No more medallions

One of the most ubiquitously practiced—and yet, seldom interrogated or defended with any true intellectual rigor—habits of the state comes in the form of the restriction of the pool of labor in any given industry. Although such restrictions can come in a myriad of forms, such as licensure, unionization or mandatory school attendance until adulthood (as in the case of the NBA), the economic consequences for consumers and unlucky (or unconnected) labor are almost always the same.

As economist Robert P. Murphy has pointed out, a textbook example of the consequences of artificially restricting desirable goods is found in the practice of issuing “medallions,” or numbered metal plates, to taxi cabs in cities such as New York. In areas that follow the medallion system, drivers who wish to operate a cab are required by law to first obtain a medallion from the city. The city government, under pressure from political and financial interest groups, severely limits the number of medallions—and, as a result, the number of taxi cabs—on the road at any given time. (As recently as November of 2011, for instance, the total number of medallions in New York City was fixed at a paltry 13,237.)

As supply of medallions stagnates and demand for them grows, a number of things begin to happen. One of these is that the value of each medallion, now the sole means by which to operate a cab—and, for many, to earn a living—skyrockets. In fact, the market value of medallions has climbed so high in New York that most cab drivers are unable to afford them at all. (In 2011, for example, medallions were selling there for as high as $1 million apiece.) As a result, drivers who don’t wish to change lines of work and acquire new skill sets are left with little choice but to take out loans from corporations such as Medallion Financial, which charges them a relatively reasonable—yet still more than counterfactual zero—interest rate of 4.8 percent, or to rent medallions from owners. This can leave a driver in a hole of over $100 at the beginning of each day, which can in some circumstances result in the sacrifice of safety, low-yield customers or both as a driver attempts to make up the difference with enough time left over to make some money to take home in the evening.

It’s easy to blame firms like Medallion Financial, who profit off of what appears to be a more or less arbitrary rent-seeking ploy, for rising fares and declining quality in the hired car industry, and it’s not altogether unwarranted, either. After all, New York Gov. Andrew M. Cuomo, whose father Mario has long sat on the board of Medallion Financial and whose political career has been bankrolled by the corporation, has put himself in the interesting position of passing judgment on medallion-related issues in New York. (To Gov. Cuomo’s very limited credit, he did approve a modest increase in medallions in late 2011.) If anything, though, firms like Medallion Financial serve as red herrings in the medallion debate, and—once we accept the conceit of a state-mandated restriction on the number of cab drivers in a given city—do provide a desirable function: Without them, cab drivers would have an even harder time securing funding for medallions, and the industry would suffer further as a result.

If Medallion Financial isn’t truly to blame for the farcical boondoggle that is the taxi cab medallion scheme, then some other major player must be at fault. In order to find out who or what that is, it’s useful to look at Washington, D.C. The nation’s Capitol has witnessed its own share of corruption in the taxi cab industry, as it has toiled through debate on bills authored indirectly by taxi cab magnates and has seen dozens of men indicted on bribery charges relating to the issue. The common denominator in all of these instances has been the state and its attempts to artificially restrict the labor pool in a given industry, thereby pitting productive worker against productive worker and promoting a system according to which the quickest road to profit is to abandon consumers and please politicians in their place. Instead of pointing the finger at mere opportunists like Medallion Financial, those who are dissatisfied with such a bureaucratic spoils system would do well to look deeper into the matter, and to track down the source of the honey that is drawing the flies.

In fact, those paying attention to rent-seeking scams like the medallion travesty—which, frankly, is far more than half the battle—will notice how easily the lessons drawn from it can be extrapolated to any industry in which third-party interventions forcibly restrict the size of the labor pool. It is not by some flaw in execution, but rather by design—which relegates most workers to unemployment while rewarding inflated revenues to an at-best lucky and at-worst politically connected few—that schemes such as medallion issuance, state-backed unionization, government licensure and minimum wages inevitably result in an increase in prices and a corresponding decrease in quality, availability and, perhaps most importantly, overall employment.

Of course, it is possible, based on the system of morality of the reader, to perceive these consequences as the necessary price to pay for regulated taxi cab service or guaranteed homogeneity of medical practice or additional benefits for unionized workers; that is a different point entirely. What is not possible, however, is to squeeze blood from a stone. Artificial restrictions on the labor force will always, for the reasons listed above, make an industry less competitive, and will harm consumers and the vast majority of implicated laborers in the process.

Chris Bassil, Trinity ’12, is currently working for Dana Farber Cancer Institute in Boston, Mass. This is his final column of the semester.