Last week I had a fascinating 3:00 AM cab ride from San Francisco airport to a hotel in downtown Oakland. My cab driver was an immigrant from Pakistan who was putting two kids through college. After working for years as a driver he managed to save enough money to buy his own cab, and more importantly to buy the medallion that gives him the right to operate a cab in San Francisco. The medallion cost $250,000. He is still paying $2,300 a month on the loan to get the medallion in an addition to annual fee to the city of $1,500.
The medallion is far from the only cost the city imposes on cab drivers. It requires a special license, which involves four days of classes (i.e. lost work time), plus fees. They also must get a special background check by the FBI and a special badge, both of which involve additional fees. In addition, cab owners must have a special safety inspection for their car and brakes, which means yet more time and fees. And they must carry a $1 million insurance policy to protect passengers, which costs around $750 a month.
I apologize for the Thomas Friedmanesque digression, but there is a point. My cab driver was complaining about all of these expenses because he has to compete against two ride services, Uber and Lyft, that have largely escaped the same set of regulations. These companies and their drivers are not subjected to the same set of rules that are imposed on traditional cab services. This has put my cab driver and others like him at an enormous disadvantage, and made Uber the latest Wall Street wonder with an implicit market capitalization of $17 billion.
It shouldn’t be surprising that a business can makes lots of money if it is exempted from the regulations that apply to its competitors. This is largely the story of Amazon’s success. It avoided collecting sales taxes in most states for most of its existence. (The company claimed that its staff was too incompetent to figure out the appropriate tax rates.)
The savings on sales taxes gave Amazon a dividend that has exceeded its cumulative profits since its inception by an order of magnitude. That has allowed the company to grow into one of the planet’s largest retailers and made Jeff Bezos one of the richest people in the world.
This is not supposed to happen in a market economy. To encourage efficiency, we would want a proper set of regulations and taxes and have them apply equally to everyone. The point is to encourage people to make profits by providing better products or lower cost services, not to get rich by finding clever ways to evade regulations.
In the case of the taxi industry, it may well be the case that the existing regulatory structure is excessive. The industry pushed city governments to restrict the number of cabs so that they could have more pricing power. Other rules, like the insurance requirement and safety inspections may also be excessive. In a context where costs could be easily passed on to consumers there was little reason for the industry to resist the imposition of these burdens.
If Uber and Lyft force a re-examination and modernization of taxi regulation in San Francisco and elsewhere, they will have provided a valuable public service. However it can’t possibly make sense to have a stringent set of regulations for traditional cabs, while allowing Uber and Lyft to ignore them just because customers order these services on the Internet.
If we go the route of ending the requirement that taxies need medallions, there is also the question of what we do about the sunk costs for people like my cab driver, who is currently out $250,000 from buying a medallion. On the current path, these medallion owners will just be out of luck. Their life savings will be made worthless by young kids who are better at evading regulations than immigrant cab drivers; so much for the American Dream.
It is worth considering this issue in light of the larger issue of the growing inequality we have seen over the last three decades. Uber, like Amazon, has allowed a small number of people to become extremely rich by evading regulations and/or taxes that apply to their middle class competitors. Amazon and other Internet-based retailers have used their tax advantage to put tens of thousands brick and mortar stores out of business.
This is a pretty simple story. In a country where rules are enforced or not enforced to benefit the rich and screw the middle class, you will have increasing inequality and a middle class that is seeing few of the benefits of economic growth.
If people recognized this fact, then we might seem more of a political drive to demand rules that treat people equally. Thankfully we have economists who tell us the problem is just the natural development of technology and globalization, and reporters and columnists who drive home this argument. This allows millions of professional types to spend hours fretting about inequality, while never doing anything to address the rigged rules that are its cause. See, it’s all so complicated.