Pur Autre Vie

I'm not wrong, I'm just an asshole

Sunday, July 26, 2015

Why I Disagree with the Ubermenschen

In a departure from my normal blog topics, I'm going to write about taxi regulation and regulatory policy generally. I'm going to start with a little side-discussion, which you can skip if you only care about the sexy Uber debate.

Side Discussion: Regulatory Policy and Distributional Concerns

In general, U.S. consumer regulation is aimed at making things extremely safe and extremely cheap. The classic example is food safety regulation. I can't find it now, but when New York City started giving letter grades to its restaurants, there was a humorous item in the New York Times in which low-end restaurants with good grades were asked for their tips, which were passed along to fancy restaurants with low grades. The suggestions were along the lines of, "Cook the meat until it is gray all the way through." (I'm probably exaggerating a little, but it was a funny piece.) Of course the same thing goes for cheese made with unpasteurized milk.

Note an important feature of this type of regulation: it enables consumers to choose the absolute cheapest option at the grocery store without trading away safety. In a libertarian society, people would be free to sell contaminated or adulterated food, and consumers would have to pay a premium for safe food. Being "frugal" would mean risking death for you and your family. In the U.S., all of the food is safe, and suppliers compete heavily on the basis of price and quality. There is no premium that consumers have to pay for safety. You can pick the cheapest milk at the store without getting sick. (I'm exaggerating slightly again—food isn't perfectly safe here, but it's reasonably safe. Also, I doubt there is much of a correlation between price and safety. There might even be a negative one.)

The same priorities are visible in airline regulation. It is dirt-cheap to fly in this country, and it is also extremely safe. But it is also very uncomfortable. It didn't have to be this way. Before President Carter deregulated the airlines, flying was comfortable and expensive for everyone. After deregulation, things were basically bifurcated. You could buy a coach ticket and suffer all of the indignities that entails, or you could pay a lot more and fly first-class (or business-class or whatever).

There's a good argument for the Carter approach. But let's point out an alternative. Instead of regulating solely for price and safety, the regulators could also regulate for comfort. (A very quick side note: the antitrust regulators, who can oppose airline mergers on competition grounds, may not be on the same page as the FAA in terms of keeping prices as low as possible. I'm going to ignore that complication.) Imagine that the FAA required a minimum 32" of legroom. (My understanding, based on very little research, is that this is the amount of legroom provided by Southwest and Virgin, but more than the legroom provided by Delta, American, U.S. Air, United, and Spirit.) Now picture a consumer who needs at least 32" of legroom to be comfortable, and who lives in a city that is best served (or solely served) by airlines that provide 31" or less. The FAA's hypothetical legroom regulation makes this consumer much better off: he can fly coach in perfect comfort, whereas in a no-legroom-regulation environment he has to pay for a first-class seat or fly in discomfort.

Who is worse off when we (hypothetically) regulate legroom? Anyone who prefers to pay less and get less legroom. So legroom regulation would result in a lot of consumers paying a little more, and a few consumers paying a lot less. (The latter are the consumers who, absent legroom regulation, would buy first-class seats.) Whether this is a net improvement or not depends on how you weigh these different preferences. Are you tall? Are you rich? Then you probably favor legroom regulation. Are you short? Are you poor? Then you probably don't. There are people who think cost-benefit analysis is well-equipped to make these kinds of distributional determinations. I think that's ridiculous, but that's a discussion for another day.

Back to the Main Discussion: Uber and Pricing

New York City taxis are supremely cheap. This is by regulatory fiat: if a taxi charged more than the going rate, even with the customer's consent, the operator would be punished. Taxis are also unpleasant in a variety of ways. They are not ideally comfortable, and they can be difficult to hail at certain times and in certain places.

