This article was published by The McAlvany Intelligence Advisor on Friday, October 2, 2015:
According to three college professors, the answer is “very.” After interviewing 32 drivers and users of Uber, Lyft, and conventional cab services in London and San Francisco, the Uber and Lyft drivers and customers were the clear winners. The drivers had more freedom to select their working hours, many of them driving part-time to supplement their full-time work. The ride-sharing customers not only paid less than they would have for regular taxis, they felt safer, they knew more about the driver and his ratings from previous customers, and could track and follow the driver as he wended his way towards their location.
They also enjoyed getting to know their Uber or Lyft driver, discovering that they were just like them – ordinary people making a living and enjoying the process. Wrote the professors:
Both Uber customers and drivers are clear winners. The [Uber/Lyft smartphone] app circumvents the complex system of “middle-men,” to match customers and drivers together more efficiently. [Uber/Lyft] drivers wait less time for rides and passengers get faster service.
The losers? Existing cab drivers, cab companies, owners of taxi medallions, and city authorities who have less control over drivers and passengers.
There are other losers as well, including investors who bought taxi medallions as an investment, and banks and credit unions that helped finance their purchases. On September 18 the Montauk Credit Union, in Montauk, New York, was taken over by the state of New York after examiners found “unsafe and unsound conditions” in its investment portfolio.
For years Montauk focused its attention on loaning money against taxi medallions, aware that with government regulations limiting the supply, and increasing demand, their collateral value would at the very least remain stable, and more likely increase over time. Under present rules, the National Credit Union Association (NCUA), established in 1934 as part of President Franklin Roosevelt’s New Deal, allowed credit unions to offer loan paybacks up to 25 years. Investors also saw how the arbitrary distortions in the market would work to their advantage. It was simple supply and demand economics: where the supply is limited, and demand is increasing, the price inevitably will rise. As Corey Owens, Uber’s head of global public policy, noted: “The taxi medallion in the U.S. was the best investment you could have made in the last 30 years.”
As Warren Buffett famously said, it’s “only when the tide goes out [that] you discover who’s been swimming naked.” Montauk was warned in a memo sent by the chairman of the NCUA in April, 2014 about the special risks of using taxi medallions as collateral:
A limited supply of taxi medallions in a given market can raise the value of the medallions in that market above the economic value relative to a given level of demand.
Simply put, the speculative value is the difference between the economic value of a medallion and the price the market is willing to pay for that medallion.
She warned that other assets than just revenues from leases must back up loans: “repayment of the speculative portion will have to be from another source (such as the borrower’s liquidity or other earnings…).”
As Uber began to make its presence known in New York City, the advantages summarized by the three professors began to take hold, and the price of taxi medallions began to drop. At their peak they were going for $1.3 million. Best estimates now are that they are being offered at half that, with few takers. In Chicago, which has a similar program in place to limit taxicabs, a decision was made earlier this year to offer 50 new taxi medallions, at $360,000 a pop. They held an auction and no one showed! (That’s a primary benefit of a free market: accurate pricing information so buyers and sellers can be well-informed.)
The taxi cartel, according to Owens, is a terrible way to serve customers:
If we actually cared all that much about what the customer experience was, is this [taxi cartel the] system we would have built?
People talk about Uber as this revolutionary thing. The technology is very sophisticated. It’s really cool. But I think what’s truly disruptive about Uber has to do with economic incentives.
Just how disruptive are Uber and Lyft? Not only is the smartphone app revolution putting traditional taxi drivers out of work, it is also negatively impacting cab companies, managers, investors, and banks and credit unions financing the whole business.
There is one other party involved in the disruption: the taxpayer. When the NCUA was originally created, it was to “regulate, charter, and supervise” federal credit unions while insuring them against bad decisions they might make. Despite Montauk’s take over by New York State, it is still hawking taxi medallion loans on its website, declaring that “Montauk Credit Union is a solid and well-capitalized financial institution,” and that “no one has ever lost a penny placed in trust with a federally insured credit union….”
No one, of course, except the taxpayer.
New York Post: State takes over credit union after taxi medallions tank
Peer Production: Disrupting the Cab: Uber, Ridesharing, and the Taxi Industry