Tuesday, April 24, 2018

"No Driver" Wins a Race to the Bottom

I often have the opportunity to speak to young people about their future goals and plans. And when the subject of economics arises, I try to instill in them the concept that they will need to find ways in which they can distinguish themselves from others. I encourage them to work on identifying the things at which they personally excel, in which they are personally interested or passionate, and the performance of which leads to feelings of fulfillment. I am no guidance counselor, but I think people should find a vocation, occupation or profession which they find fulfilling. 

An example I use to illustrate economics with them is sand (as sand is familiar to Floridians). I suggest to them a business idea in which they set up a table in the beach parking lot and sell Solo cups of sand for $3.00 each. Their investment is minimal, buying solo cups (product expense), getting a table (capital investment), scooping sand, and attending the table (labor expense). I often have a student volunteer their perception of just how idiotic they think my idea is. I have often heard some variant of "it would never work, they can just scoop their own sand."

This leads to a discussion of various elements of basic economic analysis. What are you asking the customer to buy? An argument can be made that there is no real product, as you are offering merely a commodity; one which is readily and freely available in great quantity. An argument can be made that you are instead marketing a service (convenience of a cup of sand versus the burden of obtaining a cup elsewhere and scooping one's own). 

But, if you went into the sand business, what would you expect of your marketplace? What if someone began selling solo cups of sand on the Internet (that firm needs no table at the beach nor anyone to staff it), and beating the prices you have charged? What if they enjoyed lower labor costs, such as China, and shipped in sand cups that could thus be sold for a lower price than locally sourced sand?

There is some inclination to suggest that these are competitive forces, and that supply and demand will interact to accomplish market efficiency. The sand stand that sells locally sourced sand cups may be unable to compete with the price point of the website selling Chinese sand. Local people may find demand for their services decreases because they cannot compete with the price point that results from some non-local sources. An establishment ("sticks and bricks") may find that lease, maintenance, and staff costs render it unable to compete with the Internet-based competitor. This has been a reality of the disruption of the information revolution. 

These are rudimentary examples, but they illustrate some of the analysis of why business may succeed or fail. A couple of years ago, I proposed an analysis of workers' compensation and change, What is Right with Comp. There, I suggested that we might apply Newton's laws to business, or to an enterprise like workers' compensation. Newton offered that "bodies" tended to retain their character or performance, "motion" or "rest," until acted upon by some outside force. I question whether people, businesses, or enterprises are really any different.

A recent story of a New York suicide made my thoughts return to this subject. Just before the recent school shooting in Florida, there was a suicide outside the City Hall in Manhattan, as reported by National Public Radio (NPR). A professional driver posted a lengthy Facebook explanation of the desperation of that profession, drove to City Hall, and ended his life by suicide. 

The NPR story explains and laments that it is increasingly difficult to earn a living driving a car in New York city. They say some might work a 12-hour shift and take home as little as $50.00 (just over $4.00 per hour). Drivers lament that they have no alternative but to work these hours, some saying they have not had a day off in years. 

As in the sand example, there is a glut of readily available supply, and as a result the price that can be charged has decreased. NPR interviewed a representative of the union which is "fighting for the rights of NYC's 50,000+ taxi drivers," the New York Taxi Worker's Alliance or NYTWA. Its executive director, Bhairavi Desai, suggests that the solution to the problem is decreasing supply. She believes that government should regulate the number of drivers that can ply their trade in New York, a "cap on the number of vehicles." This would decrease competition for passengers and as supply decreases price would correspondingly increase. Similarly, the government could limit your ability to take sand from the beach, thus increasing the likelihood that you would purchase some from a vendor. 

Ms. Desai also suggests that every driver, in every such vehicle, should be required to charge the same price, a government mandated "one metered rate." This would decrease competition among drivers, and assure that those who drive would be sheltered similarly to the protection that a "minimum wage" provides to workers in other avocations. Ms. Desai suggests that the "one metered rate" must be increased from the current norm. This, she contends, would produce a living wage for those drivers. It would allow them to "work with dignity and justice" through "proper regulation."

