6.27.2008

Boston's Medallion Morass

Boston’s cabbies are justifiably angry. They can’t afford the $380,000 it takes to buy one of the 1,825 medallions the city allows – essentially a license to operate a taxi, given out by the Hackney division of the Boston Police Department – so they have to lease them at rates of $500 per week from businessmen who own scores of medallions. They have to buy their own run-down cars to use, pay for their own gas, the city sets what fares they can charge, and as a result of all this, their net income after expenses is a pittance. So they work 12-16 hour shifts, barely scraping by, without hope of building equity because they don’t own their medallion.

Other regulations state that they can’t pick up passengers in surrounding cities, so if they drop someone off in Cambridge they have to drive back across the Charles River, passing by any hopeful people standing on corners, desperately trying to flag down a ride into Boston. To make ends meet, they sometimes disobey the laws and pick up people anyway. It's called "fare poaching" and it's a $500 offense in Boston.

On the other side, customers are angry too. All those desperate potential customers see is an empty cab blowing by. It's often difficult to tell that a cab is in "enemy territory" and that it's illegal for that taxi to stop. Within each city, there are woefully too few taxis available. If by chance one does stop to pick someone up, the cab is broken down, dirty, smelly, the driver is rude, he doesn’t know where he’s going, and it’s very very expensive. Boston currently has the third highest rates in the country, and the cab driver’s union (United Steelworkers) is requesting a new hike that would put the rates higher than any city.

What is the solution? Some are calling for more medallions, but the city has been very slow to move on that idea, and most involved agree that it won’t help much, and won’t lower the cost of purchasing one enough to open the business up to individual owner-operated cabs. The poor quality of service has led some to call for a “Passenger’s Bill of Rights”, and the union has countered with a call for a “Driver’s Bill of Rights.” The drivers want a rate hike, and the passengers want fares lowered and quality increased. In crude terms, it’s a royally screwed up situation. But why?

The problem is with the medallion system itself, and the myriad regulations that go along with it. The government caps the supply of taxis, imposing an artificial scarcity, driving up the cost of starting a cab business immensely and skewing the entire "market" from the very beginning. In a Boston Magazine article from 2004, Chris Berdik writes, “Medallions were introduced in the 1930s to curb a glut of cabs on city streets. The number was capped at 1,525 and remained there for six decades until a 10-year legal battle led to 260 more being sold at auction in the late 1990s.”

As a result of this artificial scarcity -- with a supply that has changed little in nearly 80 years -- all the other strange problems start popping up. The government adds a regulation here or a price hike there to try and fix things, and new issues crop up. Eventually we see a system that is horribly complex, incomprehensible, and basically unfixable. That is, until we start talking about deregulating the industry and abolishing the medallion scheme.

The government must get out of the way. It should not be interfering in this market at all. Fundamentally, it is violating the property rights of any person who wants to start a business carrying passengers from one location to another. On this principle alone, the entire corrupt bureaucracy should be demolished. But for those who refuse to recognize an argument based on core principles and individual rights, think of this: it would work better, too.

A Free Market Example
There is already an example of a quasi-free market for taxi service in Boston. Limousine services are mostly free to operate in the city, and the stipulation is that they can only do scheduled pickups; they can’t drive around looking for fares. But as far as I know there is no limit on the number of limos in a company’s fleet, and thus the supply is determined by market forces and the goals of the business owners.

People love the limo services because the cars are immaculate and the service is excellent. Companies like Boston Coach, which is owned by Fidelity, can respond to the market in whatever way makes sense. They can treat their vehicles as simple assets and their drivers as regular employees, selling cars or laying off workers if they have excess capacity. It's a rational response to market conditions, unaffected by the irrational condition of having sunk $380,000 into a government license to operate each vehicle.

At the same time, a smaller business owner could start up a competing firm, without having to wait until a medallion owner dies first. If they offered better limo service or lower fares, and there was a market for their products, they could start to take a bite out of the business of the larger firms like Boston Coach. It’s a free market. The businesses make money and the consumers benefit with lower prices and better service.

Innovation
Under the current medallion scheme and the pressure of rising gas prices, some people are calling for a city-mandated conversion of fleets to hybrids, allowing the drivers to save gas money. Lost on the hybrid advocates is the fact that they are suggesting yet another government regulation dictating how property owners use their own property. Of course hybrids are also smaller (less room for passengers and luggage) and much more expensive up front. Remember also that the cabbies who lease medallions have to buy their own cars.

