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Let 'em Walk to the Clinic!

by Timothy Sandefur

Charging too little to drive the elderly and disabled to the doctor is against the law in Tampa.

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Five years ago, Daniel Steiner went into the limousine business. Today, his company, DSL Transport, operates five Lincoln Town Cars, and employs six people in the Tampa area. Until recently, DSL was a respectable company, transporting its elderly and disabled patients to their doctor appointments. But then, authorities say, he began breaking the law. In October, after a lengthy investigation by Hillsborough County's Public Transportation Commission, authorities declared that the unassuming, hard-working Brazilian immigrant was charging too little.

Hillsborough County's regulations of taxis and limousines may seem like a strange place to look for an education in political philosophy. But they are an object lesson in the way government intervention in the market handicaps entrepreneurs — usually lower-class workers and immigrants — to benefit politically powerful interest groups.

Long before James Buchanan and Gordon Tullock published their classic "Calculus of Consent," American political thinkers were familiar with the problem of "faction": groups seeking economic and political power would invest time and energy into gaining control over the government. The more power they could get by gaining such control, the more intense their efforts. This was one reason that early libertarians fought against government's power to grant monopolies: such monopolies benefited politically powerful groups by preventing others, hard-working, but politically unpopular, from earning an honest living. Fortunately, for much of early American history — with some major exceptions — courts held that the United States Constitution prohibited government from giving such "naked preferences."

In the 1932 case of New State Ice Co. v. Leibmann, for example, the Supreme Court struck down an Oklahoma law which prohibited anyone from entering the ice business without first proving to the state's Corporation Commission that a new ice business was "necessary." Of course, this presented three obvious problems. First, it meant that existing ice businesses were protected from competition from upstart entrepreneurs. This meant that the existing businesses could confidently raise prices and provide poor service — the classic abuses of monopoly. Since the commission was made up of already-existing ice businesses, the conflict of interest was obvious. Second, even if the commission had been perfectly unbiased, the Oklahoma law required new ice companies to do the impossible: prove a negative. Rather than the state having to give a good reason for prohibiting the business, the newcomer to the ice market was forced to prove that he ought to be free from regulation. As Anthony de Jasay writes, proving that one ought to be free from regulation "is a needle-in-the-haystack type of task, very difficult and costly if the set of potential objections is large, and logically impossible if the set is not finite." Finally, proving that a new ice business was necessary — as opposed to convenient, or beneficial to society in some way — is an extremely difficult, if not impossible, burden. This is even more true since businessmen like Earnest Leibmann weren't allowed to try the experiment first.

The Supreme Court struck down the Oklahoma law in Leibmann. The Constitution, it held, protects the right to earn a living, and prohibits monopolies that merely protect some economic interest group against competition. "The practical tendency of the restriction," wrote Justice Sutherland, "is to shut out new enterprises, and thus create and foster monopoly in the hands of existing establishments, against, rather than in aid of, the interest of the consuming public. . . . There is no difference in principle between this case and the attempt of the dairyman under state authority to prevent another from keeping cows and selling milk on the ground that there are enough dairymen in the business. . . . "

In retrospect it's ironic that Sutherland used dairies as an example. A mere two years later, Leibmann was overruled in Nebbia v. New York, a case which heralded the rise of a new Constitutional law.

Since at least the 1920s, judges like Oliver Wendell Holmes and Louis Brandeis had argued that the Constitution should be reinterpreted to suit newly evolving political theories. One contemporary admirer of Justice Holmes explained that "Justice Holmes came to the bench in 1882, when the transition from individualism to collectivism in England was in progress. [He realized] . . . that the socialistic trend in American political thought would finally demand extensive paternal legislation. . . . [T]he necessity for the establishment of a benevolent attitude towards social reform was apparent. . . . [But] no further [constitutional amendment] might be looked for. . . . Next to amendment of the Constitution, the most feasible means of giving validity to new principles was to change the interpretation of the provisions [of] . . . the 5th and 14th Amendments."

In Nebbia, the Court signaled this change by upholding a New York law which set a minimum price for milk. The state argued that the law was necessary to prevent dairies from going out of business: competition, the law's defenders argued, would drive profits down so low that companies would simply get out of the milk business entirely. Competition from new milk companies, wrote the Court, "produce[d] waste harmful to the public, threaten[ed] ultimately to cut off the supply of a commodity needed by the public, or portend[ed] the destruction of the industry itself. . . . " Therefore, minimum price laws had to be set to protect existing milk companies against competition.

Today, most American cities regulate public transportation in the way that Oklahoma tried to regulate ice companies. In Denver, for instance, city laws require any new taxi company to obtain a "certificate of necessity" by proving that current taxi services don't serve existing demand. Just as with the Oklahoma law, this places an impossible burden on entrepreneurs, who must prove the need for their services even before offering their services to the public. But every business owner knows the truth of the old adage "supply creates its own demand": it's not possible to prove that the public wants a new service until it's offered.

Many cities micromanage their public transportation services in order to achieve a "balance" between suppliers, in the same way that New York tried to "balance" existing milk producers through price regulation. Hillsborough County's limousine regulations, for instance, require all limousine services to charge at least $40 per hour. Asked why consumers need protection from low prices, Gregory Cox, director of the County Public Transportation Commission, explained that the rule is intended to "keep a balance between the taxi industry and the limousine industry so that both remain solvent." In other words — to ensure that taxi companies don't have to be competitive with limousine services.

Daniel Steiner ran up against the rule this summer when he began offering transportation to medical clinics. The clinics pay Steiner's company directly, every month — the passengers pay nothing — and the rate always exceeds $40 per hour. But this wasn't enough for the commission, which declared that its rules really mean $40 per person, per ride. At a hearing in October, the commission brushed aside the pleas of several of Steiner's passengers, and placed his business license on probation. Represented by the Pacific Legal Foundation, Steiner is appealing.

Whenever government has the power to give people economic benefits, that power becomes a prize in a political competition. That is the central insight of public choice economists like Buchanan and Tullock. The taxi market is a prime example: taxi companies use government licensing rules to prevent fair competition and, in essence, to get rich by making it illegal for customers to shop elsewhere. But preventing these sorts of unfair preferences is one reason that the Constitution was written: as a federal appeals court recently held, "protecting discrete interest groups from economic competition is not a legitimate governmental purpose." But so long as decisions like Nebbia remain on the books, the courts will have a hard time protecting hardworking entrepreneurs like Daniel Steiner against the protectionist laws that benefit the economic and bureaucratic establishment.

© Copyright 2010, Liberty Foundation

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