Business May 2012

Why You Can’t Get a Taxi

And how an upstart company may change that
Zohar Lazar


Where I live in Washington, D.C., about a mile and a half north of the Capitol, you can sometimes get a taxi in two minutes flat. And sometimes, after spending 20 minutes wistfully waving two fingers in the air while the traffic hurtles past, you have to give up and trudge to the train.

There’s no way to tell which will happen until it happens—and so, I rarely bother to try hailing a cab. Neither do my neighbors. And the paucity of potential fares in my part of town—a relatively low-income, low-density neighborhood—also makes it harder to get cabs back home from other neighborhoods. Technically, it’s illegal for D.C. cabdrivers to refuse a fare within the District, but then, technically, it’s also illegal to drive above the speed limit, jaywalk, or falsely claim to have been awarded the Medal of Honor. On a typical Saturday night in the District, as far as I can tell, all of these laws are mostly honored in the breach.

Like most urbanites, I’ve spent a lot of time voicing the standard complaints: Why are taxis dirty and uncomfortable and never there when you need them? Why is it that half the time, they don’t show up for those 6 a.m. airport runs? How come they all seem to disappear when you most need them—on New Year’s Eve, or during a rainy rush hour? Why must cabbies drive like PCP addicts? Women complain about scary drivers. Black men complain about drivers who won’t stop to pick them up.

The cabdrivers have their own litany. They drive long hours for little money: the average cabdriver earns $27,060 a year, before expenses. They are at high risk for traffic accidents and, because they carry a lot of cash, for robbery. When drivers turn down fares to neighborhoods like mine, it’s not because they don’t want to miss a second of The Diane Rehm Show while they take my cash and make change. Those trips, where they probably won’t get a return fare, and must instead burn time and gas while the meter’s off, can mean the difference between profit and loss for the day; cabbies can’t afford too many of them.

What I’m describing is a classic market failure: people who are willing to do business together can’t make it happen. If taxis and passengers only knew how to find each other, and could strike deals that would appeal to both, everyone would be better off. Why can’t we fix this?

As it turns out, a small but rapidly growing business is trying. One Friday night in December, my husband and I drove over to Adams Morgan for some karaoke with friends. “You drove?” a friend who lives near us asked incredulously. “I just used Uber.”

Travis Kalanick, who co-founded Uber, told me that he and his partner “wanted to be able to push a button and get a ride.” That’s a fair enough description of the service that they launched in San Francisco in 2010, and that is now available in nine major cities—including New York, Boston, and Paris—with plans for expansion to at least 25 more. Set up an account, plug in your credit-card number, and in less than five minutes Uber’s smartphone app will be showing you a map of your location, the nearest available cars, and how soon one can get to you. Click the screen a couple of times, and a sleek black sedan is on its way.

Unlike traditional limo services, which rent you a car and driver by the hour, and usually on no less than an hour’s notice, Uber charges time-and-mileage fares, just like taxis, and the cars it finds for you typically show up within 15 minutes of your request. That convenience and style is costly; in D.C., the price is usually at least 50 percent more than that of an equivalent cab ride. Uber’s critics frequently imply—perhaps with a grain of truth—that it’s a service for the affluent that takes fares from hardworking taxi drivers who are struggling to make rent. “Uber’s real defenders,” a D.C. blogger has written acidly, “comprise a mix of socialites, transportation fanatics, and libertarians.”

And yet, this analysis misses something important. Yes, Uber has created a higher-priced, higher-class service for people who can afford it—but it has also broadened the market to people who formerly couldn’t get cabs at all. For my husband and me, the appeal of Uber is simple: it’s there. A car that will actually show up to take me to the airport, or to my home, is worth considerably more than a cheaper, but unreliable, alternative.

As you dig deeper into Uber’s story, you find out that it’s about more than plush car service wherever and whenever you want—or even the innovative technology that powers it. Perhaps most of all, Uber’s story is about the ins and outs of regulation—and about why cab service is so unsatisfactory nearly everywhere in America.

In 1907, an innovation hit the streets of New York: 65 gasoline-powered vehicles were equipped with taximeters. Invented by Wilhelm Bruhn in 1891, the taximeter could record time spent on a journey and distance traveled in order to calculate fares.

The vehicle for hire is an old concept, of course, but horse-drawn cabs seem to have mostly escaped regulation. By the 1920s, America’s taxi regulations were proliferating, though they were still mostly limited to things like setting maximum fares and requiring cabbies to post their rates.

Then came the Great Depression. Desperate new drivers flooded the market, escalating the fare wars that had begun in the ’20s. Meanwhile, the nation’s governing ideology was shifting radically. Parts of the New Deal were explicitly anticompetitive—merchants and manufacturers who wanted to display the blue eagle of the National Recovery Administration, for instance, were expected to sign on to an industry “Code of Fair Competition,” which typically contained a price-fixing agreement. In the taxi industry, local governments began setting minimum as well as maximum fares, and controlling the number of cabs that could enter the market. In 1937, New York City’s Haas Act introduced its famous medallion system, limiting the number of taxis to 13,566—about where it remains today.

Many defenders of regulation argue that restrictions are necessary because cabdrivers make so little money as it is. But there’s very little evidence that restricting the number of cabs improves the lot of the people who drive them, rather than the lot of the companies that, by and large, own the licenses. It’s simply too easy for new would-be drivers to show up at a taxi service and compete cabbies’ earnings down—in these days of GPS, you don’t even need to be familiar with the area. So any excess profits from restricting entry tend to accrue not to the drivers, but to the people who own the right to drive. Last October, two New York City taxi medallions sold for $1 million apiece.

“In New Haven, nearly every taxi is owned or controlled by [the same] person,” Robert McNamara, an attorney at the Institute for Justice, which litigates against these sorts of rules, told me. Restricting entry “hasn’t made the drivers better off.”

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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