If the medallions were abolished, then the individual business owners could decide for themselves if it made sense to invest in hybrids. Or they might come up with other innovative ways to save money and gas, similar to what UPS did in reducing gas-wasting left turns.

Another innovation-crushing aspect of the whole medallion scheme is the set of absurd regulations imposed by the City of Boston, such as mandating that the trunk of every cab be painted white. One example of the absurdity of government regulation stifling progress is that drivers cannot accept credit cards. They aren’t allowed to. Why not? Who knows? It’s a bureaucratic quagmire; think innovation by committee, which means no innovation at all.

An acquaintance of mine is wheelchair-bound. She has a terrible time finding taxis in the city that can accommodate her wheelchair, and if she happens not to call hours in advance or has an emergency, she might be completely out of luck. There are so few vans in the Boston and Cambridge fleets that are handicapped accessible that it’s nearly impossible to find them.

If taxis were able to operate in a free market, then the market could respond to the need for accessible vans. Perhaps they’d charge more or less. Perhaps there would be a niche service that dealt only in that market. It’s hard to say, but if there was a need, then businessmen would find a way to exploit it to their benefit. As a natural outcome, the customers would benefit too. As a side note, it’s ironic that city, state and federal governments are so concerned with enforced accessibility and regulation, and yet their own over-regulation of business is causing problems for the very people they claim to work for.

The Simple Solution
In countless examples, the free market has shown itself to work better than any government scheme, both for producers and consumers. More importantly, the only proper function of government is the protection of individual rights, and the medallion scheme is a massive intrusion and violation of those rights. The only moral and just course of action – and one that would solve all the seemingly unsolvable problems faced currently – is to dismantle the medallion bureaucracy and open up the taxi business to full and free competition.

9 comments:

Burgess Laughlin said...

Congratulations for writing an intriguing article. The subject matter is something you can see and deal with directly, but the conclusions you draw could apply to anyone, anywhere, and at any time. That integration of particulars and universals makes the article vivid and persuasive.

softwareNerd said...

I remember reading about a major city (I think it was either Minneapolis or St. Paul) that recently decided to phase out their taxi-medallions over 5 years. They have been sued by some cab-owners, on the basis that the change in law constitutes a regulatory "taking".

The argument goes like this: a cab-owner has paid money (less than Boston's $300K, but still not a small sum) for the medallion. The medallion is an asset. The change in law destroys that asset overnight. Imagine that a cab owner take out a $150K loan to buy a cab for $15K and a medallion. All of a sudden, the government changes the law, leaving him bankrupt.

Of course, I agree that the medallion system must go. Worse still are the attempts you describe to make the system more complex. I just thought the Minnesota case is an interesting side-light on the types of issues that must be handled when dismantling bad laws.

C. August said...

Thanks, Burgess!

Softwarenerd, I was thinking about that, too. It didn't fit into the article, but I did wonder about "how exactly would deregulation occur?" One quick thought I had was that the government would essentially have to buy back the medallions at market rates. The problem with that is the that money used to buy the medallions is taxpayer money. The bill for that would easily be in the $700M range at current rates.

Just like you mentioned, this is the tragic mess we get into in a mixed economy. It's so contradictory that there are no real answers -- just varying amounts of pull. With government mucking up the works, individual rights get trampled one way or another. I don't know how to balance the inevitable rights violations in deregulation.

I wonder if there are any other examples of deregulation that could be drawn on as an example? I'll have to look up the Twin Cities example you mentioned.

Burgess Laughlin said...

Should slave masters have been compensated for the loss of their "assets" when slavery was abolished?

I have no sympathy for anyone who pays a coercive government for the privilege of having a forcibly restricted market for his benefit. But if one wants to non-coercively help such unfortunates, then one step might be to make their businesses and other property free of taxes up to the amount they paid for the license.

Of course, in the meantime, liberators should work to abolish all city taxes, but I suspect that will be a slower process than abolishing regulation of cabs.

I never worry about the consequences of freedom arriving too soon. The benefits of capitalism far outweigh any bruises that some individuals tied to the state might receive.

C. August said...

I think you have hit the heart of the matter. This statement sums it up: "The benefits of capitalism far outweigh any bruises that some individuals tied to the state might receive."

