Restrictions on the number of taxicabs in a city hurt society as a whole and are particularly harmful to the poor. They benefit a small number of already well-off people. That many cities still have such restrictions is testimony to economic illiteracy among U.S. residents and to the hypocrisy of Democratic and Republican officeholders.
News about New York City’s ongoing auction of new cab permits — at more than $500,000 apiece — is the most outrageous reminder of the problem. But it is not limited to large cities on the coasts. Minneapolis also has restrictions on new permits and the effects mimic those of the Big Apple.
Such limits are bad because they reduce competition. Existing permit holders gain some monopoly power. Prices rise, but higher prices do not increase the number of producers. Instead, the value of the permits goes up.
Economist David Ricardo pointed this out 200 years ago. He saw that when some fixed resource is used to produce a good, and that product becomes more profitable, then the fixed resource goes up in value.
Ricardo used the example of farmland. Except in the very brief short run, higher corn prices don’t increase farmers’ annual incomes. Instead, rents and land prices get bid up. Landowners are better off, but the actual return from the higher-priced corn changes very little. Those farmers who own their land are happy, but those who rent see little or no change in net income.
New York City turned taxicab permits into a scarce resource in 1937 when it capped the number issued. With a few adjustments after World War II, the number remained at about 12,000 for another 60 years.
Taxis were profitable, especially as fares went up. But no one could just get a cab and start picking up riders. One had to buy an existing permit from an existing owner. Over the years, the value of those permits increased. In the 25 years I have used New York City’s taxi medallions to explain Ricardo’s work to economics students, the price has gone from $300,000 to more than $500,000.
That is great for those who had permits in 1937. But it means that for any subsequent entrant into the business, the payment on the mortgage for a medallion is the biggest business expense — more than the car itself or gasoline. Interest alone runs more than $100 per day at current prices.
Few medallion owners actually drive cabs. They lease their permits to hungrier people, frequently immigrants, who are willing to put in long hours. After lease payments and other expenses, a New York City driver is lucky to make $15 an hour.
Someone has to come up with the money for a permit lease or mortgage payments, so riders bear the burden of limited competition in higher fares.
Higher fares don’t particularly harm the wealthy doctor or lawyer who needs to get across town. They don’t hurt the business traveler who has an expense account. They hurt the poor who need to get their groceries home. Limitations on taxi permits are one of the most regressive measures that exist at the municipal level because they hurt the poor proportionately much more than the rich.
New York City taxi authorities are auctioning 308 new permits at more than $500,000 per permit. What is particularly egregious is that these officials are touting the new permits as a valuable investment opportunity. They ignore the fact that such high prices are a measure of how badly New York consumers are being screwed by their own government.
Limits persist in New York because existing permit holders are strong political supporters of elected officials who protect their monopoly. In the past they used petty graft such as free rides for mothers of political machine leaders. Now, campaign contributions are the principal vehicle of support.
Locally, a Brooklyn Park taxi operator is suing the city of Minneapolis over its restrictions on the number of permits. He is represented by the Minnesota chapter of the Institute for Justice, a Libertarian public-interest law firm.
In reaction to the suit — and showing that some officials still have a sense of shame — a Minneapolis City Council committee has recommended that limits on permits be phased out by 2010. Jerry Fruin, a transportation expert from the University of Minnesota’s Applied Economics Department, testified on how much existing limits hurt the public and how the brunt of the cost is borne by the poor.
St. Paul, in contrast to Minneapolis, does not limit the number of permits. St. Paul charges annual fees and regulates drivers and safety. But any company that has at least five cabs can get a permit without having to buy them from existing owners.
The willingness of politicians from both major parties to tolerate abuse of the public is particularly infuriating. Republicans are all for letting markets work and opposing unneeded government regulation. But Republican mayors in New York — including Rudolph Giuliani and Michael Bloomberg — have turned a blind eye on the medallions.
The DFL has dominated the Minneapolis City Council for decades. Despite Democratic rhetoric about concern for the little guy, the council tolerated the same abusive restrictions. Indeed, when challenged by the Federal Trade Commission during the Reagan administration in 1983, Minneapolis agreed to add 25 new permits a year. But it reneged on the deal a few years later.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.