must also know when and where construction is going on and how to avoid those areas.  The test is very straight forward.  You want a cab license, then pass the very strict test.  People often study for five or ten years in order to pass that test.  But once you have the license, your income will be very close to triple digits.  In the surrounding suburbs the issuance of taxi licenses is a little different and taxis must hustle for the fares, as there is more competition.  One must understand that a taxi business has expenses.  First is the vehicle with the correct electronics for metering of the fare and usually a GPS system to correctly guide the driver to the correct destination.  Second are the expenses such as fuel, maintenance, and the like.  Third is the insurance.  That means that one must carry common carrier insurance, usually a quarter million dollar personal injury, half a million for hospitalization, and more for property damage.  also the driver need to have health insurance, unemployment insurance, social security taxes, and many more items requires by local, state, and federal regulations.  It’s not a cheap operation by any means.

Unfortunately cities often limit the number of taxi licenses issued in that city.  Oh, there is the usual talk about needing to control and regulate the drivers, the companies and so on.  I mean, no city wants its customers to feel ripped off by the taxi company even if the fares charged are terribly high. That service as an industry has a history of fraud and other crimes against the public. Since there were few barriers to entry the competition among individuals offering taxi services was very great. The political solution was a unionization of sorts. That is, limit the number of taxicabs available to the public, thus insuring a “Fair” profit or wage for the operators. There are several problems with this proposal. The first is that another institution of government must be formed and that becomes a fiefdom of its own, constantly enlarging itself at the public expense. Second is that the right to provide a transportation service creates a market for that service. Hence when the NYC Taxi Commission was formed and the first medallions sold, a new market for medallions was created. Until recently a NYC taxi medallion sold for a little over a million dollars a piece. That is quite a barrier to entry. Given that expensed do not change that much from year to year, you can see where it is difficult for the taxicab business to make a profit from the fares. Hence, there is constant pressure to raise rates. But NYC sets the rates and not the cab companies. So additional tariffs are charged, with the approval of the commission, of course. Baggage handling, waiting times, toll collection charge backs, and the like.

Thus, these man made cartels operate just like any union in the manufacturing and services industries. Competition is thwarted by legal means. In the end, it’s not the business owners who pay for the extra wages, it’s the public. So enter Uber and its business plan. Uber says that as a contractor for its ride matching services an owner and operator of a fairly new automobile can make good money conveying individuals who do not want to pay the price of a taxicab. What is eliminated are the fees paid to the local, state, and federal governments. No need to shell out a million dollars for a medallion, which must be paid for upfront before the cost can be amortised over the next twenty years. Uber tells us that this is a simple transaction between two consenting adults and that all it sells is the use of ride matching software. But you see, this isn’t about two friends exchanging gas money for transportation. A driver is in the public transportation business, a common carrier, and as such he must register with the various government levels. That is how the laws and regulations read.

These various agencies do not recognize “ride sharing” multiple times a day with multiple strangers as a purely private matter, it is public conveyance. That means that the drivers, these owner operators, must obtain the proper operator’s license and the vehicle must be properly licensed as a commercial vehicle. It also means that both driver and vehicle are required to carry commercial public conveyance insurance. the vehicles must be state or city inspected for road worthiness and accurate and time records kept for inspection. All that is the driver’s lookout, right? Not quite, since Uber exercises more than simply matching customers to drivers. They specify in great detail driver appearance and behavior. They control this business, and it is a business, very closely. If one drives for a taxicab company one does not make all that much money. A driver must hustle for fares because he is paid not by the hour but by the fare. A taxicab must be in continuous daily use, no time off, no holidays, no down time except for routine maintenance and repair. Profit margins are thin even for the cab companies.

What has happened in NYC is that the market for taxi medallions has collapsed, virtually no takers. Good for everyone, right? Not right. Drivers who had depended on their jobs for a living are facing layoffs. do you know what the average owner operator for Uber makes per hour? After all the expenses, about three bucks an hour. Uber takes its cut off the top and that cut is substantial. Public conveyance tax revenues have fallen, meaning that city governments still retain the same expenses as before but now need to make up the shortfalls from those who own real estate. That means that the public, including renters, for they are the true property tax payers, not the landlord, pays while Uber gets a free ride on the backs of its drivers. Everything has a cost, even crowdsourcing. We are the golden goose.


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