All Commentary
Wednesday, January 4, 2012

Taxi Regulation and the Failures of Progressivism

As the American people head into another election year some will be puzzled by the rise and the staying power of Progressive ideals—according to which government manages the private economy supposedly for the social welfare. But in truth they’ve been operating at the local level for more than a century.

Overestimating the power of Progressive ideas locally is difficult. Many who eschew the heavy hand of the federal government—railing against corporate bailouts, Medicare, or government ownership of companies—embrace even more extensive government manipulation of private market activity closer to home.

For example, taxicabs are almost all privately owned and operated in the United States, yet municipal taxi commissions and boards regulate virtually every aspect of the business. The codes themselves can include a dizzying array of regulations, from specific details about where cab companies can locate, to how many hours they can operate, what price they can charge, and what equipment they can use to accept calls. My own survey of taxi regulations in 15 cities uncovered 27 separate types of regulations.

Considered separately each regulation may seem reasonable, but the cumulative result has been to protect exiting companies from competition, depress wages for drivers, discourage innovation, and limit services to new customers and markets. Taxi regulations and codes fix prices by law, mandate the way fares are collected (meters), dictate hours of operation (24-hour dispatch service), regulate financial operations (by requiring financial reporting), promote public safety (vehicle inspections), set standards for language fluency and driver competence (tests), and include dozens of other regulations.

Over time many of these ordinances have grown in scope. Where a code might have first been established to ensure a basic minimum level of safety, perhaps requiring vehicle inspections for brakes or lights, modern codes can stretch to dozens and hundreds of pages involving complex and often complicated procedures and standards as the commission legislates every detail of running a taxi business. New York City has just completed a public bidding process for selecting the kind of vehicle taxi drivers will be allowed to use.

This detailed approach to regulation of private business is consistent with the Progressive mindset and political philosophy. Progressives for the most part adopt what political scientists call a “public interest” view of government. Elected officials are said to represent the will of the people, and civil servants thus dutifully carry out their vision of the public will. The problem is that public officials and taxi boards don’t always pursue the public interest, lack sufficient information about the taxi market itself, and often rely on cumbersome, outdated decision-making to enforce their codes and rules.

For example, most taxicab codes assume that operators are full-time employees. In fact most drivers are part-time and choose to drive taxis for lifestyle reasons as much as to maximize their income. My study of the taxi market in Port Chester, New York, estimated that two-thirds of the drivers are part-time. In addition, fares and trips were not evenly distributed throughout the day: They peaked at specific times such as the morning and afternoon rush hours and lunch. Full-time drivers tended to earn fares throughout the day. Part-time drivers met excess demand. In addition, most revenue was earned taking patrons outside the city (and the reach of the taxi commission).

Regulation vs. Diversity

Most taxi codes can’t accommodate this kind of diversity within the industry. The regulations are one-size-fits-all, and almost all either fail to address or acknowledge the valuable role part-time drivers play in meeting customer demand. Part-time drivers, for example, often handle calls through a cell phone and focus their activity around fixed passenger pickup places such as taxi stands, the airport, or train stations. They often charge fixed prices for specific types of trips, regardless of distance. Many drivers also develop a steady and stable client list through personal service.

Yet taxi regulations force the same requirements on every car, driver, and company regardless of service provided. Often part-time drivers are still required to have meters that calculate fares based on distance (when flat fares can easily be negotiated), be officially attached to a dispatch company, or meet requirements such as maximum age limits on vehicles regardless of amount of use. Quite simply, the taxi codes can’t keep up with the dynamics of the service provided.

Some cities regulate taxis at even greater levels of detail. Many cities require companies to submit financial reports to the local government so officials can evaluate their fiscal solvency when they renew dispatch company licenses. Ordinances require dispatch companies to lease office space regardless of the number of calls or the technology that enables them to handle calls in a home office. Many ordinances also require all companies, regardless of their market or client base, to formally affiliate with a dispatch company.

In a survey of taxicab regulations in Ohio, Taxicab Regulation in Ohio’s Largest Cities (1999), the Buckeye Institute found that cities regulated prices in a variety of ways. For example, two cities—Akron and Canton—did not regulate taxi fares at all. They let individual companies decide what prices to charge. The state’s largest cities—Cincinnati, Cleveland, and Columbus—set maximum rates. Only Toledo and Youngstown set rates by ordinance.

In my survey no single regulation was found in a majority of cities. In fact, fewer than half the cities surveyed required fares to be set by distance-based meters. Only 40 percent regulated logos and taxi colors, or mandated radio dispatching. One-third capped the number of vehicles, required public hearings for licenses, or mandated service hours or physician certificates. In terms of overall burden the most restrictive cities required 13 separate regulations while others required just a handful.

