November 29, 2006

Free the Cabbies!

What issue could possibly find me in agreement with Chris Wage, A.C. Kleinheider, Roger Abramson and Brittney Gilbert? Taxicab regulation - or, rather, the senselessness of Nashville's government regulating the number of taxicabs that entrepreneurs and taxi companies may operate in Nashville. ACK's post has links to all the others.

First, the news from The Tennessean:

The Metro Transportation Licensing Commission today denied a series of requests that would have boosted the number of taxicabs buzzing around Nashville by 50 percent.

Most interesting is this article from the January 1997 issue of the Cato Institute's Regulation magazine, titled "Regulation and the Urban Marketplace." The article was written by Indianapolis Mayor Stephen Goldsmith regarding the work of the "Regulatory Study Commission" he established soon after becoming mayor of that city. A big part of the article focuses on Indy's taxicab regulations, which in key ways were a near carbon copy of Nashville's - complete with an artificial cap on the number of allowed cabs, and a ban on hailing cabs - until Goldsmith and the Indy city council reformed it to let entrepreneurship flourish:

The RSC begins with the premise that regulatory restrictions must be justified, not simply assumed. From that starting point, we search for the least burdensome level of regulation that meets our objective. Not surprisingly, we learned upon assuming office that very little of our regulatory code had ever been subject to such a test.

The taxi industry is a good example of an area where regulations had completely displaced the economic principles of demand and competition. The number of licenses was fixed and so were the fares. At a series of public meetings designed to develop community consensus on the need for dramatic regulatory reform in ground transportation, nearly everyone who testified confirmed our worst fears. Complaints about service were rampant. Because the local industry was protected from competition, the near universal judgment was that service was poor, expensive, and highly selective. If you happened to live in a neighborhood that the dominant providers did not want to serve, namely, low income and high crime areas, you were out of luck.

Drivers who wanted to go into business for themselves argued that local regulations made it virtually impossible for them to own their own taxis. Denying business opportunities is bad enough, but to do it to the very people who need entrepreneurial opportunity most is downright shameful.

Entry into the Indianapolis taxi market was tightly controlled; the city government had set the ceiling on taxi permits at 392. The taxi market was a de facto monopoly controlled by a single large operator who owned or controlled, either directly or indirectly, nearly two-thirds of the 392 taxis. The RSC determined that local taxi service was so poor in large part because the regulations that governed them were so bad.

Taxis and ground transportation became a major test of our administration's credibility to deliver city-wide regulatory reform that could lead to real enterprise creation. If we were to do anything to reform the local regulatory marketplace, ground transportation was the arena in which we had to deliver. But after a nearly two-year battle, the City County Council finally voted 21-7 to adopt Proposal 72 into law in May of 1994. On July 1, the artificial cap on the number of taxi licenses was lifted, offering the first significant prospect of new market entrants into the ground transportation industry since shortly after the end of the Second World War. For the first time in just as long, the new law lifted the prohibition against "cruising," or hailing a cab. This anti-competitive provision was cunningly designed to prevent new market entrants from getting into the business by cruising the streets. Since the only practical way to get a cab was to call one, only those cabs with city-approved radio dispatch systems could compete, and since the only companies that could afford the city-approved dispatch system were the few dominant, well-heeled, and legally protected providers, their position in our market was secure.

The impact of the new Indianapolis ground transportation ordinance, which also abolished the official minimum fare, allowing taxis to charge as little as they like for a ride, even surpassed our own expectations. In the first month, the number of licensed taxi operators rose an amazing 60 percent, from twenty-eight licensed companies to forty-five. In addition, the new competition dropped fares among the new licensees almost 7 percent. But perhaps even more impressive than reduced fares and increased competition is the effect that the new market system has had upon the drivers themselves.

Nearly overnight, the dress code for taxi drivers went from ripped T-shirts to collars and ties. Cabs are noticeably cleaner, cabbies are friendlier and their vehicles are more visible on our streets.

In all, there have been twenty-nine new taxi companies licensed since deregulation, which means that the number has more than doubled since the proposal was adopted. Today there are fifty-nine licensed taxi companies in Indianapolis, and an entirely new industry in jitneys and minivans.

Via the Reason Public Policy Institute's Urban Futures Program I also found a report from the Buckeye Institute, titled Taxicab Regulation in Ohio's Largest Cities, published in 1996. There's a summary and a PDF link here. Summary:

Ohio's largest cities impose numerous regulatory burdens on the start up and operation of taxicab businesses. The regulations often prohibit small, independent operators from starting a taxi business. This limits economic opportunities in Ohio's major cities. Additionally, the regulations severely limit service and price competition among taxi companies.

Meanwhile, other U.S. cities have found success in deregulating their taxi markets, Within the first six months of deregulation, Indianapolis had 32 new companies start up. In Denver, four entrepreneurs sued the State of Colorado in order to start their own company. "Freedom Cabs" became the first cab company in 48 years to open up in Denver and now employs 100 drivers.

Other reading: Bruce Schaller of Schaller Consulting wrote a paper titled "Entry Controls in Taxi Regulation: Regulatory Policy Implications of U.S. and Canadian Experience," which is online here. There's also a PDF version online here, but the link didn't work when I clicked it. Schaller seems to be pro-regulation.

Also worth reading: Econ Journal Watch published an article in January 2006 titled "Do Economists Reach a Conclusion on Taxi Deregulation?." The PDF is here.

More links here

My own view is as I wrote it at NashvilleIsTalking.com earlier today:

Lots of industries use government regulatory boards to keep out competition. The economic term for it is rent-seeking.

While keeping out new competitors protects the ability of existing cabbies to make money, it also prevents the rise of competitive pressure that would lead to better services at better prices - which might just attract more people to use cabs more often.

Government ought to get out of the business of protecting cartels. There should be a set of regulations for safety reasons, but anyone who wants to start a cab business ought to be able to do so.

Free the cabbies!

P.S. This ought to be an issue in the upcoming Nashville mayoral race - do the candidates for mayor of Nashville favor adjusting regulations to enable entrepreneurs and benefit customers, or do they favor continuing to protect a cartel?