Thesis: The declining taxi industry of New York is a case of idiosyncratic risk, and the industry should be allowed to fail as it has a readily available replacement.
This past Thursday in a New York Times interview, taxi mogul Evgeny Friedman called for the city of New York to back all loans made for medallion taxi purchases. Friedman contends that the taxi market is threatened by lack of credit available to would-be taxi purchasers, and that a lack of action from the city would impact the taxi industry across the entire country. He even went so far as to claim that the taxi industry is “too big to fail,” comparing the situation to that of the financial industry during that of the mortgage-backed security crisis. But he is applying the label of “too big to fail” to an entire industry, whereas the term originated (and has historically been used) in reference to single corporations. And it’s worth asking the question: if an entire industry needs government intervention to keep it afloat, then is it even worth saving that industry?
The financial institutions that received bailout packages during the recession got them because their failure would have meant a nationwide freezing of credit and shock to financial asset prices. A failure of the medallion taxi cab industry would mean a loss of tax revenue to the city and a shortage of taxis available to riders. But while the services provided by major banks are incredibly hard to replace, the problems associated with a failure of the taxi industry have easier solutions which would be quick to implement. As taxi drivers see less and less income and take their cars off the road, their main competitors (Uber and Lyft drivers) will find their services producing more income, and new drivers will emerge until the supply of drivers and the demand for rides hit equilibrium. And while the loss of tax revenue is certainly material (New York collects 50 cents for each ride, and at 600,000 rides per day [according to a New York City factbook], the city sees about $109.5 million in annual tax revenue), taxes can be applied to Uber and Lyft rides in the same fashion.
What Friedman is really asking for is a “save my business model” bailout. There are few legitimate arguments to made as to why the taxi industry should not be allowed to fail. And in reality, taxis probably won’t completely fail for quite a few years. The price of a yellow medallion cab will certainly fall and taxis on the road will be replaced by drivers from other services, but taxis likely won’t suffer from a sudden mass extinction. Friedman, who is significantly biased (he owns 1/6th of New York’s taxis – worth about $1 billion), is overstating the economic threat. He merely overspeculated on the rising prices of an asset (taxis), and is now reaping punishment.