Taxi apps should be hailed for breaking the cabby cartel

Taxi licensing illustrates how regulation intended to serve the public is hijacked

They are taking to the streets in Paris. They have secured a ban in Brussels. They have gone to court in Berlin. Taxi drivers across Europe are united against Uber – a Silicon Valley start-up, backed by Google and Goldman Sachs, whose app-based car service is being rolled out internationally.

The regulation of taxi services arouses emotions. My local French driver asked recently: “What do London cabbies do when they retire?” He explained that his colleagues rely on the onward sale of taxi licences to fund their pensions. In New York, the value of a taxi medallion now exceeds $1m. London, however, issues licences freely to anyone who passes “The Knowledge”, the demanding test of London’s geography required of drivers of the distinctive black cabs.

Some regulation of taxis is necessary. The nature of the service they provide means that many of its users are vulnerable. They are disabled, or women who need a safe trip home late at night, or foreign tourists who have no idea what is a reasonable fare from the airport to the city. Beware Budapest, where taxis are unregulated, and Oslo, where even the metered fare will max out your credit card.

Taxi licensing illustrates regulatory capture, the phenomenon by which regulation intended to serve the public is hijacked by industry interests. As every passenger knows, drivers are voluble, and enjoy a certain solidarity; their clients, however, are diffuse and diverse. In 1978 a protest by cab drivers brought central Dublin to a halt. The Irish government responded by agreeing to freeze the number of taxis on the streets of the city. Over the next two decades the Irish economy grew strongly and Dublin became notorious for taxi queues. There was even a serious proposal to erect taxi shelters across the city, so that waiting citizens could shelter from the Irish rain.

Taxi drivers are voluble, and enjoy a certain solidarity – unlike their clients, who are diffuse and diverse
The regular Christmas chaos – taxis were effectively unavailable at times of peak demand – became a political issue. But Prime Minister Bertie Ahern stood firm in defence of the status quo. It was left to the Irish courts to declare the restrictions on numbers unlawful. Within two years, the number of cab licences in Dublin had increased more than threefold.

So long as regulation ensures that vehicles are safe and drivers honest, it is difficult to see how the public interest could ever be served by restrictions on numbers. Britain’s Office of Fair Trading reached this conclusion in 2003 (although there are no such restrictions in London, many other local authorities impose limits). But the lobbyists prevailed; the parliamentary transport committee issued an extraordinary attack on the OFT report, and the government decided to do nothing. The Law Commission reiterated the OFT’s finding in 2012, but by the following year had modified its advice and suggested that there might be a case for restricting supply, although it gave little guidance as to what that case was.

In Paris, cab numbers are tightly controlled and there are virtually no private hire vehicles. Taxis are mainly used by business people and journeys per head are less than a third of what they are in London or New York. Lower socioeconomic groups rarely use cabs in France – in London and New York they do, extensively – and there are large areas of Paris where a taxi service is in effect unavailable. That elitist outcome is strikingly similar to the experience of another regulated industry, civil aviation, where service was confined for many years to business travellers and the affluent, until deregulation and the internet made the emergence of low-cost airlines first possible and then inevitable. The parallels with the development of Uber are clear.

But the problem of the French driver’s pension remains. The American economist Gordon Tullock described “the transitional gains trap”: the policy of restricting numbers is foolish but cannot be abandoned without wiping out the hard-earned savings of drivers. One might have less sympathy for investors; most New York cabbies rent rather than own licences. In Dublin, the Irish government established a hardship fund to help compensate drivers who had been counting on the value of the licence to supplement their retirement income, or had recently taken out a loan to purchase a licence. Politicians should beware of policies that are easy to implement and costly to reverse.

http://tinyurl.com/ldhdry6