Observers have been flagellating Uber for its supposedly disastrous initial public offering because the ride-hailing giant fetched a market value of (only) $75 billion and because the stock has fallen further in the aftermarket. The bankers at Morgan Stanley, a lead underwriter, were plainly overconfident, having initially forecast $120 billion. But what the IPO actually proved is the success of Uber’s model. Together with Lyft, which also went public, the ride-hailing industry is now worth more than $85 billion. Not bad for a business that didn’t exist a decade ago and that still loses money on every fare. Uber and Lyft owe their success to two transformational innovations. They use global positioning to pair drivers with passengers, and they let supply and demand determine fares. The merits of that model, relative to the traditional taxi industry, were underlined recently by an exposé in the New York Times on predatory lending in the New York yellow cab industry. The two-part series , by Brian M. Rosenthal, is worth the read. Rosenthal described a bubble market in the “medallions” that the city requires to drive a yellow cab. Prices for medallions soared to more than $1 million, thanks in part to lenders who hawked dubious loans to drivers, many of them recent immigrants. The loans were marked by abuses similar to those in the late housing bubble, such as vanishingly small deposits, lack of borrower documentation, terms that were not understood by borrowers and debt loads wholly out of proportion to income. And as with housing, medallions crashed. Medallion prices in New York have plunged to as little as $150,000; last year, 139 medallions were offered at a bankruptcy auction. (Tragically, a spate of medallion owners killed themselves.) Similar busts in medallion prices occurred in other cities. The short answer for why medallion prices plunged is that Uber and Lyft have taken a chunk of their business. But in New York, at least, fleets of yellow cabs still roam the streets. Uber and Lyft weren’t the whole story. New York City established medallions in 1937, with the aim of preventing an oversupply. Currently, the city has just over 13,000. That number is arbitrary. If the city wanted to, it could hand out medallions on the street corner. Because people buy and sell medallions like other financial assets, some have likened them to the stock market. The analogy misses a key distinction. Medallions don’t have any intrinsic value; their value derives from artificial scarcity. In New York and elsewhere, fixed supply was a major reason for the boom. Notice that if shares of an ordinary business rise, the market is sending a signal about demand for the company’s product and ultimately its profitability. The boom in medallion prices didn’t say anything about the underlying demand. It’s not as if fare prices boomed. They are regulated, too — necessarily, since, otherwise, the fixed supply of yellow cabs could charge almost anything. The moral is that when a business is partially regulated, the other part — the part that is left to the “free” market — performs in uneconomic and often undesirable ways. This was also true in housing. Government support for mortgages, via Fannie Mae and Freddie Mac, had a lot to do with the housing bubble. This isn’t to say that free market forces — speculation, predatory lending and so forth — don’t contribute mightily to bubbles. In the dot-com bubble of the late 1990s, the government had no involvement. Wall Street went nuts unassisted. And in some cases, market intervention is preferable. Felix Salmon, a financial journalist, looked at million-dollar medallions in 2011 and concluded they didn’t make economic sense. Nonetheless, he could see the point of regulation. “If you deregulated cab fares,” he noted , “utter chaos would result. New Yorkers would basically have to haggle over the cost of a fare every time they got into a cab.” Which is something many New Yorkers might enjoy. Nonetheless, Salmon’s dilemma was about to be solved — was then being solved — by technology. Uber and Lyft don’t require you to haggle. You see the price before you get in, and accept it or not, just as one does with other products and services. Advocates for the medallion business, including New York Mayor Bill de Blasio, have responded to the ride-hailing business with a formula already proven to fail: They want to limit the number of Uber and Lyft drivers. The city council has legislated a cap on ride-hail drivers, which Uber has challenged. Because the ride-hail model is winning in the marketplace, they want to make it more like the medallion business: that is to say, a business with artificially fixed supply. Across the country, the medallion industry has fostered (relative to ride hailing) inefficiency and cronyism and, sometimes, allegations of corruption. An article in the Yale Journal on Regulation called New York City medallions “an instance of inefficient private property rights sustained by political decision-making processes subject to pressures from powerful interest groups.” And now, the medallion market — half “free” and half controlled — has succumbed to the worst sort of Keynesian bubble. Its one unquestioned advantage — reliability and convenience in setting fares — is now redundant. Why is this an industry society should protect? Medallion owners, who bought scarcity from the city, have in effect been ripped off. They are entitled to some transitional help. But there is no public interest in furthering the pretense that rides for hire are in limited supply.


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