Cities Should Embrace Innovation, Not Fight It
A new ridesharing service has recently opened in Washington, D.C.: Via. Though it is only operational in three cities as of now, its future is bright. I downloaded it after one Uber driver cancelled and another took ten minutes to reach me instead of the promised two minutes.
Although the sharing-economy model should be celebrated as a triumph of markets and innovation, regulators and incumbent firms have taken a hostile view towards platform technologies.
Encounter Books has just published a monograph on this struggle by Jared Meyer of the Foundation for Government Accountability. Entitled How Progressive Cities Fight Innovation, it is a vital contribution as the new administration tries to reinvigorate the economy. In 2016 Meyer was named one of Forbes 30 People to Watch Under 30.
Via’s selling point, its competitive edge against other rideshare groups, is the ability to transport someone anywhere in D.C. for $2.95. As D.C. residents know, that price is lower than the cost of many trips on the area’s struggling Metro system.
Sharing economy companies like Via, Uber, Airbnb, and Etsy do not offer any final products or services per se, but they provide online platforms that match buyers and sellers. The ease of this connection lowers what Meyer refers to as “transaction costs,” or all the time, money, and effort required to make a trade. Lower transaction costs enable opportunities for buyers and sellers that were previously infeasible or too costly.
This is why rideshare services have found enough drivers to greatly outnumber taxicab drivers after less than a decade of operation (Uber was founded in 2009). Similarly, only one hotel company, Marriott, is valued higher than Airbnb (founded in 2008).
Though the details vary on a city by city basis, the points of tension between the sharing economy and progressive policymakers have some common themes, Meyer shows.
First, the sharing economy upsets pre-existing regulatory frameworks. For instance, the short-term rentals enabled by companies such as Airbnb and HomeAway constantly face limits from residential zoning laws.
In Nashville, one of the many examples that Meyer uses, one of the main arguments against Airbnb is that it would cram the city’s blocks with noisy, messy neighbors. Local policymakers tried to limit residents’ ability to rent out their homes because of this concern. However, enforcing existing nuisance laws would solve the supposed problem while allowing the short-term rental market to continue developing.
Furthermore, large cities such as New York and San Francisco are experiencing a high rent crisis. Rather than adopting Airbnb as a way to help residents afford rent or mortgage payments in today’s stifled housing market, these cities blame short-term rentals for causing high rents. The real cause of high rents is high demand for housing coupled with housing shortages, which are caused by zoning laws and land-use regulations that suppress expansion.
Another cause for tension is the way that some sharing-economy companies can operate without securing the government licenses that are required for incumbent firms. One example is the medallion system that enables New York taxi drivers to pick up street hails legally. These costly medallions are supposed to ensure the quality of the taxi drivers, but New York City limits their supply, meaning the medallion system is a government-granted monopoly.
Ridesharing companies got around the medallion requirement by using technology to quickly and efficiently prearrange rides. Though prearranged rides fall under a lighter regulatory framework than do street hails, it comes as no surprise that Uber faces endless regulatory battles instigated by taxi companies that claim Uber drivers are illegally operating as de facto cab drivers.
Lastly, most arguments against new services are based in concerns over public safety. Meyer describes how Austin, Texas, required all rideshare drivers to go through fingerprint background checks, which hampered the ability of ridesharing companies to keep up with surging customer demand in the fast-paced city. Moreover, as Meyer argues, fingerprint background checks are notoriously ineffective, which leads to discriminatory results.
These effects of Austin’s regulations resulted in Uber and Lyft leaving the famously progressive city last year. The companies only recently returned to the city when Texas legislators passed House Bill 100, which overrides Austin’s power to impose these unnecessary restrictions. Regardless of Austin’s experience, similar background check debates continue in cities across the United States.
Given these points of tension, how can policymakers update regulatory frameworks in ways that allow legacy firms to compete and keep the public safe?
Instead of blindly enforcing decades-old rules on new business models, regulators can instead specify quality requirements and topics of concerns, and then allow companies to find ways to meet those requirements and solve those identified problems. In other words, regulators should set clear safety standards and then allow companies to meet these standards in a variety of ways.
Regulators also need to keep in mind that consumer protection can come from other sources besides government regulation. Technology has put previously unimaginable amounts of information in consumers’ hands, meaning that people can increasingly hold companies accountable.
Review systems, a fundamental mechanism throughout the sharing economy, help guarantee that service providers will provide quality service in a reliable manner. Many people choose services based on online reviews, whether these come from peers or professionals. As consumers gain more access to information, regulators need to realize that their role in consumer protection is changing.
For good reason, sharing economy firms have become wildly popular around the globe. Though the ascent of these business models has been swift, outdated views on government regulation continue to threaten further growth. Meyer makes a compelling case that policymakers across the country need to embrace technological progress instead of fighting it, and states and localities would do well to take note.
Diana Furchgott-Roth, former chief economist of the U.S. Department of Labor, is a senior fellow at the Manhattan Institute and an adjunct professor at George Washington University. Follow her on twitter: @FurchtgottRoth.
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