Distortion Entitlement

We can understandably pity today’s New York City cab driver. His prosperity, and indeed his job itself, is under existential threat from the technology disruption of ride-sharing services Uber, Lyft, et al. This is even more the case if he owns his medallion. Those once-highly-coveted medallions, limited in quantity by law, have dropped in value from a million dollars or more to perhaps $150,000. Many who borrowed big to buy a medallion, or leveraged against its peak value for other purposes, now find themselves deep under water, owing banks hundreds of thousands of dollars against an asset that will, in all likelihood, never recover in price.

And, we can feel personal sympathy for the families of a couple who’ve, sadly, taken their lives as a result of this distortion.

That said, anecdote and individual tragedy are rarely sound basis for policy. Especially when past policy created the distortions that led to wildly-inflated asset values in the first place.

Indeed, it is solely because New York City has restricted the manner in which for-hire cars can be used for decades that the value of a medallion reached such heights. It was and remains illegal for any for-hire vehicle other than a medallion taxi to pick up a street hail, and for decades, New Yorkers either had to make do with trying to catch a yellow cab or, in the outer boroughs especially, call one of countless “car service” companies to send a car. The latter represented an inefficient and fragmented industry, and wait times for a car were often 30 minutes to an hour or more. Along came technology, and you know the rest. Technology has made it so quick and easy to get a car that the randomness associated with hailing a taxi makes using Uber preferable for many.

Thus, just like the buggy whip maker, the ice delivery company, the mechanical typewriter manufacturer, and countless other companies, street-hail taxis are fading into obsolescence.

But, those who’ve grown accustomed to the decades of monopolistic protection aren’t simply resigned to their fate. No, they want the government to update its market distortions to continue to protect them, believing that they’re entitled to protection for their medallion investment. Cranking up a spin machine that mixes anecdotes and tendentious assertions, they pillory the new technology that, based on the market’s (i.e. consumers’) reaction, is a wild success.

So, these vested interests are asking the government to put the brakes on Uber and Lyft. They’re demanding that the city cap the number cars the companies are permitted to have, and the uber-progressive (pun intended) Mayor DeBlasio seems inclined to grant that demand. One who pays attention to how the world works might think that market forces would address the car numbers problem – if there actually is one (forgive me for being skeptical of claims by people with obvious, selfish agendas) – but that would make sense, and little in NY politics makes sense of that sort.

The government that giveth is also quite adept at being the government that taketh away, and even as DeBlasio contemplates a market intervention to protect an industry created by interventions, Governor Cuomo is looking to fix his budget and spending woes by slapping a congestion tax on for-hire vehicles in Manhattan – because we all know how making a service more expensive benefits its providers.

John Stossel observed that technology is what keeps us ahead of encroaching government, and I doubt there’s anything big-government politicians can do to quash the advent of ride-sharing. In other words, those million-dollar medallion prices are a relic of history. Yes, it tugs at our heartstrings to read of someone who invested his life savings, only to see technology turn his asset into a mountain of debt, but that happens all the time, unbeknownst to us, and in areas not massively inflated by government protectionism. Still, I expect that Uber, being big and perpetually vilified by a sensationalistic press that loves to front-page every bad trip (Uber alone has given over 5 billion rides – you do the math), will be portrayed as the bad guys, and many will clamor for relief for the beleaguered, disrupted medallion owners.

What sort of relief? Wouldn’t surprise me to see some sort of bailout proposal, where the city revamps taxi licensing by assuming ownership of medallions that are under-water due to heavy leverage. We shouldn’t stand idly by if this notion gets floated. There are 13,587 medallions. You can buy one, today, for $165K. Merely 4 years ago, the medallion market peaked at $1.3M a piece. That’s over $15 billion in lost value, in 4 years. Should that loss be put onto taxpayers?

I don’t expect the people who’ve lost that value to shrug their shoulders. I wouldn’t be surprised to see some legal challenge, based on a deeply twisted interpretation of the takings clause, demanding some sort of relief for medallion owners. Don’t fall for twisted logic – there’s absolutely no way a free society can justify compensating people who own a state-inflated asset when that asset deflates due to free market forces.

Lest we think that this is a one-off problem, limited to taxis in big cities, review the situation in generic terms:

Government artificially restricts the supply side of a market. Prices climb. A minority reap benefits, while the majority suffer due to artificial scarcity. Market forces find a way around the obstruction. Prices drop. The minority suffers, while the majority benefits. The minority, feeling entitled to the artificial scarcity, demands new distortions to protect their entitlement.

This is playing out all over the disruption or gig economy, and entrenched interests are not happy. The playbook is the same in many cases. The new player is deemed big, bad, heartless, and destructively unregulated, an assertion bolstered by anecdotes (anecdotes are not data, but that doesn’t stop critics). The existing players are portrayed as victims. A disparity in regulation is cited as justification – not for regulatory relief, which would level the playing field in the right direction, but imposition of the same (or more) excessive regulation on the new players. The war against AirBnB has followed this playbook, as has the concerted effort to vilify companies that consider workers “contractors” rather than direct employees. Pundits rarely extol the virtues of the gig economy (including the enormous benefit to consumers, the great ease of entry and massive degree of flexibility afforded to workers, and overall economic efficiency that boosts the nation’s productivity), and instead decry how it’s ruining traditional employment structures.

The distortion entitlement is also witnessed in urban housing markets, where zoning, rent control laws, and other market distortions create scarcity and inflate prices. Disruptions (again, AirBnB, for one) threaten that status quo, and the status quo is a deep-pocketed one.

A core aspect of capitalism is the idea of “creative destruction.” The destruction part stinks when an individual is caught up in it – whether it be due to choices gone wrong or due to things beyond his control – but it’s a reality of life, and one that cannot be offset by government without destroying even more wealth and harming many others. Yeah, it stinks to be a medallion owner right now, but we’d be doing more harm than good if we asked or allowed government to “fix” a problem it created in the first place.