The taxi medallion system in New York and other cities raises fares, impoverishes drivers, and hurts passengers. So why can’t we get rid of it?

When New York’s Taxi and Limousine Commission held a public hearing last week to consider whether to raise taxi fares by 20 percent, cabdrivers pled poverty and passengers argued that fares are too high. Paradoxically, both groups were right.

This lose-lose scenario is only possible under the taxi medallion system, a regulatory scheme in which the right to operate a taxi is thoroughly divorced from the actual work of driving one. It’s a classic example of the perils of financialization, the process through which economic potential is turned into a liquid and leveraged asset. By converting a portion of cabbies’ future revenue into a freely tradable asset, New York, Chicago, San Francisco, and a host of other cities have created a powerful investor class, medallion owners and financiers, whose interests routinely compete with those of drivers and passengers.

“Compete” may be the wrong word, however, since owners of the aluminum placards don’t have much experience with losing. Over the last decade, their victories have driven the price of a medallion from around $200,000 to more than $1 million in New York. Medallion owners from Boston to San Francisco have been similarly fortunate, with medallions in Chicago appreciating even faster than the sustained 16 percent per year gains seen in New York.

New York fares have gone up six times over the last 30 years, yet drivers’ real income has fallen because of rising gas prices and surging medallion leasing costs. Bhairavi Desai, the head of New York’s nonprofit Taxi Workers Alliance, isn’t far from the mark when she calls the current system “feudal.”

The public hasn’t fared much better. Deep-pocketed medallion owners have hijacked public policy through lobbying and legal challenges. Just last week medallion owners won a legal victory blocking Mayor Bloomberg’s plan to create a fleet of “green cabs” to serve New York’s outer boroughs, and last year medallion owners successfully stymied New York’s attempt to shift to hybrid taxis.

 Studies have even drawn a link between the medallion system and crummy cab service, which might seem far-fetched until you consider that drivers begin each 12-hour shift owing as much as $130 to their leasing company. If you were spending half your shift just trying to break even, you’d employ bat-out-of-hell driving tactics and tell rush-hour Manhattan fares that you didn't know where Queens was, too.

Things weren't always this way. When New York City first issued taxi medallions in 1937, they were just licenses, worth $150 in today’s terms. In the years after, life was pretty good for cabbies, as it was for many low-skill employees in postwar America. Some drivers owned their cabs. The rest were unionized employees who worked on commission and received a full slate of employee benefits.

Crucially, the owners were in the taxi business and took on the risk that entailed. If gas prices went up, that came out of the owners’ pockets. If drivers had a bad shift, the owners did too.

All that began to change in 1979. That year, New York’s Taxi and Limousine Commission changed its rules to allow medallions to be leased out for 12-hour shifts, making cabdrivers “independent contractors” under federal labor laws. The move cost such drivers their benefits, but the real fallout was far more profound. Even for medallion owners who operated their own taxi fleets, the economic value of the right to pick up fares was now severed from the value of actually doing so.

It turns out that the former business is a hell of a lot better than the latter.