Why Does A Taxi Medallion Cost $1 Million? : Planet Money Last month in New York City, two taxi medallions, the metal plates that make it legal to dive a cab in the city, sold for $1 million each. On today's show, we find out why these little pieces of metal are worth so much.
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Why Does A Taxi Medallion Cost $1 Million?

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Why Does A Taxi Medallion Cost $1 Million?

Why Does A Taxi Medallion Cost $1 Million?

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There's a cab. There's a cab. Right there. Go. Go. Go.


Is someone up getting in or getting out?

KESTENBAUM: Getting in.

SMITH: Yeah, I don't think it's going to happen. Well, let's go to Broadway. Oh, my God, I'm freezing.


KESTENBAUM: What's great is that this tape thing is going to tell me how long we've been looking.

SMITH: (Laughter).


KESTENBAUM: Hello and welcome to PLANET MONEY. I'm David Kestenbaum.

SMITH: And I'm Robert Smith. And that was us that you heard at the top, trying to hail a taxi cab here in New York City.

KESTENBAUM: Today on the show, The New York City taxi system and why economists hate it.

SMITH: You know, I'm actually going to do the indicator today because it is related to the taxi cab industry. The PLANET MONEY indicator today is one million - $1 million. That's how much a New York City taxi medallion recently sold for. Actually, two of them sold for a million dollars each.

KESTENBAUM: A taxi medallion is this little piece of metal, I think - right? - shaped like a shield that you got to have bolted to the hood of your taxi if you want to pick up passengers on the street in Manhattan.

SMITH: Actually, I have one of these - just a moment. Talk about economics or something. I'll be right back.

KESTENBAUM: (Laughter) Why do you have a medallion?

SMITH: (Laughter) One of the reporters here at NPR New York actually found on the street a metal medallion - a taxicab medallion that clearly like fell off a cab. Check that out.

KESTENBAUM: (Laughter) Let me see. Let me see. Let me see. New York City Taxi and Limousine Commission licensed taxicab - it's got the number on it. And the bottom, it's got like the top of the Statue of Liberty's head. Like, you can see her crown there.

SMITH: Now the important thing about this little piece of metal is that once you attach this to a car in New York City, then you have the right to pick up passengers for a fare. And the key thing is is there's a fixed number of medallions out there. When a medallion changes hands these days, it is for a lot of money. When they were first issued 75 years ago, the city charged about ten bucks for this thing.

KESTENBAUM: (Laughter)

SMITH: But the number of medallions hasn't changed very much over the years. So if somebody wants to get a new one - if they want to get into the taxi business, they need to buy an existing medallion. So when we hear about one selling for a million bucks, that doesn't mean that the city of New York gets it. It means that some lucky taxi medallion owner just got rich.

KESTENBAUM: And, OK, to us, you know, it makes some sense that these things would be valuable. I mean, this is Manhattan. It's one of the most densely populated places on Earth. But still, a million dollars for a medallion seems like a lot of money. It turns out some economists are also surprised by this. I talked to Ilan Kolet. He's a Canadian economist who used to work at the Central Bank of Canada. He's now a reporter for Bloomberg. And he told me this story. When he was in New York recently taking a cab to LaGuardia Airport, he started talking to the driver who told them how much these medallions cost.

ILAN KOLET: I mean, I was completely shocked by that because I - you know, I never thought that a cab medallion would be even close to being that expensive.

SMITH: Now after he goes on his trip, and he returns back to his office, being an economist, he wonders, is there any data on just how much these medallions are worth? What happened to the price of medallions over time? I mean, are they a good investment? How do they compare to gold or the stock market?

KESTENBAUM: So he finds out that, yes, there is data. New York City publishes it. Every time a medallion changes hands, they note the price, and the price appears online. But it turns out they're in these like separate monthly reports. So it takes Ilan a whole day, he goes through these monthly reports and hand enters the data into a computer and he ends up with this amazing chart. The price of medallions just goes up and up and up.

KOLET: You know, the appreciation of New York City cab medallions has outpaced, well, pretty much, everything - gold prices. It outpaced inflation. And I think we added on there - at one point, we had Berkshire Hathaway Class A shares. So really, anything that you threw at a New York City cab medallion, the cab medallion won.

SMITH: There are a couple of things that help explain the recent run up in prices. I mean, the first thing you have to know is that if you get into a taxicab in New York City, the guy behind the wheel probably doesn't own the cab. He probably doesn't own the medallion. Most medallions are owned by taxi companies - by really investors who are saying, I want to run cabs in New York City. And then they rent out their cabs, 24 hours a day, seven days a week, to guys, often recent immigrants, who want to drive for a living.

