Of Uber, cab drivers and compensation

What a title for a blog post right? Where am I going with this? A few days ago, I debated a few of my academic colleagues who tend towards libertarianism in the predominantly left-leaning province of Quebec. The topic? How the rise of Uber is killing the taxi cartel? I authored a paper on ride-sharing a year ago and I cannot be more enthusiastic towards such technologies that are allowing consumers much more choices at lower prices than with the taxi cartel. Thus, we were all in agreement. The point of contention appeared when the topic of compensation was raised. I favor partial compensation of the owners of taxi licences. Instantly, I was cast in the minority position and branded as a statist. A debate ensued and I made the case that it was not acceptable to right a wrong by committing another wrong (how Christian of me).

First, let me lay out some facts first and some assumptions

  1. A taxi licence restricting competition is a subsidy. But it is a strange type of subsidy that occurs through a redistribution of property rights (limiting the right to use one’s own car to carry individuals in exchange for payment to those who buy the transferable right to do so). Unlike cash subsidies, quotas, trade barriers and tax credits, it is the only form of income transfer that exists that is a property. You can abolish any cash subsidy, tariff, quota, tax, tax credits or legal monopoly without having to compensate since no one has property of such things. That is the source of the odd nature of the taxi licence – a subsidy with a property deed.
  2. The two benefits from these licences occur through limiting competition and thus allowing higher prices/quality ratios and through higher asset value (the permit’s value). The extent of those benefits depends on the extent of the curtailment of the liberties of other to compete. The more restrictive the policy, the greater the redistribution from consumers to producers in the long-run.
  3. However, new drivers have to pay a high price and they must have some time to recoup the acquisition of the asset. Their recovery will take some time as they also hike prices and lower quality.

So, if you want to abolish a taxi licensing scheme, is it acceptable not to compensate? According to my colleagues, yes it is. Since the benefits of higher prices were so considerable to those drivers (at the expense of consumers), compensation is not necessary.

Yet, the drivers do own property don’t they? The licence is worth many thousands of dollars, basically the value of a small house. Many drivers rely on this asset for their retirement. Now, let me make another presumption which is crucial to this discussion: the change is caused by legal changes, not technological changes.

I believe that, in the presence of the technological change, there is no case for compensation. Nobody would compensate telecoms companies for the rise of Skype since it is a process of entrepreneurship. However, the case is different if a government decides to abolish the licences. So here, my entire reasoning for compensation is contingent to a case where the state abolishes the licences, not a situation where technologies render the licences worthless like the car killed the street horses.

Clearly, it was unjust for consumers to deal with a cartel that gouged them and which was legally sanctioned to do so. But can you right an injustice by committing another injustice (the de facto dispossession of an asset)? Normatively speaking, I simply believe that using the monopoly of violence of the state to right the abuses caused by past uses of the monopoly of violence of the state is not that productive. Why? Because I have this assumption lodged firmly in my head as a result of my training in public choice theory: rent-seeking matters.

Rent-seekers will always exist. They are the social-science equivalent of gravity in physics. You just have to deal with their existence. Rent-seekers are basically political entrepreneurs who have very concentrated benefits from applying policies whose costs are not that obvious or that important for a large population. These political entrepreneurs are very alert to opportunities and they will seize them. Sometimes, they discover that their preferred course of action leads to resistance. They will automatically shift gear and find another way to obtain an unearned reward thanks to the complicity of those they bargain with (politicians and bureaucrats). Their rhetoric will change, their narratives will change, their arguments will evolve, but at the core, they will continue to rent-seek. True, you can conceive constitutional rules that limit rent-seeking (I am a big fan of that). However, one way or another, it will remain and some will find ways to connive with politicians and bureaucrats to obtain undue rewards. And even if there was such a utopia free of rent-seekers (I just won’t buy that for a dollar) where a constitution would ban their activities or even a stateless utopia (again, I am not buying it), is it acceptable to justify all means possible to reach such a destination?

What if associations of cab drivers lobby for special tax discounts on gasoline since they provide a public service? What if they lobby for stricter security checks on drivers (needless security checks) which end up having the same effects? What if they convinced regulators that only certain types of vehicles (less than 5 years old for example) should be allowed to operate? What if they mandated association with a dispatcher to better avoid traffic jams? How could a politician oppose special tax treatment for drivers, better security for consumers or all these other bogus motives? In the end, they will find a way to rent-seek. However, by dispossessing them of an asset worth many hundred of thousands of dollars, you are basically creating the certainty that they will aggressively rent-seek to recuperate their losses. Thus, you don’t end up breaking a vicious policy cycle, you end up encouraging its continuation in stranger, hidden and subtle manners whose perniciousness continues equally.

Hence my case that you can’t right a wrong by committing a wrong. Respect the rule of law, liberalize the market and compensate and attempt to rewrite constitutions to prevent arbitrary redistribution of property rights.

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3 thoughts on “Of Uber, cab drivers and compensation

  1. Silly argument, frankly. “We must allow these parasites to continue to leech off the body public in small obvious ways, else they will leech in more subtle ways.”

    I can’t comment on Canada’s taxi medallion system, but in NYC, most medallions are owned by investors who then lease them out to the actual cab drivers. They relied on political graft and corruption to make their fortunes. Let them die on that hill. Eliminate the medallion system entirely, in one stroke, and let them go bankrupt. Perhaps they will learn not to bribe politicians to set up and maintain such systems. Even if they don’t learn from it, they will at least have less money to bribe with, and so will be less able to set up such corrupt systems.

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