Photo by Eduardo Meza Soto

Getting Over Taxis

I find Susan Crawford’s arguments in Getting Over Uber puzzling and unconvincing on a number of fronts.

First, consider the statement:

Uber drivers have a tough time making a living; they’re responsible for their own cars, fuel, benefits, maintenance, tolls, and certain insurance as well as the kickback to Uber that takes a substantial slice out of every fare they pick up…. Uber consistently squeezes its drivers as tightly as it possibly can; new drivers are paying an even higher cut to Uber than the first generation did.

Most taxicab drivers also have a tough time making a living. They aren’t responsible for their own cars, maintenance, and some insurance, but they do have to pay for their own fuel, tolls, benefits (because 87% of all taxi drivers in the US are independent contractors), and they pay a daily rental fee that is far higher than any possible slice of every fare that an Uber or Lyft driver picks up.

The charged language “kickback to Uber” is particularly loaded and inappropriate, given that the slice of a driver’s daily revenue that is taken by Uber is actually less than that taken by the typical taxicab owner, albeit in the form of a daily rental fee for the taxi rather than a percentage of every fare.

I’m not going to bother rebutting Susan’s statement:

“[Uber drivers] may or may not know where they’re going, and they may or may not be driving cars that are safe.”

given the experience that I have had (and Susan herself must have had) in taxis whose drivers don’t know where they are going, driving old rattletrap cars that wouldn’t pass an Uber or Lyft inspection.

Do the Math: Taxi vs Uber

A taxi driver typically rents his or her taxi from the owner, usually for a fee of $100 to as much as $130 a day (or, assuming the driver works 5 days a week), a total of $2000 to $2600 a month.) This is referred to as “the gate.” The driver keeps 100% of all fares and tips over that amount, but that is the cost of entry.

Now, compare Uber: you provide your own car, but you pay no daily rental fee. You keep 70–75% of every fare (Lyft gives the driver 80%, and if you’re a full time driver with Lyft, you keep 100% of every fare.) For the 25–30% share that Uber keeps to equal a $100 Gate fee for a taxicab, the driver would need to generate $400 per day in fares. That’s the equivalent of $2000/week or $100,000/year!

Given the enormous pushback when Uber claimed that some of their drivers could make as much as $100,000/year, this number seems unlikely. (felix salmon had glowing things to say last year in The Economics of “Everyone’s Private Driver.” After a scathing rebuttal from Tom Slee, Salmon wrote another, somewhat apologetic correction about having misinterpreted Uber’s projections of possible driver income.) That means that the share of the driver’s income taken by a taxi company is far greater than the amount taken by Uber.

This comparison isn’t entirely fair, because the taxi driver does not have to provide his or her own vehicle. But what does that cost?

A quick internet search shows that I could lease a 2013 Toyota Camry from Uber’s leasing affiliate for payments as low as $109/week, and Allstate told me I could insure a similar vehicle for $103/month. That works out to about $25 per day, assuming that the vehicle is driven 5 days a week. That is probably on the low side, but the point remains: it is a fraction of the cost of the daily rental that most taxi drivers pay.

There is one other simple thought experiment that you can make to understand the fallacy of Susan’s argument. And that is to ask how taxi owners make their money. They rent their cars to drivers. If the rental income they received from drivers weren’t higher than the costs of owning, insuring, and servicing the car, not to mention the cost of purchasing the medallion (which can cost many hundreds of thousands of dollars), they would be out of business.

The Path To Ownership

Using this back of the napkin math, it appears that on the cost side, being an Uber driver is a better deal than being an independent taxi driver. And while the amount that you can make as an Uber driver is a matter of considerable debate (see Felix Salmon vs Justin Singer), it is almost surely higher than the median income for taxi and limousine drivers in 2012 reported by the US Bureau of Labor Statistics.

So why don’t more taxi drivers switch? Many do. But I suspect that the reason others do not is the same reason that many low wage workers can’t get better jobs: they can’t afford to. Buying a new car of your own may be cheaper than renting a taxi by the day, but you have to have good credit to make the purchase. As is so often the case, the poor pay more because they can’t afford to pay less.

Uber recognizes this problem, and has been trying to make it easier for potential drivers to acquire their own cars. Their first foray into vehicle leasing was a disaster, with many drivers getting in over their heads with cars they couldn’t afford, paid for with leases they couldn’t get out of. Recognizing this problem, Uber has been working hard to make car leases both more affordable and more flexible.

There is one set of taxi industry players that is particularly hard hit by disruption from Uber and Lyft, and that is medallion owners. (I am particularly sympathetic to the plight of individual medallion owners, many of whom worked their way up from being drivers.) They paid a lot of money for the exclusive right to operate taxis in a particular city, without competition, allowing them to keep fares high, and they are being challenged by upstarts not just with better technology and better user experience but with a different economic theory: that if you can drive down fares sufficiently, you will increase utilization to the point where people choose on-demand transportation over the alternative of owning and driving their own car. And further, they are betting that that increased utilization will provide better income to drivers despite the lower fares. (See my previous piece, Improving Uber’s Surge Pricing, for more details.)

There is no question that there was a path to ownership of a valuable asset in the previous regime of taxi medallions that is no longer available in the Uber era, but that opportunity was available to few, and most taxicab drivers are simply low-paid independent contractors with high costs and little ability to grow their income.