KESTENBAUM: So what they're thinking is, like, how much money am I going to get? I have to spend a million bucks to get one of these, but then I get a pretty steady income. I know how much a taxi driver's going to bring in every day.

SMITH: Yeah, you could make tens of thousands of dollars a year - pretty much guaranteed income - by owning a taxi medallion and running a cab.

KESTENBAUM: So what would cause the price of medallion to go up? Well, there are a couple of things, right? Anything that's going to increase the amount of money a taxi driver can bring in in an evening is going to make a medallion more valuable, right? So in 2004, the city raised the taxi fares. It raised the amount that taxis charge. And that should push up the prices for medallions. They also put in credit card machines, which, arguably, would make it, you know, more appealing. People - more people would be willing to take cabs. It would be easier.

SMITH: Yeah, then there's also the Ben Bernanke effect, as we call it. When people buy medallions - you know, you can borrow to do it just like you can do for any other big purchase - and interest rates, thanks to the Fed and Ben Bernanke, have been incredibly low recently. So people think, hey, I'm willing to pay a little bit more for a medallion now because I can borrow cheaply. And that pushes the price up, and then I'm guaranteed an income for years to come.

KESTENBAUM: Another thing, also, if you look around right now, there's just not a lot of great investments, right? I mean, stocks are where they were 10 years ago. Bonds pay almost nothing. So someone says to you, yeah, it's a million bucks. But you could beat both of those, probably. That sounds like a pretty good bet.

SMITH: But that leaves out what is arguably the most dominant reason a taxi medallion is worth so much money. It's really the only reason why medallions are worth anything at all, which is that New York City restricts the number of them. They are rare. Currently there are 13,237. That's for the entire city of New York - 13,237 taxi medallions, about the same number there were in the 1930s.

KESTENBAUM: So why does the city do this? Why limit the number of taxis? To answer that question, you have to go back a pretty long way in time. And to tell this part of the story, we have Graham Hodges, a professor at Colgate University. He wrote a history of taxis, and he used to drive one himself right here in New York.

GRAHAM HODGES: New York City - 1971 and 1975.

KESTENBAUM: What were the taxis like in '71?

HODGES: Well, they were all Dodges. They were pretty bad.

KESTENBAUM: People smoked in cars back then, right?

HODGES: Well, people smoked in high school. Everyone smoked. Well, the other thing too is I was a very fast, somewhat reckless driver. So as long as they hung onto the back seat, they were going to get where they wanted to go fast.

KESTENBAUM: Did anybody wear a seatbelts then?


SMITH: I just picture his cab pulling up. You open the door and just smoke rolls out. And you hear the Velvet Underground like playing in the background. And he's got a big mustache and long hair.

KESTENBAUM: He said he had a cassette player, and he would do his own, like mixtapes, with like jazz and stuff to play as he talked to the people.

SMITH: See. That was New York. I miss that.

KESTENBAUM: So Graham said he never gave any thought at all while he was driving a taxi to the medallion that was bolted to the hood until later in life when he became an academic. And the story of how medallions came about, it's pretty amazing. It goes back to - what else? - the Great Depression. Basically, all these people were out of work trying to make money any way they could. And so, some people in New York who had never driven a taxi, they just figured, well, I got a car. Maybe I can go out and pick up some fares.

HODGES: If you look at the famous play, "Waiting For Lefty" by Clifford Odets, all of the drivers are fallen professionals - doctors, lawyers, professors.

KESTENBAUM: They're out driving taxis?

HODGES: They're out driving taxis because there's no work. And they're competing with unskilled workers who've been driving for - taxis for a longer period. As well as, you know, people coming in from other cities looking for jobs. So there's this large mass of men - almost entirely men - who are competing for an ever elusive number of fares.

KESTENBAUM: So if I want to take a taxi, I could stand on a corner and like four cabs will pull over?

HODGES: 10, 15.


HODGES: And they'd be very glad to have you too.

SMITH: (Laughter) As you could imagine, the existing taxi drivers, the professionals who work for the taxi fleets, were so upset because of this. Their wages were dropping. And in part because of this, they staged these huge protests.

HODGES: They went on strike. The strikes were quite violent. They were burning cabs in Times Square. They were beating up passengers who were in cabs that were scabbing against the strike. You know, there were pitched battles in the streets. It was pretty dangerous. It went on during 1934, 1935 for a period of months.

KESTENBAUM: So the city government comes up with a solution. Solution is we're going to limit the number of taxicabs. This is known as the Haas Act, after Lou Haas who was an alderman at the time. The magic number of taxicabs - 13,595.

SMITH: Graham Hodges says this was not some new-fangled idea. The idea that it made sense for government to intervene in the economy this way went way back.

