THE BUMBLING COLOSSUS  By Henry F. Field                                              
The Regulatory State vs. the Citizen; How Good Intentions Fail and the Example of Health Care;
                                  A New Progressive's Guide    
  (available at amazon.com)

Taxi Robber Barons -- Regulatory Capture on Display



With the job of taxi driver being the "port of entry" for many new Americans in most cities, you would think it to be one of the last bastions of free and open competition, a kind of Wild West version of Hong Kong.

Not so. In fact, just the opposite.  In most big cities today, a couple of big taxi companies control most of the medallions (licenses). The number of licenses is limited by local political authorities. Limiting competition by government fiat is the hallmark of intrusive regulation. It creates monopoly profits for the medallion owners. It stifles innovation, lifts prices, and harms the consumer.

 In NYC for example, there are 13,000 medallions which go for just under a million dollars. Each. That implies a lot of profit per vehicle. In turn, political contributions recycle a part of these profits back to support the politicians who maintain the regulatory restrictions. Scratch my back and I'll scratch yours. 

This is a classic example of "regulatory capture", discussed in TBC at 212-216. And the taxi and political interests will fight hard to defeat intruders and keep this state of affairs going, as the story of "Uber" and Travis Kalanick, which follows, shows.

There are always ostensible "good" reasons for this type of scheme. For taxis, the strongest reason is to try to enhance the rider experience -- reliability, trust, and safety. But less intrusive ways than limiting medallions (and thereby entry into the business) exist to achieve these goals -- screening all applicants, requiring bonds, insurance appropriate to the risks, etc.

Enter
 Travis Kalanick, entrepreneur. He started "Uber" a while back in San Francisco as a mobile app-based limo service designed to provide a safe, reliable, improved local ride. From the January 25, 2013 Wall Street Journal, "Travis Kalanick: Transportation Trustbuster: How He Learned to Beat the Taxi Cartel and City Hall", Andy Kessler reports:

"The company is a hot San Francisco startup that already has 25 outposts around the world for its simple, seductive service: on-demand transportation. With an iPhone or Android app, you call up the Uber map, spot an available town car or taxi, and summon it with a click. The fare and tip for a town car, or limo, is maybe 50% higher than for a regular taxi ride and paid for through the service.

"Nearby, several middle-aged men, all wearing black suits, white shirts and ties, listen to a young guy in jeans, orange socks and sneakers. He is consulting a MacBook as he talks to them. "Your account is no longer active, due to quality concerns from negative feedback," he says to one of the men. "You've had 105 trips and your quality scores are low."

"As the "no longer active" driver might attest, the company puts a premium on customer satisfaction. Uber has been successful enough that city bureaucrats across the country, eager to protect homegrown taxi and limousine services, have thrown up regulatory roadblocks left and right.

"Uber launched as an iPhone app in June 2010. The cars that iPhone users summon are typically town cars owned by a limousine company but not on a call. Instead of idly waiting for work, the nearest available driver answers the app call. Other cars are simply privately owned vehicles whose drivers have been vetted by Uber.

"The idea worked. How could Mr. Kalanick tell? Four months after the launch in San Francisco, Uber was served with a "cease and desist" order from the California Public Utility Commission and the San Francisco Municipal Transportation Agency. He verified with his lawyers that what Uber was doing was indeed legal, then the company took its case to the public through Twitter and email.

"Did you ever cease?" I asked. "No." "Did you ever desist?" "No." "So you basically ignored them?"

"As he talks, Mr. Kalanick paces around the conference room carrying a golf putter. The more wound up he becomes, the more he seems likely to break a window than practice his stroke. "The thing is, a cease and desist is something that says, 'Hey, I think you should stop,' and we're saying, 'We don't think we should.' The only way to deal with that is to be taken to court, and we never went to court."

"But Uber did have to meet with the San Francisco Municipal Transportation Agency, where the woman in charge of taxis "was upset," Mr. Kalanick says. "Oh man, I've never. . . . She was fire and brimstone, deep anger, screaming. But here's the thing, SFMTA has no jurisdiction on what we do. They regulate taxis. Every single limo company we work with is licensed and regulated by the state of California."   Ultimately, he says, the question boiled down to this: "Are we American Airlines or are we Expedia? It became clear, we are Expedia."

"Then, last year, came the clash with regulators in the city where they order red tape by the truckload: Washington, D.C. A month after Uber launched there, the D.C. taxi commissioner asserted in a public forum that Uber was violating the law.

"This time Uber was ready with what it called Operation Rolling Thunder. The company put out a news release, alerted Uber customers by email and created a Twitter hashtag #UberDCLove. The result: Supporters sent 50,000 emails and 37,000 tweets. Mr. Kalanick says that Washington "has the most liberal, innovation-friendly laws in the country" regarding transportation, but "that doesn't mean the regulators are the most innovative." The taxi commission complained that the company was charging based on time and distance, Mr. Kalanick says. "It's like saying a hotel can't charge by the night. But there is a law on the books, black and white, that a sedan, a six-passenger-or-under, for-hire vehicle can charge based on time and distance."

"In July, the city tried to change the law—with what were actually called Uber Amendments—to set a floor on the company's rates at five times those charged by taxis. "The rationale, in the frickin' amendment, you can look it up, said 'We need to keep the town-car business from competing with the taxi industry,' " Mr. Kalanick says. "It's anticompetitive behavior. If a CEO did that kind of stuff—you'd be in jail."

                                   **************
     This story nicely reveals the problem of "regulatory capture" discussed in "The Bumbling Colossus" at pp. 212-216.  To protect their privileged position, the taxi interests and their political/bureaucratic friends lit out after Travis' operation like hounds after a hare. So far, Travis seems to be holding his own, but at tremendous cost. 

     Unlike private monopolies or combinations, which history has shown are unstable and temporary, when private interests capture public powers (usually filtered through the smokescreen of regulation), privileged positions are created which history shows are long-lasting and extremely hard to break. (TBC at 167). For example, most of the taxi regulations and their corresponding corporate Goliaths we see today were created in the late 1920's. 

Travis Kalanick and those like him are the brave souls on the edge, dancing that narrow line between political pressure, illegality, and the kinds of physical threat which taxi companies were once famous for before they achieved their present privileged status. The difference now is that "disruptive" technology innovations are enabling quick and safe connections between rider and carrier which supplant the call to Yellow or Checker or waving one down from curbside. Still, those protected by the legal regime scream and call on their political allies for help in suppressing the threat.
 
Travis Kalanick and his "Uber" are genuine American heroes. They are also the sort of anti-regulatory threat the Obama Justice Department misguidedly is prone to prosecute. Yet notice what they accomplish. They provide high customer satisfaction AND profit by it. At a cost appropriate to the service. If he were delivering health care instead of rides, people would say the profits need to be eliminated to keep the costs down, that the public interest requires non-profits or government. That is how far we of the regulatory mindset have gotten from economic reality and common sense. The truth is, only profit-making spurs innovation and cost-reduction (see "How Profit-Making Heals", nearby). 
 
Those seeking to eliminate the profit motive from health care and similar areas of "need" should drink deeply from Travis' cup and rethink. ObamaCare builds in exactly the kind of deeply entrenched privileged interests, which capture and are protected by the regulatory regime, that you see with the Taxi Robber Barons. Intrusive regulatory control, whether taxis or health care, is begun in high hopes and good will, but turns out to be no friend of the public or consumer. 

Keep up the good work, Travis.

Read the whole story of Uber and Travis at: www.online.wsj.com

"The Bumbling Colossus" is available at:  www.amazon.com

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