Improving Common Carriage

It is precisely because Lyft and Uber are so clearly set on improving public access to low-cost, universally available transportation that Susan Crawford’s second argument against Uber is the one that really bothers me the most. She says:

So even when private companies provide basic transport and communications services — in America, that’s often how we do it — they do this subject to extensive public obligations. That’s where the whole idea of “common carriage” came from — transport and communications networks operated by private companies that provided a high level of uniform service at uniform rates under uniform promises of safety and reliability.

So far, so good. In my opinion, Uber and Lyft meet this bar. They do so not because they are regulated, but because they must do so in order to attract customers. And outside of cities like New York, which has an extensive, widely-available taxi fleet, they provide a far more accessible service than taxis ever did. Not only that, but they are providing service in previously under-served neighborhoods, and at prices considerably lower than that of taxis.

Even further, services like Lyft Line and Uber Pool are working to bring costs down to a level not just below taxis, but comparable to public transportation. This has been the vision of Lyft from the beginning.

Susan’s argument continues:

Here is my self-interest: I am a fan of taxis wherever I find them. Taxis are not the same as Uber. Their rates are regulated and set; their pricing is transparent and can be double-checked (just look at the meter, which is itself regularly tested); they look like a uniform fleet; they are subject to very strict licensing and safety requirements. With rare exceptions, they don’t employ surge/congestion pricing schemes. I want them to work well.

Hmm. “Rates are regulated and set.” If government weren’t doing it, we’d call it “price fixing.” Rates higher than those of Uber and Lyft are good because they are “regulated and set”? “Their pricing is transparent and can be double checked”? Not as well as the pricing from Uber and Lyft. I can get an estimate of the cost before I set foot in the vehicle. And I get a detailed receipt showing the exact amount of time and the route. And if I have been taken on a roundabout route, I can contact the company and receive a rebate. (I have done this.) “They don’t employ surge/congestion pricing schemes.” Yes, but as a result, you can’t get a cab at many times. Surge pricing is an innovation that improves service, not a problem.

From my perspective, cities should be focusing on making their taxi services better. Taxis should be more accessible to everyone. Taxi fares should be low, predictable, and uniform. Taxi geographies should be wide. Taxis should be clean, fuel-efficient, driven by trustworthy, well-trained drivers, and available for frictionless electronic hailing. Because when you have a working taxi service that serves everyone at a basic level, urban society as a whole does better. Right now, taxis may not be doing enough to meet these basic requirements.

Here, I completely agree. And, quite frankly, this is happening because of competition from Uber and Lyft. If city-authorized taxi services meet all these criteria better than Uber or Lyft, they will beat them in the marketplace. But I’m not holding my breath.

There is absolutely a role for government in providing key infrastructure for its cities, and “common carriage” is one of those things that makes a city work. But when the private sector is doing a better job of providing that service than the previous government-chartered monopolies, government needs to get out of the way.

So what should government be doing?

1. Removing outdated taxi regulations that make it difficult for taxis to compete with Uber and Lyft, even given comparable technology. For one example, consider Washington D.C., served by taxis with geographic restrictions. A taxi driver can pick up a passenger in Montgomery MD and bring her into DC, but must then drive back to Maryland to pick up another passenger, since he is prohibited from picking up in the city. A driver from Virginia can only pick up Virginia-bound passengers at Washington National Airport. And so on.
2. Working closely with Uber and Lyft to understand how well the city is being served. There is some evidence that Uber and Lyft are improving availability in previously under-served neighborhoods. Cities should be working to build on and verify these studies.
3. Understanding whether the reputation systems (and other self-regulatory regimes) of Uber and Lyft are producing results at least as good as the older regulatory regimes under which taxis operate. The passenger experience suggests that they are doing considerably better than the older regulatory regimes, but cities should actively be pursuing data to confirm or disprove this anecdotal evidence, and introducing regulation only when systematic problems have been uncovered.
4. Working with Uber and Lyft to understand the tradeoffs between lower fares for passengers and driver income. There is a risk that in pursuit of low prices for consumers, these companies could end up exploiting workers. Government does have a role in making sure that companies produce great experiences not just for their customers but also for the workers delivering their services. But guess what: government has abdicated that responsibility in low wage industries like retail and fast food, where workers are paid so little that they must supplement their wages with public assistance. (Recent estimates put the taxpayer subsidy to these industries at $153 billion/year.) I’d much rather see government focus on areas like this where there is a clear and present problem rather than in new industries like on-demand transportation where the market has not yet settled on the right balance between value to customers and value to workers. The fact that Uber and Lyft are competing so hard to attract drivers suggests to me that the market still has a lot to say about that balance.
5. Improving crime reporting so that there is a consistent basis for evaluating the relative safety of taxicabs versus Uber and Lyft. While there are many anecdotal accounts of bad Uber experiences, there are also anecdotal experiences of bad taxi experiences, but crime statistics are not reported in a way that allows cities to understand if new safeguards are needed.

Regulation is not a good in itself. It is a means of achieving public goods. And so far, it is pretty clear that Uber and Lyft (and in particular, the competition between them) are improving the transportation options in American cities. Regulators should be using the opportunity to revisit the old way of doing things rather than trying to make the new conform to outdated rules that no longer serve their purpose.

I’ll be hosting a discussion of these issues and more at the Next:Economy Summit November 12–13, 2015 in San Francisco.