The DC Taxi Medallion Hustle: Round 3

My article criticizing the proposed Washington, DC taxi medallion system (April 1, 2011) has predictably stirred up a few protests. In my article in the Washington Post, I argued that a medallion system would inevitably limit economic opportunity and make cabs more scarce in the neighborhoods. Now, a cab driver has challenged me, arguing that the oligopoly that would be created by system would benefit everyone. The critique is worth examining in more detail.

Of course, the author first challenges me by questioning whether I really read the ordinance carefully. This might seem like a smart debating tactic…until you read the ordinance itself (which is online). The proposed legislation is only 16 pages long but be prepared to hire a consultant with specialized taxi industry experience to understand it. If anything, the ordinance makes the case against the proposal simply because of its complexity and lack of transparency.

For example, as currently proposed (March 2011), “The Professional Taxicab Standards and Medallion Establishment Act of 2011” creates six (6) general classes of medallions: unrestricted, restricted, low emissions vehicle, wheel chair accessible, non-district resident tags, and special events. (The term “standard” in the title is a misnomer; nothing in the ordinance has anything really tod do with performance or standards.) Since several of these permits are for individuals and companies, the number of classes is actually larger. The cap on the number of medallions for the first four classes, which serve the broad-base of everyday taxi consumers, is 4,000.

Most classes have price tiers based on whether the purchaser is an individual or company, and their current tenure as a driver/owner in the district. Drivers or companies operating in the district for more than 30 years have a lower initial statutory (non-market) price than those with between 20 and 30 years, and those with fewer than 20 years. So, there are six separate medallion prices just for Class 1, Class 2, and Class 3 cabs and companies.

All this and we’re only on page 6 of the proposed ordinance. And we haven’t even done any analysis!

More substantively, the cabbie asserts that proposed ordinance takes care of the neighborhoods by reserving a certain number of medallions for low income and “underserved” neighborhoods:

“Staley failed to note that the legislation sets aside 800 “restricted medallions.” Holders of these medallions would be required to transport to, from and within only “geographically underserved areas,” defined as Wards 7 and 8 and parts of Ward 5. Through this provision, the legislation indeed provides for service to the “poorer neighborhoods” that Staley said he was concerned about about. This omission gets to the heart of one of his major arguments against medallions: an imagined lack of service to poorer neighborhoods.”

Actually, no it doesn’t. Simply establishing intent doesn’t mean it will happen. And the truth has been that in cities that have established medallion systems with caps, the neighborhoods have suffered. The DC government cannot mandate levels of service in poorer neighborhoods (let along other higher income neighborhoods that will also not be served as well as under the current system). The author asserts without evidence that 800 cabs would be sufficient to meet the needs of these neighborhoods. I doubt it. Denver, Indianapolis, Cincinnati, New York City and other cities found that caps led to less service in these neighborhoods. I don’t see how DC is an exception. In fact, I see cabs as serving a more vital function in the lower income neighborhoods if they are allowed to compete in a free market.

The only way we can know if the cabbie’s assertion is true is if a market with open and free entry is allowed to exist so that supply can rise and fall with the demand in these neighborhoods. The proposed law explicitly prevents that from happening and provides no mechanism for increasing the supply if demand is greater than they forecast. Moreover, the teired approach to allocating medallions makes it even more unlikely the market will be to adjust to changing demand at the neighborhood level. In fact, the purpose of the medallion system is to reduce supply to jack up compensation for existing drivers. In practice, however, medallion systems increase the profits for companies and vehicle owners at the expense of drivers because owners can take advantage of a less competitive market place. Drivers depend on fares which are fixed by the local government.

The driver’s second argument is somewhat more obtuse:

“There are 8,250 licensed taxicabs in D.C. Until about 2003, the city usually had somewhere between 6,000 and 7,000, and 8,000 is too many. Anyone who has seen the swarms of cabs on Capitol Hill, on Pennsylvania Avenue between the Capitol and the White House, on 14th Street in Columbia Heights and in Adams-Morgan at night cannot disagree.”

Umm, yes, I can disagree, as can anyone who uses a cab and would now be faced with fewer choices and opportunities to use one under the ordinance. The proposed legislation limits the number of medallions to 4,000, significantly below the 6,000 to 7,000 cited by the author. Again, this appears like a transparent attempt to limit competition simply to improve the profits of the taxi company owners.

Argument number three:

“The purpose of the low medallion prices that would be offered to veteran drivers is to allow those of us who have sweat equity in this business to remain in it. Many of us entered this business 20 or more years ago with the reasonable expectation that we would not be regulated out of it. We survived the crime waves of the 1970s, the crack epidemic of the 1980s and another crime wave of the early 1990s. It would hardly be fair to tell us that, now that things are better, the business is not for us.”

At least he’s being candid here. The medallion system will significantly jack up prices for anyone who wants to drive in the District. So, veteran drivers carved out an exception so that they can continue driving even though new entrants, particularly low income drivers, will likely be financially shut out.

In the end, none of these driver’s arguments undercut my main points: A cap on taxis, and a medallion system in particular, does little more than enrich large companies at the expense of non-vehicle owning drivers and neighborhoods. They create oligopolies that will naturally be exploited by the existing companies at the expense of new entrants and drivers who don’t own their vehicles. The cap will ensure that the high margin trips in downtown, on Capitol Hill, in high-income neighborhoods, and to the airport will receive preference from drivers as they take advantage of the artificial limit on supply. Consumers and most drivers lose out in the end.