HODGES: The Haas Act is based upon historical precedent dating back to the origins of the city and before that really to the municipal guilds in Europe - that certain occupations deemed in the public interest should be regulated and the number of practitioners limited. And this creates then a bond of attachment between the workers and the city. The workers know that there will be a limited number of people they have to compete against. They'll behave properly in the city, and the public will benefit as a result.

KESTENBAUM: So that's the story. But, you know, to a lot of economists today, the idea of the government putting a cap on the number of something like taxis, it seems old fashioned.

SMITH: The word you're looking for is crazy. It seems crazy.

KESTENBAUM: I think it seems crazy, right?

SMITH: Yeah. The city does not limit the number of doctors, the number of lawyers or construction workers or news reporters.

KESTENBAUM: If they did, everyone would be up in arms. They'd say, no wonder lawyers are so expensive because they're all - the city only lets there be three of them. You know, whatever. And the problem is once you start intervening in the markets, you get sucked into creating a whole bunch of other rules. Like you want to limit the supply of taxis, fine, but when you limit the supply of something, the price of that thing goes up. So imagine if there's just like one taxi medallion allowed for the city, right? That driver could say, oh, you want to go to Times Square? OK. That's fine. It's $500.

SMITH: (Laughter) Which is why, in addition to limiting the number of cabs, the city then has to intervene in other ways. For instance, it also sets the fare. And if you've ever been in a New York City taxicab, it's right there on the window. It's crazy. It's $2.50 to get in the cab. And then it's 40 cents for every fifth of a mile, plus - no, no, wait - there's 40 cents for every 60 seconds that the car isn't moving or if the car is moving slower than 12 miles an hour. This is all written down.

KESTENBAUM: Let me just read from one recent assessment of the medallion idea. This is by the chief financial officer and the chief economist for Washington, D.C. It was published in 2010, looking at how well medallion systems had worked. The answer was not very well.

SMITH: (Laughter) Yeah. It's a crazy document because it lists in one place all the different reasons why you would not want to limit the number of medallions in a city. So for instance - I'm going to read from this.

(Reading) There is a broad consensus among economists that such restrictions allow a small group of private citizens, those who are among the first round of recipients of medallions, to earn windfall profits at the expense of consumers and drivers without medallions.

So in other words, the people who bought those medallions at $10 each here in New York City got incredibly, incredibly rich at the expense of those who did not.

KESTENBAUM: It continues, quote, "evidence from other jurisdictions suggests that limiting entry into a taxicab market leads to a decline in overall service. Consumers pay higher fares, wait longer for an available taxi, face more service refusals and receive less service than they would otherwise."

SMITH: Apparently not afraid of piling on because there are more reasons. This report says that outlying areas tend to suffer, which makes sense. If there's a limited number of taxis, they're all going to cluster in the part of the city right downtown where all the people are.

KESTENBAUM: So for economists, this is exactly why you don't interfere with markets when you don't have to. The market does these things better than you can. The invisible hand of the market coordinates supply and demand.

SMITH: In this case, in the New York City taxi market, the hand isn't actually invisible. It belongs to this guy.

ASHWINI CHHABRA: My name is Ashwini Chhabra. I'm the deputy commissioner for policy and planning at the Taxi and Limousine Commission.

KESTENBAUM: The Taxi and Limousine Commission is the New York City agency that regulates taxis and tracks that medallions. So, Robert, when you and I went down there, I was expecting Ashwini to argue that, hey, even in the modern era, there are good reasons for a medallion system. Maybe like by limiting the number of taxis, we get to limit the amount of congestion and pollution or something like that.

SMITH: Yeah, but he didn't go the environmentalist angle. But he did argue that there are some benefits to those of us New Yorkers who ride in the back of taxi cabs. The driver has got something at stake. That million-dollar medallion on the hood of the car? The city can take that medallion away if the taxi driver doesn't behave properly.

CHHABRA: You get into a cab. You trust that it's appropriately insured. You trust that the driver is going to get you to where you want to go. Because at the end of the day - and you as the passenger may not be thinking about all this - at the end of the day, there's a million dollars on the line for that medallion owner. They're not going to lease it out to a driver who's going to drive recklessly - or they shouldn't. They're not going to have insufficient insurance on that because that exposes their medallion. And so the owners are going to take precautions that they might not if there weren't such a valuable asset attached to it.

KESTENBAUM: There's a counterargument to that, though. The counterargument is just on the other side of the East River. It's Brooklyn. I mean, you know, in Brooklyn, I want to go somewhere, I call up a car service. They pick me up. They don't need a medallion. The city doesn't limit the number of car services. And I have to say, it's always been a pretty pleasant experience. Actually, they have nicer cars.

