A 'Patient' Uber Relieves Janet Yellen's Fed of Its Clothes
Uber's genius is ultimately a function of its common sense simplicity. Most sensibly, the car-sharing service seeks to serve its customers' needs by virtue of it serving those of its drivers. Trade is a two-way street, by definition, but economists and government officials generally act as though there's only a buyer.
Uber is many wonderful things to millions of people, but for the purposes of this piece it's best to focus on CEO Travis Kalanick's understanding of something that's lost on economists, particularly those at the Federal Reserve. Obvious to Kalanick is the basic truth that if you love your customers you must equally love those serving them.
Applied to traditional cab service in the very narrow sense of supply, regulatory bodies presume to dictate price. While allowing for the certainty that there are variations in cities and towns across the U.S., the general rule is that cab meters regulate, or better yet limit, what drivers can charge per 1/8th of a mile. There are surcharges at times for rush hour periods, others imposed when gasoline is abnormally expensive, and in locales where it snows drivers are sometimes "allowed" to charge extra when it's snowing. With traditional cabs regulators decree prices, not market signals.
On its face such a system fails since regulators can't possibly possess all the information necessary to consistently reach a price that perfectly matches the needs of driver and passenger. That's all a price is, just a number that maximizes the possibility that seller and buyer will transact.
And then when you get government involved with supply and demand, it's inevitable that the price fixing will nearly always "favor" the passenger. The result of such a scenario is inevitable, and it's one that harms the passenger: scarcity. We all knew this well about cabs prior to Uber: they were much less plentiful when we needed them the most. During rush hour they were often very challenging to find, when raining extraordinarily difficult, and then when it would snow: forget about it.
As is well known, Uber fixed all of this by virtue of it designing a system meant to please the driver as much as the passenger. Importantly, Uber doesn't have a clue what the price of transportation should be. All it knows is that if it wants happy passengers, then so must its drivers be kept happy. Most of all, they must have an incentive to be on the road when their services are most needed. Specifically, they must have an incentive to ferry passengers when traffic is the worst, when the rain is coming down hardest, and yes, when snow renders driving somewhat perilous.
Uber ensures that its drivers are on the road by virtue of it letting prices adjust to demand. Customers of the innovator know all of this very well. When the snow is cascading downward, or it's raining tropical style, or it's New Year's Eve, what's called "surge pricing" comes into effect. Eager once again to make sure that there are enough drivers to transact with eager passengers, Uber makes access to its service "easy" by virtue of it raising the prices that passengers pay in return for service. Specifically, Uber floods the markets with supply by hiking the cost of the supply; the higher costs logically serving as a lure for those who have it (Uber drivers) to get out on the road. Kalanick knows that the only way to meet the exacting standards of Uber passengers is to similarly meet the needs of Uber drivers.
All of which brings us to the Federal Reserve, the world's foremost central bank. For weeks and months, a confused market commentariat cheered on by equally confused economists has kept an eagle eye on what the head of the Fed, Janet Yellen, will do next. Will she raise the Fed funds rate to allegedly "tighten" credit, or will she be "patient" and keep the rate at zero so that credit is "easy"? Not commented on enough is just how silly this whole exercise is, and has been. There's no helping hapless market commentators obsessed with the Fed, but the economists focused on Yellen should perhaps know better?
Seemingly ignored by both is how silly is the very notion of a central bank planning the cost of credit in the first place. While the Fed is charged with overseeing monetary policy, it's too often forgotten that credit is not money. "Credit" amounts to access to the economy's real resources - think tractors, trucks, computers, office space, and labor. We would recoil in horror at the idea of a central body setting the cost of Apple computers, economists would especially recoil, but somehow it's normal to them that a committee in Washington, D.C. presumes to plan the cost of access to everything in the economy, including Apple computers.
Even more comical and disturbing all the same is what has Yellen "patient." Worried that the U.S. economy is still too weak, Yellen is reluctant to "tighten" credit by virtue of raising the price of it. It was hard to type the latter without laughing, but in Yellen and the Fed's defense, if she or anyone else in her employ had a clue about economic growth, they obviously wouldn't be economists, Fed officials, or both. Still, implicit in her analysis of the economy is that credit must be plentiful for the economy to continue growing.
Ok, if we accept what vandalizes basic economics, meaning the Fed attempting to plan the cost of credit, Yellen misunderstands what is plainly obvious to Uber's Kalanick, along with just about any other sentient being in the real economy: with trade it's not just about the buyer. The seller must be satisfied too. Applied to credit, if you love the borrower you must also love the saver. You can't have one without the other. Yellen's "patient" stance whereby she intends to keep the cost of short credit at zero suggests she despises the saver to the detriment of borrowers.
Were the Fed or Yellen more in tune with reality or simple economics, they'd float the Fed funds rate altogether since the FOMC can't possibly know what the rate should be. Barring that, these central planners would, if they're worried about plentiful access to credit, copy Kalanick on the way to instituting "surge pricing" rate increases for the very credit they want more of.