Optimal Numbers

Perhaps the most illustrative example of the “government knows best” mindset is found in regulations limiting the number of cabs, drivers, and companies. The theory is that there is an “optimal” number of vehicles for a given market size and the commission’s staff can figure out what that is. It is also presumed that the regulatory board will make decisions about what rules to enforce based on objective criteria. A cottage industry has even emerged of consulting firms that have developed sophisticated statistical models to estimate the number of taxicabs that should be allowed to operate in a city.

In the real world, however, the demand for taxis is dynamic and markets are often separated by the types and needs of diverse customer bases. In Dayton, Ohio, one company focused on airport services, another on spontaneous calls from the street (street “hails”), and a third on specialized services to the local transit agency.

Moreover, the boards and commissions themselves are mostly run by citizens with little knowledge of the taxi market and staff that have little background in the specific workings of the industry.

Not surprisingly, inefficiencies reign. One indicator of inefficiency is the black market for taxi medallions (government-granted licenses that allow someone to operate a taxicab). Caps on the number of taxis as well as other regulations increase the costs of entry into the business, restricting supply well below demand. Common sense (as well as basic economics) suggests that if enough taxis are plying the streets of cities to meet demand, illegal medallion markets would not exist.

In fact medallions in the black market can command staggering sums. In New York City a cap on taxicabs created an illegal market of “gypsy cabs” that may have reached 30,000 in the 1990s. While the city government is slowly increasing the number of medallions, the official price runs upwards of $600,000. In fact, two medallions recently sold for $1 million each in a private sale in October 2011. In Boston the going rate for a black-market license is $400,000. In less restrictive cities licenses still can cost $25,000 or $30,000.

Pricing Out the Competition

While this price might not seem high for many middle-income families, the typical annual wage for a taxicab driver hovers around $30,000. In effect the high prices for a medallion make it virtually impossible for drivers to save up enough money to buy their own cab or start their own company. Increasingly severe restrictions are a boon to existing medallion holders because the value of their licenses increase. Thus one of the more pernicious effects of tightly regulating the taxi market and preventing supply from fluctuating to meet demand is dramatically fewer entrepreneurial opportunities. Low-income and minority communities are hit the hardest when markets that should have easy access are closed.

Meanwhile existing cab companies, which often have representatives on the boards and commissions that regulate their industries, typically use their influence to prevent competition. Local taxicab ordinances often have “need and necessity” provisions for new applicants that end up protecting a cartel of existing taxicab companies. Under such provisions the presumption is that the commission or board has already set the optimal number of cabs and level of service for the city. A prospective cab company must present evidence that it will serve a part of the market that is not currently being served by existing companies. Often applications are denied simply because existing companies showed they have the capacity to serve the market if it existed. New applicants are caught in a regulatory Catch-22. They have to prove that a market exists for their service. But if that market existed, established companies argue, they would be serving it. Therefore the underserved market doesn’t exist. Application denied.

Unfortunately taxicab regulation demonstrates yet another hard, cold reality of politics: Once the regulatory authority is established in local ordinances, local politics make it difficult to deregulate. The benefits of regulation are concentrated in the hands of a few key players, usually existing taxicab owners and medallion holders, who have strong financial incentives to lock out new competition. They have access to the regulatory apparatus and relationships with regulators that put upstart companies and innovators at a distinct disadvantage. Entrepreneurs are not free to compete in the marketplace. To enter the market they need the permission of regulators influenced by those with a stake in maintaining the status quo.

Laudable Beginnings

Progressives led municipal reform movements across the nation during the 1880s and 1890s in a laudable attempt to purge cronyism and patronage from corrupt political systems. They led efforts to create electoral transparency and fiscal accountability, and recast politics in a more “professional” framework. Many of these municipal reforms led to the professionalization of city management. Even the institution of civil service was a step forward for most cities. Civil-service standards and exams for police and firefighters helped professionalize services. Although the downstream effects of public-sector unionization led to bloated budgets and inefficiency, fiscal transparency and accountability were laudable reforms.

Progressivism, however, has a dark side few fully appreciated at the time. Caught up in the emotional appeal of “scientific management,” many thought government could and should be run like a business. One of the highest profile Progressives was President Woodrow Wilson, a father of modern-day public administration, who wrote pioneering articles in the late nineteenth century advocating the separation of administration from politics in government. The theory put the trained expert—the bureaucrat—at the center of political administration.

Few areas of urban policy reflect the overly optimistic worldview of Progressive thinking, and the negative consequences for consumers and suppliers, as much as taxicab regulation. The fatal flaw in the Progressive view is the belief that administration could in fact be separated from political pressure. Unlike the private market, where greed, egos, and inefficiency would be punished by losses, legislative election cycles are poor mechanisms for providing accountability.

  • Samuel R. Staley, Ph.D., is the author of “Contemporary Film and Economics: Lights! Camera! Econ!”, a Research Fellow at the Independent Institute, and an award-winning novelist. He is also an urban economist and on the full-time faculty of the College of Social Sciences and Public Policy at Florida State University.