Dense cities are the world’s traditional marketplaces, where people come together to trade goods and services in pursuit of profit. But what happens when the world’s markets are warped? This year’s marquee initial public offering—the app-based car-hailing service Lyft, set to debut Friday on the Nasdaq exchange—isn’t so much a gauge of functional, robust markets, but a marker of the challenge that global cities face amid the whims of central bankers and venture capitalists.
A decade of record-low interest rates has made a fun-house mirror out of investment markets. In a normal world, with tighter credit, investors would not pour billions of dollars into companies that are likely to lose money indefinitely. In our world, though, interest rates have been low for years, and Lyft and its larger archrival, Uber, have the funds to lure drivers into already crowded downtowns.
Lyft and Uber have artificially reduced the price of a car ride in dense global cities such as New York—and so they have artificially increased the demand for such rides. Over the past decade, the number of registered for-hire cars in New York City, for example, has nearly tripled. Traffic speeds have fallen to record lows. In Midtown Manhattan, riding in a car is barely faster than walking. As they sit in worsening traffic, Lyft passengers have ample time to reflect on how financial markets are distorting real life on the streets.
How did this happen? Eleven years ago this month, the investment bank Bear Stearns collapsed, ushering in a historic financial crisis and the biggest bailouts the Western world has ever seen. Starting in December 2008, the Federal Reserve slashed basic interest rates to virtually zero, where they stayed until late 2015, in order to jump-start borrowing and lending, and thus economic activity. Even now, despite the Fed’s attempts to “normalize” rates, effective rates are at just 2.4 percent, far below historical averages.
Low interest rates make it difficult for investors to earn decent returns, at least not without taking higher risks. The world’s safest bonds—$10 trillion worth—now offer negative interest rates, meaning investors pay to hold them. As Bloomberg News noted this week, such yields “intensify … the conundrum for investors hungry for returns.” In a normal liquidity crisis, there isn’t enough money in the financial system. In our current liquidity crisis, there’s too much.
Persistently low returns have created a new phenomenon: companies that do not have to earn profits to prosper. Lyft is known for its bright pink-purple logo, and its IPO documents are every bit as cheerful. The company declares that its mission is to “improve people’s lives with the world’s best transportation.”
This is a laudable goal. Let’s look at the first company that tried to accomplish the same task by harnessing the mass-market power of the automobile, around the turn of the last century: Ford. In 1903, “with 12 investors and 1,000 shares,” Ford notes of its own history, “the company had spent almost all of its $28,000 cash investment by the time it sold the first Ford Model A on July 23rd … But by October 1st … Ford Motor Co. had turned a profit of $37,000.” Start-up Ford could not grow unless it proved quickly that it could make money for its investors.
Now let’s return to the Lyft IPO documents. In its offering, Lyft warns its prospective public investors, “We have a history of net losses and we may not be able to achieve or maintain profitability in the future.” Indeed—in 2018, Lyft lost $911 million on $2.2 billion in revenue, a profit margin of negative 41 percent. In the new investment math of liquidity-crisis-era tech companies, this is progress: In 2016, Lyft’s loss was only (!) $683 million; to optimists, the subsequent increase in how much money the company bled just means that its market share is growing.
Lyft’s losses definitely aren’t the result of massive investments in physical assets that will generate a big return in the near future. In fact, Lyft is asset-lite; its total assets are worth just $3.8 billion, compared with the company’s estimated market valuation of more than $24 billion. The company is now investing in bike-share and scooter-share equipment, and it’s building up fleets of cars for its hire-car drivers to rent. Yet it has only just begun to amass the physical resources that most companies need to produce earnings.
In large part, Lyft’s losses are the result of “promotions.” That is, as the IPO documents note, “to increase the number of rides that riders take through our platform, we often engage in promotions to riders … Market-wide promotions reduce the fare charged by drivers to passengers for all or substantially all rides in a specific market.”
In other words, Lyft loses money on the car-hail rides that customers take. The cost of the car, gas, tolls, and paying the driver is higher than the price the customer pays. “Competition has meant spending heavily to … subsidize rides for consumers for nearly a decade,” The Wall Street Journal reports. “Early private investors say they had hoped heavy rider subsidization would have ended years ago.”
It would be none of the public’s business whether investors want to subsidize ride-hail passengers indefinitely—except for one thing: what economists call “negative externalities.” From San Francisco to Boston, “the emerging consensus is that ride-[hailing is] increasing congestion,” Christo Wilson, a professor at Northeastern University, said last year. The economics are straightforward: Ride-hail companies have made it cheaper and easier to take a car, but a city can’t and won’t make any more streets to fit all those cars.
Car-hail companies aren’t the only liquidity-crisis tech companies upending the traditional, useful signals of supply and demand. WeWork, the office-leasing company, posted a $1.9 billion loss last year. In this case, too, an innovative company has taken a traditionally profitable business—subletting office space to companies—and transformed it into a loss-making one. Again, it wouldn’t be any of our business, except that WeWork’s ability to rent office space in global cities on its investors’ dime artificially increases demand for office space, changing the physical landscape of cities independent of traditional market forces.
Eventually investors themselves will correct these distortions. They cannot subsidize losses on what were once profitable activities forever. But “eventually” can take a long time. Meanwhile, city dwellers marveling at the wonder of a cheap ride can’t praise, or blame, the free market. The invisible hand of the government, and its record-low interest rates, control the streets at the moment—not Adam Smith’s invisible hand of the marketplace.