R>ecently New York’s new mayor got a lesson in the strange politics and even stranger economics of the city’s taxi industry when cabdrivers panned his proposal to raise taxi fares. The drivers knew what Mayor Bloomberg probably has yet to figure out: there is something wrong with the city’s taxi system that has nothing to do with low fares. The system is fundamentally flawed—so much so that Mayor Bloomberg needs to junk it and create something new. True, past reform efforts have gotten nowhere, killed by fierce political opposition from the powerful owners of taxi medallions—the license that transforms a car into a yellow cab that can operate in Manhattan and at the airports. But this mayor is in an unprecedentedly strong position actually to bring about the fundamental transformation that Gotham’s cab industry has needed for years.

When the current system came into existence during the Depression, it contained a fatal flaw, which has become only more pronounced as the city’s economy has grown and changed. In the mid-1920s, New York licensed as many as 21,000 cabdrivers, and those who did the actual driving held the permits. But during the Depression, many drivers simply let their licenses lapse, so that by 1937 only about 12,000 were active. That year, under pressure from drivers, the city passed a law limiting medallions, a limit that eventually settled at 11,787. But the law went one crucial step further: it granted current medallion holders their licenses permanently, and it permitted them to sell the medallions. Later, the city allowed individuals to accumulate more than one medallion and to lease them to others.

The city, in other words, created a protected oligopoly in the right to provide cab service to an ever growing city. Just like the favored nobles and merchants to whom European monarchs of old gave a monopoly on precious commodities like salt, the fixed number of medallion holders, without ever lifting a finger, were certain to coin money out of the public’s need for the service they controlled, a service whose supply became increasingly less likely to meet demand fully as the city’s economy expanded.

As is often the case when government restricts competition, the new system sparked a sharp rise in the price of medallions as the city’s economy recovered from the Depression and grew. A medallion that originally sold for only $10 most recently changed hands for about $200,000, after declining from a pre-recession high of $275,000. Moreover, buying and selling these licenses has become an industry unto itself, encompassing medallion brokers, taxi consultants, and specialized lenders. The fares that New York riders pay have supported this entire industry for years, in addition to providing the medallion owners with a return on investment high enough to justify a $200,000 medallion price. In other words, taxi fares in New York are not too low; they are unnecessarily high. Eliminate the rentier class, and cabdrivers could support themselves for years on the current fare structure.

While the system has proved a boon to the privileged medallion owners and those businesses that serve them, it has been an increasingly bad deal for drivers and taxi riders. In years past, medallion holders owned fleets of cabs and hired drivers to operate them at a salary, even providing drivers with health insurance. But around 1979, the leasing system replaced the old arrangement. Now, drivers would pay the medallion holder a fee to use the cab for a 12-hour shift. As a flood of new immigrants created a limitless supply of prospective drivers willing to work for very low pay, around $10 an hour, lease fees rose to some $100 a day or $30,000 a year—increasing the return on medallions and raising their price. The industry’s stable, lower-middle-class force of drivers gave way to a class of inexperienced cabbies, among whom turnover was high. Regulators charged with protecting the public interest sat by and watched as New Yorkers complained that this new class of drivers didn’t know the city well, spoke limited English, and often drove dangerously.

The system became an even worse deal for these low-wage drivers after the attacks of September 11 deepened the recession that was already under way, keeping tourists and business travelers out of the city and depressing taxi ridership for the first time in years. Drivers could no longer earn a living, some days actually losing money, when fares didn’t cover the $100 lease fee and the additional $20 cost of gas. Many stopped showing up for work, and cabs sat idle in their garages. In response, medallion owners began pressing for a fare increase, which they claimed would bring the drivers back, and in February Mayor Bloomberg announced his support for a hike. But almost immediately, drivers themselves balked. In the past, they pointed out, owners have simply raised leasing rates every time the city increased fares—claiming most of the fare increases for themselves.

“New York City has more taxi passengers than any city in the country, but drivers can’t make a living because of the leasing rates,” says Bhairavi Desai, founder of the New York Taxi Workers Alliance. She points out, moreover, that in the current recession, many owners have been willing to let their cars sit idle rather than lower their lease rates, in order to increase pressure on the mayor. She might have added that raising prices to make up for falling demand makes zero economic sense, since the fare hike will only cut demand further.

Although this system is transparently bad, the powerful medallion owners, especially the 20-odd owners of big fleets, and the brokers and lenders who support the industry are among the biggest political givers in mayoral and City Council races and so have thwarted past reform efforts. Over the years, in fact, some of New York’s most influential politicians have defended the owners’ interests, from Bronx Democratic boss Stanley Friedman in the 1980s to Noach Dear, head of the City Council’s transportation committee and a big recipient of the industry’s campaign contributions, today. The industry poured more than $40,000 into Dear’s unsuccessful 1998 congressional campaign.

