Political Entrepreneurs

The Economic Engine of Political Change

Taxi Cab Medallions, Uber, and The Transitional Gains Trap: Part 1

June 24th, 2014 by Todd Nesbit

As Ed Lopez suggested in this post back in December 2012, the political battles surrounding the emergence of Uber and other ride-share services have proven to be a goldmine for those of us studying and teaching political economy, with the taxi cab medallion at the center of this story of political change.  Both the introduction of the taxi cab medallion and the more recent political struggle in reaction to the entry of ride-share service firms provide for excellent applications of the story of political change as described in Madmen.

In this post I discuss the forces of political change that led to the establishment of the taxi medallion system in New York City in 1937.  Part 2 of this discussion, which I will post later this week, will discuss how the medallion system, with the resulting vested interests, has led to a transitional gains trap and to the political barriers being enacted against Uber and other ride-share services.

The Introduction of the Taxi Cab Medallion:

In the early 1930’s, the tax cab environment was ripe for government intervention.  As is described briefly in this PBS historical story of the taxi, public sentiment against the existing taxi industry was growing–both among the cabbies and the public at large.  High unemployment of the Great Depression led to an increased supply of cabbies, allowing working conditions to worsen (i.e., longer hours and lower wages).  Discontent among New York City cabbies came to a head in 1934 when more than 2,000 cabbies organized a strike in Times Square.

General public angst with the taxi industry was also coming to a head in the early 1930’s, as claims of price gauging grew more frequent as did complaints concerning the ethics and morality of the business.  During prohibition, cabbies learned that speakeasies, and not hotels, provided the best opportunity for larger tips; they predictably frequented such areas more often.  Further, safety concerns grew as cabbies worked longer shifts and maintenance became infrequent in an effort to retain positive cash flow despite increased competition and reduced passengers during the depression.

With the stock market crash and the general status of the economy, the public’s trust in the market had also been shaken.  Thus, rather than rely on private sector solutions to their concerns, both consumers and cabbies were likely more confident with solutions proposed public officials than they had been prior to the crash.

With both the general public and the cabbies vocalizing their displeasure and the growing general sentiment against unregulated markets, the environment was set for local politicians and powerful special interests to enact change.  The special interests of concern were primarily theowners of the largest taxi fleets, namely Checker Cab Company, General Motors, and Ford Motor Company, among others.

Consideration of authorizing a monopoly for taxi services in NY City were squashed with the reports of the Checker Cab Company bribing then Mayor Walker (here and here).   The tax cab medallion, signed into law by Mayor La Guardia with the Haas Act of 1937, brought all the key parties together.  The public was assured of increased safety and were promised reasonable, standardized fares.  The cabbies secured reduced hours and acceptable compensation through required licensing to drive a taxi.

The primary beneficiaries of the medallion system were–and still are–the limited number of large fleet owners who owned the medallions and leased their taxi (roughly 70% of the 11,787 taxi medallions at the time according to Wikipedia).  The resale value of taxicab medallions in NY City in May of this year exceeded $1 million (here) and the growth of value of medallions across many major cities has outpaced that of the S&P500 by a large margin over the past 40 years (source for charts):
image

Those currently holding such high priced medallions will resist any change that puts that value at risk despite the propensity of the change to benefit society at large–it is what Gordon Tullock has famously coined a transitional gains trap.  In Part 2 of this series to be posted later this week, I will discuss this transitional gains trap as it relates to on-going policy restricting ride-share services.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.121, ch.5)

When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.

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