Thirty years ago I drove a taxi-cab in Chicago, IL. At that time the city had completed a huge expansion to their convention center and was also in the process of promoting tourism. This resulted in an inadequate number of taxi-cabs available for the tourism and special events. The city controls the number of taxi-cabs by issuing medallions. At the time there were about 5,000 medallions issued by the Taxi and Limousine Commission of Chicago. Each cab needed a medallion to operate in Chicago but there was a limited number. These limited medallions were bought and sold amongst taxi-cab companies and private owners. As a result the medallions had a value of about $35,000 each. If a company or a private owner wanted to put a new cab on the road, he would have to purchase an existing medallion from another company or private cab-owner.
Due to the shortage of cabs, the mayor decided to issue about 2,000 new taxi medallions over the next 5 years. The mayor decided not to put these newly issued medallions up for sale on the open market despite the fact that the sale of 2,000 medallions would earn the city 70 million dollars because he did not want the 2 big cab companies to buy most of them. He didn’t want the rich taxi companies to get richer on the backs of the poor cab drivers. He wanted the cab-drivers themselves to have the opportunity to go into business for themselves.
In order to distribute the new medallions to hard-working poor cab drivers, the mayor came up with the idea of a taxi medallion lottery. To be eligible to enter the taxi medallion lottery you must be a licensed cab driver for at least 5 years and register for the lottery. The city would hold a lottery during each of the next 5 years and they would issue 400 new taxi medallions each year. The lucky winners would get the medallion free of charge and the banks were required to lend them the money to buy a fully equipped taxi-cab regardless of their personal credit rating. The medallion would be the collateral for the loan. The only restrictions were that the new cab owners must put a new cab on the road and they were not allowed to sell their medallion for 5 years. Unfortunately, I did not win a medallion myself but I knew many drivers who won taxi-medallions in the lottery.
The big cab companies were not allowed to buy these new medallions from the drivers so they found a loophole. The cab companies offered the medallion winners $400 per month to lease these new medallions. About half of the new medallion winners took this offer and got paid $400 per month which was enough money to pay the rent on a nice apartment at that time. The drivers continued working for the cab company but they got a $400 monthly windfall, which would increase as the value of the medallions went up. The cab companies were able to put new cabs on the street and increase their profits with these “leased medallions”. This was a win-win situation for everyone except the city who gave away 70 million dollars worth of medallions for free.
The other half of the lucky winners decided to put their own cab on the street. They got a loan, bought a cab and they were in business for themselves. Unfortunately, most of these new owner-operators did not have the the discipline, self restraint, focus and self sacrifice to run a successful business. They did not have the wherewithal to run a successful business and most of them went bankrupt and lost their cab and medallions within a year. The new cabs and medallions were auctioned off by the banks and most of them were bought by the big cab companies.
The reasons for failure were numerous. Some drivers did not work enough hours. Since they had no boss demanding a daily “nut”, they took it easy and were unable to pay costly insurance premiums, taxes and vehicle repairs. Others hired friends to drive the cabs for them. When their friends did not always pay them and they didn’t have enough money for insurance, taxes and repairs. Some drivers hired an extra driver to work the night shift. Often they didn’t check their driving records and the night driver had numerous accidents which they could not afford to repair. One driver went to the racetrack everyday with his cab to bet on the horses. He went bankrupt in short order. Many new owner-operators bought new cars, boats, TVs and fancy clothes with their windfall and could not afford the expenses of maintaining their business.
In the end, the big cab companies ended up with most of the newly issued medallions. The reason for this is that the cab companies had the knowledge and wherewithal to run a taxi business but the drivers didn’t. The drivers were good at driving cabs, but they were awful at running a business. Human nature is such that wealth will inevitably flow into the hands of those who have the discipline, focus and self sacrifice to manage it. Wealth will slip through the fingers of those unable to manage it. Most poor people are poor because they are unable to manage money. There have always been rich people and poor people in every society in human history. This is not good nor bad, this is an unchangeable part of human nature.