Rudy Giuliani was the first mayor to challenge the industry, albeit mildly. Refusing to bow to political pressure, in 1995 he successfully won City Council legislation that increased the number of medallions by 400—the first change in 58 years. Later, responding to the rising tide of taxi accidents, he initiated a whole host of safety measures and forced fleet owners to increase their inadequate liability coverage to less risible levels. But his actions did little to solve the basic problem with the medallion system and its market-distorting influences.

Although most people over the years have acknowledged that the system is broke, few have understood how to fix it, because government cannot simply expropriate the current medallions from owners who have purchased them. The medallions may be a species of private property wholly invented by the government out of nothing, but they are private property nonetheless, which some current medallion holders have paid up to $275,000 to own.

But there is a way to end the system that would not involve expropriation and would dramatically lower the cost of operating in the taxi business. At the heart of a new system would be a new set of licenses granted by the city only to the actual drivers of cabs. Such licenses, which would replace medallions, would be renewed every year, and when drivers gave them up, the licenses would revert back to the city instead of being sold in the aftermarket at exorbitant prices. They would not constitute property.

To institute this new system, the city would have to buy back all its current medallions, at least at the price that medallion owners paid for them, which varies from the $275,000 peak to only $35,000 for many medallions purchased years ago. Such a buyback would cost hundreds of millions of dollars, perhaps more than $1 billion, but the city could raise the needed funds without taxing the municipal treasury by using the fees that the new licensing system would generate.

Here’s how the deal could work: under the new system, New York would charge taxi drivers a significant licensing fee, between $5,000 and $10,000 a year. While the price seems steep, it is much less than the $30,000 or so a year that drivers must currently pay in leasing fees to medallion owners. The city would also raise the number of taxi licenses, awarded by lottery to qualified applicants, to about 25,000, to account for the fact that corporate medallions currently are leased to two shifts of drivers a day. This licensing system would raise between $125 million and $250 million a year. Then the city would float a bond offering backed by these dedicated licensing revenues to finance the buyback of medallions. Eventually, when the city paid off the bonds, the money from the licensing fees would accrue to the city, which currently gets no annual benefit from its taxi licenses.

Such a move is certainly a better idea than merely raising fares again and passing the next fare increase on to the medallion owners. Indeed, under a new system that eliminated the medallion holders—whose cut of the industry’s $1.3 billion in fares annually amounts to $750 million—the city would not need to raise fares again for at least a decade.

Medallion owners would fight this reform fiercely, both in the courts and in the City Council. But what makes this moment a unique opportunity for change is that the owners are more vulnerable than they have ever been. Term limits have brought into the City Council a host of new members who are not traditional supporters of the taxi owners and owe them little. At the same time, billionaire Mayor Bloomberg, who financed his own election bid, owes nothing to the medallion owners, who have for years bought their influence over other politicians with campaign contributions.

No matter how hard the owners fought, a determined Bloomberg would realize that he holds the high cards in this battle. He could—and should—stop granting fare increases to owners, since in effect they simply contribute to further speculation in the medallion market. The mayor and City Council could also issue new medallions, diluting the value of the current medallions, until the owners realized that they had no choice but to accept a city buyout.

Some reformers argue that the city should go further and completely deregulate the market, allowing anyone with a car to pick up passengers. But there are advantages to having some limits on, and control over, taxis. For one thing, prior to the medallion system, the streets of Manhattan often became jammed with taxis, and there is little enthusiasm for further congestion. Moreover, regulated fares spare riders from having to negotiate the price of every ride.

But there are market reforms that the city could introduce into this new system. One, proposed by Edward Rogoff, a professor of management at Baruch College who has long advocated ending the medallion system, would be to have the city’s regulated fares be the maximum allowable but permit drivers to charge less and advertise what they charge. In effect, that is similar to the system New York has today, with its 30,000 licensed livery cars that serve the areas of the city outside the central business districts and the airports. In addition, New York supplements the 12,000 yellow cabs that operate in its central business districts with 8,000 so-called black cars, vehicles offering premium service for higher prices (see “New York’s Unsung Taxi Triumph,” Autumn 1999).

Ending the old system should prove a boon to everyone except medallion owners and the hangers-on who support themselves off this government-created market. Taxi drivers will face a much smaller financial burden, allowing them a decent living at current fares. As in London, drivers would become middle-class small-businessmen, like today’s livery drivers, rather than virtual peons, exploited and disposable. More stability among drivers will mean a more knowledgeable and safer cabbie corps. At the same time, the city will be able to demand more of these drivers in the way of safer, more comfortable cabs, fuller insurance coverage, and more driver training. Right now, because of their razor-thin or nonexistent profits, drivers understandably meet every call for new safety measures or other regulation with cries of harassment.

The taxi industry is one of the few businesses where regulation makes some sense. But the regulation must benefit the public—not, as it does today, the oligarchs.


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