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The pitfalls of government oversight

One of the great false dilemmas in economics is that a lack of government regulation or direction necessarily means chaos. Change is necessary for economic progress, but brings unfamiliar and often frightening new circumstances. As children we turn to our parents when the world frightens us. This leads many of us as adults, I think, to naturally look to government for protection and reassurance.

Commercial drone innovators and new startups like the ride sharing service Uber and house rental service Airbnb have run into barriers in the form of government regulation. Unfamiliarity and the clear potential for harm lead many people to seek reassurance in these cases through the application of existing government regulations. For instance, nobody wants to see sexual predators using driving for Uber as a means to find victims, and swarms of drones might certainly disrupt commercial air travel.

I have previously discussed how market forces give companies like Uber an incentive to prevent such problems. Today I want to consider the potential for misuse of government regulation in ways that ultimately harm consumers. Birmingham and Tuscaloosa recently decided Uber would have to follow taxi regulations to operate within their cities, so taxi cab regulations provide a good place to start.

Taxi regulation promises protection and reassurance. Travelers face a danger of being ripped off by local taxi drivers. Licensing cabs seems like a reasonable way to protect consumers. Yet the regulations more often benefit taxi owners at the expense of customers.

Over the last 80 years, New York City taxi medallions have proven to be one of the best investments in America. A medallion signals the legal right to operate a taxi in New York. They are of no value on their own – they can’t drive the cab, help the driver negotiate traffic, or help passengers with their luggage or groceries. And yet they sell for over $1.2 million. According to economists Stuart Dompe and Adam Smith in a recent Mercatus Center paper, medallions have yielded their owners an annualized return of over 15%.

New York issued 16,900 medallions when taxi regulation was established in the 1930s. Pressure from cab companies has kept a strict limit on the number of medallions, with only about 12,000 still in use. The fact that a medallion with no intrinsic value can be sold for $1.2 million provides undeniable evidence that regulation has kept the number of cabs too low.

You might think that cab drivers would benefit from taxi regulation, but they do not. Dompe and Smith report that New York cabbies make about $30,000 a year for doing an extremely dangerous job. Between 1980 and 2009, 1,126 New York cabbies were victims of “occupational homicides.” Over those same years, which included the 9/11 terrorist attack, 173 New York City police officers died in the line of duty. We do not think of cabbies as heroically risking their lives in public service, but perhaps our thinking needs to change. Under regulation, medallion owners profit, not the cabbies. Reportedly some Uber drivers in New York make three times as much as the regulated cabbies.

Some critics accuse the Federal Aviation Administration (FAA) of dragging its heels in establishing regulations for commercial drones to protect the interests of current package delivery companies, including possibly the U.S. Postal Service. If so, the FAA is merely continuing a long tradition of regulation being used to protect vested interests in air travel.

The Civil Aeronautics Board (CAB) regulated interstate commercial air travel between 1938 and 1978. The CAB kept fares artificially high, as the low fares on unregulated intra-state routes in California and Texas demonstrated. The cross-country trip in the family station wagon, immortalized in National Lampoon’s classic movie Vacation, persisted partly because high fares kept families from flying. Upstart companies wanted to compete to serve customers, but had to get permission from the CAB. The CAB denied each and every one of the 79 applications for entry made over four decades.

Government regulation can sometimes function comparably to market forces. But the regulatory power to exclude provides too great a temptation for misuse to protect taxi companies, traditional delivery firms and numerous other firms from competition.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at dsutter@troy.edu and like the Johnson Center on Facebook.

 

About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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