SMITH: Yeah. And, you know, competition does take care of itself. You know what the good car services are and you know the bad ones are. And there is still, you know, what keeps them from driving around like a maniac if they don't have a million dollar medallion. Well, the same thing that keeps the rest of us in line - police officers.

KESTENBAUM: We showed Ashwini the chart that the economist had made. And Robert, you pointed out that the value of a medallion had increased by 1000 percent since 1980.

SMITH: It seems to me that you have a supply-demand imbalance. The fact that a price has gone up above a million dollars and it has gone up so quickly, I think in any other business they would say, wow, we don't have enough supply. We need to make more of them.

CHHABRA: I don't disagree. We currently are pursuing legislation to increase the number of medallions.

KESTENBAUM: I didn't - you're thinking of increasing the number medallions for like the second time in history here?

CHHABRA: There is currently legislation pending in Albany to increase the number of medallions by another 1,500 medallions. So it's an 11 percent increase.

SMITH: And, you know, there's a benefit, obviously, if you can sell a few new medallions into the system. Remember that million dollar price tag we were talking about. That was one taxicab owner selling it to another taxicab owner. The city did not get the entire million dollars. But if they make fresh, new medallions, then the city gets to pocket the money.

KESTENBAUM: How many new medallions are you thinking of introducing?

CHHABRA: Fifteen hundred.

KESTENBAUM: So if each of those sells for a million dollars, say, that's 1.5 billion dollars in revenue you've just earned for the city?

CHHABRA: That's the thinking. I mean...

SMITH: Is that the main thinking?

CHHABRA: No, certainly. I mean, there's, as you as you pointed out - supply, demand. If there's insufficient supply of taxi service in the city, that's our primary goal.

SMITH: It seems like the rationale for the system, which came out of the crazy moment of the Great Depression, no longer exists - right? But because we sold medallions for ten dollars to people - and the medallions didn't just say you can drive a cab for ten years, then you get a new one. The medallion said forever, like to infinity. If you were to live forever, you could drive a cab forever. We're sort of stuck with this system, which, I think every economist would tell you, all other things being equal, is not a great way to run it because you got to keep guessing what the right number of cabs is. This is a worse system. And the original reason for it is in the distant past.

CHHABRA: We have inherited the system. You know, there are often calls for changing it and doing away with the medallion system. I don't know what - whether that's - I don't know what the right answer is on this. I do think that what we do in periodically reviewing whether there's sufficient supply is probably the best we can do in the framework that we've got.

SMITH: But you're basically trying to just mimic the free market in a really artificial, sort of clumsy way where you get in a room and be like what is the demand. I think it's a lot higher. Let's try and increase the number.

CHHABRA: That's probably right.

SMITH: I don't know, David. I started to feel for Ashwini. Like he's had to live by these rules set up 75 years ago. And for all that time, some guy like him has been sitting in the same chair having to hear two different constituencies yelling at him.

KESTENBAUM: On one side of him are all the people who own the medallions, who have this incredibly valuable lock on the market and who have this vested interest in there being a limited number of these things out there.

SMITH: Yeah, and on the other side are New Yorkers like us. After we talked with Ashwini, it was 5 o'clock. It was freezing out.

KESTENBAUM: It was freezing because you forgot your coat.

SMITH: I had forgot my coat. And so we are running through the streets. After talking for an hour about taxicabs, we're running through the streets in the cold looking desperately for a taxicab. They're all off-duty or filled with people. We're trying to wave one down. We're up there. And it feels like...

KESTENBAUM: No, no, don't do it.

SMITH: It feels like...


SMITH: It feels like my hand is invisible.

KESTENBAUM: Ah, you're killing me, man. I can't believe you're going out on an Adam Smith joke.

SMITH: PLANET MONEY, what are you going to do?


SMITH: This the worst place in the world to get a cab, I think.

KESTENBAUM: Oh, oh, over here - over here - over here. Come on. Come on. Hi, how are you?

UNIDENTIFIED MAN: I cannot go anywhere.

KESTENBAUM: You can't go anywhere?

UNIDENTIFIED MAN: I am in New Jersey.

SMITH: This is a Newark, New Jersey cab.

UNIDENTIFIED MAN: Ah, Newark, New Jersey cab.


SMITH: As always, we'd love to hear what you thought of today's podcast. Or you can send us advice on how to better get a cab. We clearly need some advice. You can email us at planetmoney@npr.org.

KESTENBAUM: You can also find us on Facebook and Twitter. I'm David Kestenbaum.

SMITH: And I'm Robert Smith. Thanks for listening.


M83: (Singing) Waiting for a ride in the dark. Waiting in a car. Waiting for a ride in the dark. Waiting in a car. Waiting for a ride in the dark.

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