There are risks inherent in any business venture. I do have a bit of sympathy for the businessman that tries to succeed in a hopelessly mixed economy. But the fact that the market he is in was created by arbitrary whim and force of the government -- even if he didn't ask for the system in the first place -- can't outweigh the absolute wrong of the system itself.

Thanks for helping my clarify my thinking on this issue.

Philadelphia Taxi Driver said...

You are on to a national problem. My research shows that the medallion system was created to protect the drivers income during the depression. Then around 1980 it became a property right and was monopolized by a few. I believe that if it was investigated, every anti-trust law would be shown to be violated. It also is a hell of an investment because of the Independent contractor status , a tax loophole. Medallion Financial Corp. is doing very well in the recession. So "Boston's Medallion Morass" is really America's Medallion Morass, and I would like to see the medallion mafia taken on. There are places that have abolished it, like Hawaii. I really appreciate that you understand the constitutional concerns. Hope to hear from you.

C. August said...

Thanks for the comment, PTD. While I agree that the original intent of medallions in most cities was likely to protect the markets for a certain class of small businessmen, and that the medallions eventually were consolidated under a few large companies, I detect that your concern is, to put it simply, "the virtuous little guy vs. the evil big guy."

This is not to belittle the current situation--I understand how bad it is for the taxi drivers and independent medallion holders--but I must point out that the real conflict, as I wrote about in my post, is between the free market and the government. The original government intervention to "protect" one class of businessmen is just as wrong, just as much a violation of individual rights, as is the current regime that props up the fat cats.

The reason why this tragically mixed market is as confused, unfair, and corrupt as it is, is not because some wealthy owners bought up medallions, but because the government created the medallion system in the first place. The artificial scarcity of the system is what drives up the price of the medallions, and keeps independent entrepreneurs from freely entering the market. In other words, the government violates the property rights of businessmen by granting a license to operate to only a select few.

When you mention the "medallion mafia" you should remember that it is the men in City Hall who are the Dons of such a mafia. They make it all possible by distorting the market.

Now, this is somewhat out of the scope of this discussion, but because you brought up anti-trust I must mention it. A monopoly in a free market is not a problem because it cannot wield force, and cannot violate the rights of competitors or consumers. In such a case, a monopoly is simply a superior competitor, and they may even control a market for many years. But they have no police power to bar others from competing, and as in the case of Standard Oil (or what would have been the case, had the government not intervened), such a monopoly eventually succumbs to market pressures and changes in technology. As long as they are kept from using force or fraud by the application of objective law, no one's rights are violated. [Note: please read this piece -- it's a fascinating and thorough debunking of historical and economic myths around Standard Oil, and I think the application of the principles discussed in this article to the medallion system will be extremely informative]

The only place where a monopoly becomes evil is when government is involved, and it becomes a coercive monopoly. This means: a monopoly that controls a market with the implicit or explicit force of government behind it, restricting entry to the market, mandating pricing, etc., and violating the rights of some for the benefit of others. Only government could legally do such a thing.

You and, as I said, "Boston’s cabbies are justifiably angry." I would only ask that you re-read my post considering the clarifications I have made here, and try to identify the deeper problem: the interference in the market by a rights-violating government. I'm sure there are some really slimy operators in the medallion racket right now -- the research I did for this post showed me a number of examples -- but the crucial point is to realize that if there was no government-created racket, if men could freely enter a market if they thought they could provide a better service at a better price and make a profit in the end, then the slimy operators either wouldn't exist, or they'd get out-competed. Such is the glorious, rights-respecting nature of free market capitalism.

If you disagree or want to ask any clarifying questions, please don't hesitate to comment further.

Philadelphia Taxi Driver said...

When you talk about capitalism, are you talking about pure capitalism or capitalism and democracy? Pure capitalism, using history, is enslavement. And the taxi industry is just that to thousands of drivers. I believe that the anti trust regulations and the labor acts, which democracy intervenes only after millions are enslaved, were enacted with good intentions. Pure capitalism without intervention, would be total slavery. The taxi industry needs intervention

Anonymous said...

PTD,

You must re-read the article because you apparently did not grasp its essential points. As for "Pure Capitalism", you apparently subscribe to a Marxist view of it; therefore, I suggest that you read George Reisman's "Capitalism: A Treatise on Economics" carefully and completely, along with every book in its bibliography. Then you will have a correct understanding of Capitalism and understand why Marxism is completely wrong--and vicious (as is "Pure Democracy").