Posted by: bmeverett | July 22, 2011

The Taxi Medallion Outrage


Many people cling to the belief that public transportation is an inexpensive solution to our energy problems. It seems intuitively that moving large numbers of people around in buses, subways or trains must be more efficient than using private cars occupied by a single person. As discussed before in this blog (See “The False God of Public Transportation”, June 9, 2009), this assumption is questionable. Public transportation works well in large, dense urban areas like New York, but mainly because automobiles in these cities are very expensive and not because public transit is cheap. Surprisingly, there is one form of public transportation that may be the most cost effective of all – taxis. Intuitively, that seems wrong. Rich people take taxis, while the poor take the bus. True, but that may be an artifact of bad public policy, not real economics.

Take New York City, for example. Let’s say you want to drive a cab in New York City. According to data from The New York City Taxicab Fact Book by Schaller Consultants (at http://www.schallerconsult.com/taxi/taxifb.pdf), an average New York yellow cab brings in about $145,000 per year, including tips. Advertising revenue may add another $5,000 or so. A fully-equipped taxi is expensive, say $50,000, and it may last only 3-5 years. A car loan would cost about $15,000 a year. The operating costs of a taxi are also high, including annual expenses of $5,000 for insurance, $5,000 for maintenance, $2,000 for parking and $18,000 for gasoline. I’m sure there are other miscellaneous costs as well, let’s say another $5,000. With total costs of roughly $50,000 and revenue of $150,000, owning and operating a cab looks like a pretty good opportunity, even if my estimates are off by quite a bit. Why wouldn’t entrepreneurs be crawling all over each other to get into this business? The answer is taxi medallions.

A taxi medallion is essentially a license to drive a taxi in New York City. You can operate a private car service without a medallion, but you would not be allowed to pick up passengers on the street. That’s a right owned exclusively by the licensed yellow cabs. Before we explain what a medallion is, let’s understand what it is not. It has nothing whatsoever to do with the safety of the cab or the skill of the driver. Driving a cab is essentially an unskilled job and the overwhelming majority of New York City drivers are immigrants. That’s not a criticism of immigrants, but it makes New York quite different from, say, London, where taxi drivers must pass rigorous exams regarding their knowledge of London streets. New York does require taxi inspections, but these have nothing to do with medallions.

A New York taxi medallion is nothing less than a legal monopoly sold by the city. The city gets a little bit of revenue, and passengers pay a bundle to the medallion owners. The system was introduced in the 1930s during the Depression by New York May Fiorello LaGuardia. LaGuardia, FDR and other New Dealers believed that low and declining prices were responsible for the Depression. Government’s task was thus to prop up prices through controls on virtually all economic activity in the country. The absurdity of this system was highlighted by the arrest in 1934 of an immigrant dry cleaner for charging 35¢ to press a pair of pants instead of the legal minimum 40¢. New York taxi medallions were intended to limit the number of cabs in New York and thereby raise the cabbies’ wages. There were 16,000 taxis in New York City in 1923. The initial medallion limit set in 1937 was 16,900. No matter how much you wanted to buy and operate a cab, you could not legally do so without buying a medallion from someone who already owned one.

You might assume either that this system was abandoned when prosperity returned during World War II or at least that the city would issue additional medallions as the city grew. Both assumptions would be wrong. The city gradually reduced the number of medallions from 16,900 in 1937 to 11,787 in the late 1940s and held that level until 1996. In the last 15 years, an additional 1,450 medallions have been sold by the City. New York City still has 17% fewer taxis than in 1923. Instead of increasing the availability of taxis to New Yorkers, economic growth has put constant upward pressure on the price of medallions, resulting in a windfall for those who have them. How much of a windfall? In 1962, medallions were selling for $25,000 each. As of last month (June, 2011), the price was approach $1,000,000, that’s one million dollars – an average increase of 8% every year. The growth over the last 10 years has been closer to 20% per year. Remember that the sale of a medallion is a transfer between private parties. The city gets nothing.

To make matters worse, about 60% of medallions can only be owned by approved taxi companies. In the 2008 auction, the City sold an additional 86 corporate medallions, 2 medallions for special alternative fuel vehicles and a grand total of 1 (one) for independent owners.

What in the world is going on here? It’s simple. When the City turned the right to operate a taxi into a capital asset, it created a powerful interest group whose livelihood depends on restricting the number of taxis. The greater the restriction, the more the asset is worth. This is very much like the system used in Elizabethan England where the King/Queen granted exclusive monopolies to favored retainers in return for up-front payments and ongoing tax revenues. That system worked well for the monarchy and aristocracy at the expense of the average consumer. Taxi companies now put all their political and lobbying weight behind restrictions on the number of taxis, and politicians are, as always, reluctant to offend any wealthy and vocal group. Taxi medallions are at best bad public policy and at worst a form of corruption in which public goods are given to private individuals.

In my rough economics outlined above, New York City taxis earn about $150,000 a year at an annual cost of about $50,000. If a new taxi owner, however, has to pay $1,000,000 for a medallion and borrows the money from a bank at a rate of 6% for 30 years, it costs him an additional $70,000 a year. That would mean he would net about $30,000 a year for his taxi, assuming he drove it himself. A business that is highly lucrative has been rendered marginal by deliberate government policy.

New York City is not the only municipality to have engaged in this miserable practice. Boston, San Francisco and a few other cities do the same thing, and, like New York, it’s too politically painful to abolish the system. Washington, DC is actually considering instituting a taxi medallion system, a proposal very much in line with the incompetence and corruption demonstrated by new Mayor Vincent Gray. Medallions would net the city a little bit of revenue today in return for decades of constantly rising taxi fares and declining service for consumers.

Today, New York City taxis cost about $1.05 per passenger-mile. New York City buses cost about $1.35 per passenger mile. The only reason that cabs seem more expensive is that taxi riders pay the full fare, including the medallion cost, while bus riders pay only a third of the cost of running the bus system. Eliminating the medallion system would create a flood of new taxis in New York City and a dramatic decline in costs. With more taxis available at lower cost, fewer people would bring their cars into New York City, thus reducing congestion and improving air quality. Everyone would benefit except city politicians and their corrupt retainers. Sounds like a good deal to me.

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Responses

  1. We are having the same battle here in Wilmington NC. But instead of calling it a Medallion, it is called a W Number, which is Capped to 155. The above article could have been written about here, it is all too familiar.
    The sad part of it is, that Crime (victims of opportunity) and DWI / DUI (Citizens who want to avoid Crime) rises, during the Nightlife. So we have More Car Fatalities, More Crime, Less Choice for the Customer and Higher Cab Prices.. And when was this ever good for anyone?
    I have been detailing our battle to Lower DWI & DUI here http://www.franc-atlas.livejournal.com . It is a fight for freedom and one of which we may ask Mothers Against Drunk Driving (MADD) to help us with, so we can lower DWI & promote Lower Crime, Lower Prices, with More Choice, for American Citizens and Visitors to our Country.
    Great detailed article, I will write about this on my site !!

  2. Keep up with the truth and let no one stop you.


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