New Yorkers love Uber. But is Uber good for New York?

Uber is undoubtedly transforming the transportation dynamics of cities around the world, none more so than San Francisco and New York. But while Uber spends millions of dollars on lobbyists trying to convince policymakers that this transformation is a positive development, politicians in general – especially at the municipal level – are far from convinced.

In one of the more recent skirmishes, New York’s mayor blamed Uber for turning his city’s streets into a congested mess and devastating its taxi industry. So, what’s really going on? While millions of individual riders have embraced Uber, are they damaging their cities by doing so?

New York mayor Bill de Blasio certainly thinks so. He recently tried to put limits on Uber’s growth, although eventually he shelved his plan to prevent Uber by growing any more than 1% per year. His arguments have merit at first glance. But once you start digging into them a bit, they fall apart.

De Blasio certainly has facts at his disposal. The city’s foremost taxi owner, Gene Freidman, filed to put many of his companies into bankruptcy last week, and delinquencies at one major taxi-medallion credit union have now hit an eye-popping 22%. Before Uber came along, there was a finite number of heavily-regulated yellow taxis, causing a finite amount of congestion. Then Uber arrived, with potentially unlimited growth, and, according to the de Blasio view, took a lot of the taxis’ fares, while at the same time swamping the streets with cars. The result? Economic chaos for the taxi industry and worse congestion for everybody else.

But let’s unpack those assertions a little bit.

For one thing, it’s not at all clear that Uber has stolen a lot of taxi fares. Here, for instance, is the chart (from the most recent Taxicab Fact Book) of total yellow-cab trips over the period in which Uber entered the New York market. I, for one, can’t see any real effect.

On the other hand, what Uber has done is provide an attractive alternative not just for passengers but for drivers. Instead of renting a taxi for $120 per shift, drivers can use their own car – and leasing a car costs a tiny fraction of $120 per shift. What’s more, they can drive that car as much or as little as they like, and thereby have much more control over their total earnings.

As a result, the taxi owners – rather than the drivers –are suffering because they are hard-pressed to find people willing to pay $120 per shift to rent a taxi. Sometimes the taxis end up sitting idle; other times the owners must accept lower rent. So their income is now slightly less than it used to be.

All businesses see their revenues go up and down, of course, and the amount of revenue that the taxi fleets have lost is not particularly huge. The problem, instead, lies in the way the taxi industry is set up.

New York has a limited number of taxi medallions, which are licenses to drive yellow cabs. Those medallions used to be worth roughly $1 million each, and were generally owned by wealthy taxi magnates like Freidman. The magnates got bank loans to fund acquisitions of medallions, then rented their medallion-adorned taxis out to drivers.

As services like Uber began infringing on the taxi scheme, however, the value of medallions – which is just the net present value of their associated cashflows – became highly uncertain. And today, the taxi medallion market is frozen. Although many medallions are up for sale, very few are changing hands because no one really knows what they are worth.

This presents a problem for people like Freidman, who have taken out loans to finance medallion purchases. The debt is generally structured as short-dated “balloon” loans where borrowers pay a modest amount of interest and then have to pay a large sum back at maturity. That’s a model which works fine, just so long as the medallion owner can simply take out a new loan to refinance the old one when it comes due.

And ultimately, that’s why Freidman filed for bankruptcy, and others might too. Corporate titans often use bankruptcy as a tactic to wipe clean their debt slates by handing over assets to creditors, rather than paying back more than the assets are worth. (See: Donald Trump, 50 Cent and pretty much all private equity firms for reference.)

Freidman himself was at pains to tell Crain’s New York that the filing was a “power move” and “not a move from weakness.” So it’s hard to see Freidman’s bankruptcy filings, even if they are Uber-inflicted, as being bad for New York City.

So what about de Blasio’s charge that Uber is creating more congestion on city streets?

Uber makes its own reasonably compelling case that their drivers are not the cause of rush-hour gridlock. Most of its trips take place at night, rather than at rush hour, and in any case its 3.5 million pickups per month are still only a small fraction of the 14 million pickups by yellow cabs. And because Ubers can’t accept street hails, they do much less unnecessary driving-around than either yellow cabs (who are cruising for hails) or individuals (who are looking for a parking spot). If car-driving switches from cabs and personal cars to Ubers, or if Uber makes it easier for suburbanites to get to a public-transit hub rather than deciding to drive their own cars, then that should decrease congestion, rather than increase it.

More generally, Ubers – and taxis at large, for that matter – look more like a solution to congestion than a cause of it. The best way to reduce traffic is to put a price on it: charge cars for driving in congested areas. And while formal congestion pricing failed to get political support a few years ago (and Bill de Blasio was one of the politicians who opposed it), New York does have de facto congestion pricing with cabs and Ubers.

Yellow cabs charge 50 cents for every minute spent in slow traffic; UberX charges 40 cents for every minute regardless of traffic. What that means is that if you end up getting stuck in traffic for ten minutes, you end up spending an extra four or five bucks. As a result, per-minute taxi pricing is a congestion tax, which gives you a clear financial incentive not to take a cab around Manhattan when traffic is barely moving.

So, why did de Blasio put so much political capital behind squashing Uber in New York City? It could be the same reason he tried to get rid of horse carriages in Central Park: because wealthy people who support the idea are major financial backers. The taxi industry gave about $550,000 to de Blasio’s mayoral campaign, which means they expect his support in return.

Ultimately, congestion in New York is a function of three forces which are much greater than Uber: population growth, economic growth, and a public-transit system which is groaning under the weight of current ridership. Uber’s claims that it will reduce congestion, through things like UberPool, are not particularly convincing. But the public has embraced Uber because it makes it easier to get around the city. That’s something municipalities should be encouraging, rather than fighting.