Saturday, October 31, 2015

Taxi License Problem Reveals Grossly Inadequate Laws

Disruptive new technologies are so …. disruptive!  A recent example in New York City evokes well-deserved sympathy for  taxi drivers who invested hundreds of thousands of dollars to buy a license only to have the market value of their licenses cut in half by the arrival of Uber. 

Unfortunately for taxi operators,  it is hard to stop progress when it is embraced by millions of customers who appreciate prompt and inexpensive service and thousands of drivers who appreciate being able to make money while retaining flexibility in scheduling work.  Chalk up one more victory for smartphones!

It is important to note that the predicament of taxi drivers was caused, not just by opportunities created by smartphones, but also by grossly inadequate licensing laws that go back many decades. 

The basic problem is that the licenses were sold to drivers by the city instead of being leased to them.  This not only required drivers to put large amounts of money up front to buy licenses that were in effect capital assets,  but it subjected them to the risk that the market value of those assets would,  as capital assets not uncommonly do,  take a big hit.

Of course it was also possible that the market value of a license would increase, which also often happens with capital assets.  But there is no reason why such capital gains should be captured by private individuals who had nothing to do with creating them.

If, instead,  the city had rented out licenses for limited periods of time,  none of these problems would have developed.  Taxi drivers could have paid annual rents for their licenses out of current cash flow instead of having to sink huge amounts up front.  When the market value of licenses was halved by competition from Uber,  the annual license rent could have been adjusted downward the next time the lease came up for renewal.  If market value of licenses had increased,  the increase could have been captured by the city in the form of higher rents, again the next time leases came up for renewal.

There is one further dimension we need to think about.  Issuing a limited number of licenses in effect gives a monopoly over the taxi business to the people who have the licenses.  Such a monopoly may well be in the general interest.  But if we want to create the monopoly by means of genuine law (as distinguished from arbitrarily) the only possible legitimate owner of the monopoly would be the public,  which consists of every man,  woman, and child subject to the jurisdiction of the government.   Although the government creates the monopoly it does not own the monopoly but only acts as a trustee for the public when it leases out the licenses.

The rents received by government as trustee should therefore not be spent by the government, which would be an abuse of its fiduciary duties as trustee for the public.   Instead the money should be distributed in equal amounts to all members of the public as an annual social dividend.  Such a system would resemble the oil dividend which goes to all Alaska residents. 

Of course this is not how taxi licenses were handled in New York City,  and sorting out the current mess in a way which does justice to taxi operators,   people who travel around town,  and the public will be difficult, if not impossible.  That is what happens when you do something the wrong way to begin with.   But maybe we can learn something from this experience and do things the right way the next time.


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