So, if the government steps in as suggested there would be a change in a marketplace. In such a change, there would be those who gain and those who lose. For example, the higher "one metered rate" would ostensibly result in a driver making a greater wage (gain) but the passenger paying a higher rate (loss). I say "ostensibly," because a passenger confronted with a higher rate might instead (1) walk, (2) catch a bus, (3) ride the subway, or (4) not make the trip. If the passenger chose any of those four alternatives, the passenger would in fact save the fare (gain) and the driver would earn no fare (loss). While the probability is that trips would still be consumed, and volumes would likely adjust after the initial effects of such change, some volume of consumption might be permanently lost. 

Examined through a different lens, consider someone who is no longer a driver. There are many drivers in New York. There are an estimated 13,587 Yellow cabs in New York, and perhaps four times that many other cars affiliated with private services and "ride hailing" computer apps like "like Uber, Lyft, Via, Juno, and Gett," a total of almost 75,000 cars. If the government effected Ms. Desai's suggestion and cut that number in half, to 37,500, the effect would likely be increased price per ride. The decrease in supply would be likely to yield the desired increase in price. And, this assumes government could stuff the ride app genie back into a bottle somehow. 

The 50% of drivers that remained on the street after her proposed action would likely make more money than they did before. If they were taking home $50.00 before, then they would perhaps take home $100.00 per day after (more like $8.00 per hour perhaps). But, from where would that increase come? Arguably, it comes from the consumer, who is again faced with the four alternatives discussed above. But, perhaps more so, the increase to the remaining 37,500 drivers would come from the pockets of the other 37,500 drivers who are no longer allowed to earn a living driving. Those, now prohibited, drivers would earn $50.00 less per day from driving than they are earning now. The lucky driver gets twice as much for the same work, and the unlucky driver gets nothing, through "proper regulation."

The change would be government. Government regulating who may earn a living and who may not. Government preventing competition and efficiency. Some would suggest that a similar effect on supply would occur if those drivers who are not satisfied with the earnings currently available from this work would instead leave the profession and work in some other field. The basic laws of economics seem to dictate that workers will operate in their own best interest. If they perceive that their reward for labor driving is insufficient for their support, then they would work elsewhere. 

In the end of the analysis, the fact is that this debate may be a tempest in a teapot. While today's drivers are arguing over how government might regulate to force a market to pay more, they are seemingly missing the coming age of technology. The self-driving car is a reality. Entities like Waymo, Uber, Ford, and others are bringing us cars that will require no driver. And, the predictions of when are now being expressed in months. This innovation has the potential to eliminate all of those 75,000 driver jobs in New York. Those who believe the disruption of Uber, Lyft, and similar apps has been devastating need to get ready for the real disruption that is coming. 

Will advocates like Ms. Desai be successful enacting "proper regulation" to require that autonomous, "driver-less" cars still retain a human operator for our old friend Justin Case? Similarly, might regulators require each beach visitor to purchase at least one cup of sand from a local vendor while here? (If that had been the solution in the past, would we each be forced to buy a new buggy whip each year in the interest of protecting the employment of those who make them). Or, will the driving profession (along with auto body repair, car insurance and medical care professions) adapt to the reality of change? It is a question that is being heard in many professions. How Will Attorneys (or any of us) Adapt?

Is the solution to this technology revolution having government force outcomes through "proper regulation," to the benefit of some workers and the detriment of others? If that is the course chosen, does anyone think that government can keep up with the disruption that technology and innovation are bringing? No one would suggest government force people to buy sand cups to start a "sand cup" business model, why would they suggest it to preserve a model overtaken by progress?

In the end, it is likely that "no driver" will become the paradigm. Some will argue that this is a race to the bottom, to the detriment of workers. Others will see it as a boon to consumers. In the end, the consumer will demand it for their benefit and technology will deliver it. It seems that the smart drivers would recognize the current paradigm is not serving them and the next one will less so. Suicide is not the answer, but adaptation is. The smart drivers should look for a way to transition to a new employment role. 

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