I don’t often agree with The Age‘s campaigning journalism, but I thought they picked the right cause – if not quite the right argument – in their advocacy this morning on behalf of taxi drivers. The paper led this morning with the heading:
12 hour shifts
All this for $8 an hour
For the benefit of interstate readers, on Tuesday night a taxi driver, like many of them an Indian student, was stabbed by a passenger (who thanks to the cameras installed in cabs was arrested by police within 24 hours). At last report, the driver was still in a serious condition in hospital.
Drivers responded by blocking a major city intersection, eventually forcing the state government to agree to security screens and pre-paid fares late at night.
Though an analysis piece and an editorial did refer to the licence system in the industry, they did not draw the obvious conclusion that it is to blame for the miserable earnings of taxi drivers, despite the seemingly high fares paid by passengers.
The CIS has a long history – though one unfortunately without policy success – of criticising taxi regulation. One of its earliest publications, by Peter Swan in 1979, was a critique of regulation of the Canberra taxi industry. This was followed by articles by commenters on this blog, Jason Soon in 1999, and Christian Seibert in 2006.
There are two big issues with taxi regulation. The first, and the main source of the industry’s problems, is that you can only operate a taxi if you have a licence, and because that licence is tradeable it has hugely appreciated in value. As this report (pdf) from Victoria’s Essential Services Commission explained, the value of a licence has increased from $123,000 in 1989 to nearly $450,000 in 2007. What this effectively means is that only about 10% of the capital cost of putting a taxi on the road is real, and the rest is just rents created by regulation.
On top of that, taxi fares are regulated, and at a level that provides a return on such a massive investment. This explains why fares can be high and drivers get very low hourly rates at the same time.
Partly because of a belief that licence holders would have to be compensated, no state government has been able to deal with this problem, despite success in a wide range of other microeconomic reforms.
Personally, I agree with Christian’s analysis that:
Most taxi licences were acquired inexpensively decades ago. These owners have already enjoyed high returns on their investment and therefore should not be entitled to compensation. This argument applies also to owners of taxi licences bought from other taxi licence holders at later times. For example, taxi licences changed hands for $25,000 in 1982. These owners would also have had time to achieve good returns on their investment.
For recent purchasers of taxi licences the issues are more complex. Arguably, they were taking a risk in making this purchase. Investments in intangible assets are generally high risk and this is especially the case with taxi licences that are directly dependent on government policy. Investors in taxi licences hope to secure high returns—a taxi licence bought for $25,000 in 1982 is now worth $347,000, and high returns are normally associated with high risk.
But unfortunately I suspect that in another 30 years the CIS will still be publishing articles calling for reform of the taxi industry.
Update: Similar points now coming from the Age opinion page.