Bloomberg: The Taxicab Bubble Couldn’t Last Forever

by Joe Nocera
Bloomberg News on Monday posted an article about something that has become a pretty big deal in New York City: Taxi drivers are committing suicide.

Since November, six drivers, beset with financial difficulties, have taken their own lives, most recently last Friday. After every death, there are calls from the Taxi Workers Alliance, which represents the drivers — and plenty of others — for the city to start restricting the number of Uber and Lyft cars on the road. Taxi drivers view Uber Technologies Inc. and Lyft Inc. as not so much disrupting their industry as destroying it.

I suppose you can't really blame them for portraying Uber and Lyft as the enemy. In 2011, before Uber entered the New York market, there were 13,587 yellow cabs in the city of 8.5 million people.

The number of cabs in New York has been capped since 1937, after a Depression-era glut made it impossible to make a living as a taxi driver. The mechanism the city used to restrict cabs was a medallion that one had to buy to own a cab. Because there were so few cabs for so many people, the law of supply and demand kicked in, driving up the price of medallions. According to the New York Times, the value of a medallion topped out at $1.3 million in 2014.

Today, according to Bloomberg, there are an astonishing 80,000 "app-based transportation vehicles," driving around New York City. If 13,587 cabs were too few, then it's fair to say that the current 100,000-plus cars-for-hire are too many. The price of a medallion has dropped as low as $130,000.

Taxicab operators who thought their medallion would finance their retirement are now drowning in debt. Cabbies — many of whom lease their cabs from medallion owners — can no longer make their lease payments because their business has dwindled. And there is one other downside: All those app-based cars have slowed down traffic in New York by 23 percent since 2010, costing the city an estimated $34 billion a year.

On the other hand, is it really fair to blame everything on Uber and Lyft? I would argue that before throwing rocks at the competition, the New York taxi industry would do well to take a long, hard look in the mirror. Like internet stocks in the late 1990s, and real estate in 2005 and 2006, medallions were a bubble that was bound to burst. Uber and Lyft mainly provided the pins that popped it.

As was the case in many cities, yellow cabs in New York held a monopoly on cars-for-hire — and as is often the case with government-mandated monopolies, the result was an industry that put its own needs before that of its customers. As my colleague Barry Ritholtz pointed out recently, the taxi industry changed shifts between 5 p.m. and 6 p.m. — the exact moment when the largest number of people were trying to hail cabs. It was impossible to get a cab when it rained, or if there was a subway breakdown. Cars were often grimy.

Did the taxi industry care? No. So long as cabs remained scarce, the value of their medallions kept going up — and that's all that really mattered. As the price rose, people wanting to buy medallions had to take out loans that were as big, or bigger, than their mortgages. But that was OK too. They made the same assumption that homebuyers made in 2006: that the price could only keep rising.

There are any number of things the industry could have done to minimize the impact of Uber and Lyft. The most obvious was to have increased the number of cabs over the years, something that could have been sensibly calibrated so that cabbies could still make a good living while riders had an easier time finding a taxi. It could have embraced technology so that people could hail a cab via an app instead of having to stand at a corner and hope for the best. 1  And it could have replaced medallions with renewable licenses, which would have ended the bubble before it got out of hand.

But the taxi lobby was powerful, and so was the industry's view that medallions were a sure-fire way to get rich. The situation was untenable, however; if Uber hadn't come along to burst the bubble, something else would have. Because the taxi industry had treated riders so shabbily, people embraced the new cars-for-hire even though they were usually more expensive than a taxi ride.

What is astonishing to me is that the industry still doesn't seem to realize that it sowed the seeds of its own destruction. For instance, in a case decided late last year, two medallions owners sued the city's Taxi & Limousine Commission for failing to maintain the "financial stability" of the medallions — as if that were somehow a government responsibility. But, wrote the judge, the plaintiffs "have pointed to no statute or regulation that compels the Taxi & Limousine Commission to artificially inflate the value of medallions." The suit was tossed.

In another case, medallion owners and their lenders sued the city and the commission for, as Reuters put it, "jeopardizing their survival by imposing burdensome regulations and letting the Uber ride-sharing service take passengers away." That suit got tossed as well.

At a rally outside city hall Monday, the Taxi Worker Alliance once again pointed to Uber and Lyft — "Wall Street companies," an alliance official called them — as the reason for the cabbies' struggles. She called on the city to both regulate them and reduce their number.

I have some sympathy with the latter request. A cabbie — or an Uber driver — ought to be able to make a living driving a car-for-hire, and that doesn't appear to be possible now. 2  But any reduction should involve every kind of car-for-hire, not just Uber. There is no law that says the number of Uber cars must shrink so that all 13,587 taxis can be saved.

Medallions are a different story. When the internet bubble burst, nobody bailed out tech investors. And when the subprime loan bubble burst, the federal government took the position that it had to let foreclosures run their course, no matter how much pain they inflicted on homeowners. Why should medallion owners be treated any differently?

Medallion owners had a sweet deal for a long time. Now that sweet deal is going away. It's painful, yes, but it's not the job of government to protect a monopoly. Once medallions are no longer prized for their ability to make people rich, everyone in New York — taxi drivers included — will be better off.

1. It uses such technology now, but it's a day late and a dollar short.
   
2. I've spoken to many Uber drivers over the years. I've yet to meet one who said he could make a living driving full time for the company.
   

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