Uber represents a simple proposition: the regulators have set the equilibrium in the wrong place. It would be better to establish an equilibrium in which it is about twice as expensive to get from point A to point B (and many multiples of that at certain times), but in which it is easier to hail a car (if you have a smartphone) and the car is more comfortable. Uber also represents the proposition that car service should not be used to subsidize mass transit, and that drivers should be able to decline to pick up certain customers. (Taxi drivers are subject to a surcharge, which funds the MTA, and are not permitted to decline to take anyone anywhere within the 5 boroughs.)

But let's focus on price, since Uber's stance on the MTA surcharge is basically indefensible. Who wins and who loses if Uber comes to dominate the industry? Well, the big winners are people who are willing and able to pay extra for comfort and convenience. These are affluent people who have smartphones. Who loses? Poor people and people without smartphones (there is presumably lots of overlap in these populations). It's the airline example all over again, except now it's not about how tall you are, but solely about how affluent you are and how much you are willing to pay for comfort/convenience. It's pure class war, and Uber is on the side of the rich people.

You might argue that it's okay to bifurcate service between cheap, uncomfortable cabs (for the masses) and expensive, comfortable Uber cars (for the affluent). (This is, of course, how it has always worked, except that the line between the two was drawn much further up the income scale.) Poor people will still be able to get rides at the same old price, the argument goes. But rich people can enjoy better service while paying through the nose. They should be allowed to make that choice.

But that assumes the market can support two equilibria. As Uber takes more and more market share, taxis will thin out and it will be harder and harder to hail them. The customer mix will also change: taxis will serve a disproportionately poor clientele. I assume, perhaps unfairly, that this means that taxi drivers will have to put up with customers who are less likely to pay and less likely to tip generously. Taxi service may become so shitty and unreliable that the equilibrium can't be sustained: the more taxi service shrinks, the more people are driven to Uber, and the dynamic could go all the way to zero taxis. (Bear in mind that the playing field is not level. Taxis are more heavily taxed than Uber and they are subject to a variety of burdensome regulations designed to achieve fairness. So Uber is fighting an opponent that will forever have at least one arm tied behind its back, making it relatively easy to drive taxis out of business entirely.)

Uber loves this prospect. Uber hates any regulation that favors a low-price equilibrium (low prices mean low profits), and Uber is happy to flout the regulations if the regulators aren't sufficiently... cooperative. Uber is also throwing its political weight around, gambling that the upper middle class can be rallied around its banner at the expense of working-class people, who are poorly organized. In American politics, you should generally bet that a coalition of upper-middle-class people is going to beat a coalition of working-class people every time.

That's fundamentally why I despise Uber. Uber is seeking to undermine a regulatory equilibrium that, while far from perfect, serves working-class New Yorkers very well. The best argument for Uber is that by operating what is effectively a taxi service outside the scope of taxi regulations, it will force the regulators to adopt better policy. (This is basically the same as the argument that it's good for some states to have weak environmental regulation, because this will lure employers away from high-regulation states and thus encourage states to improve—that is, weaken—their environmental regulation.) I'm skeptical, because Uber is emphatically not going to start complying with regulations once they permit e-hailng. In fact, the Taxi and Limousine Commission already has an e-hailing pilot program, and yet Uber continues to operate outside the bounds of taxi regulation. Uber's whole business model is inconsistent with price regulation. Uber isn't about e-hailing. It's about charging far more than taxis have traditionally been permitted to charge in New York, while paying fewer taxes and shouldering fewer regulatory burdens. So Uber won't ever comply with a regulatory regime that provides cheap taxi service to New Yorkers.

It is possible to argue that the TLC has gone too far in keeping prices low, just as it is possible to argue that the FAA should regulate comfort. Certainly some people would be better off if taxis were twice as expensive but considerably more comfortable and convenient. But that is the argument people should be making: taxi service is too damn affordable for poor people, and it sucks too much for affluent people. This debate isn't about innovation or "disruption" or free markets. It's about who wins and who loses when we regulate taxicabs. And it's about whether the city gets any say in what taxi service will look like for its citizens.