October 30, 2014, Policy Network
New businesses always tout the extent to which they present a qualitative break with their old competitors. That is part of their attraction to customers. It is unfortunate when reporters and political figures believe this hype, as appears to be the case with the ‘collaborative economy’.
The essence of the businesses that call themselves part of the collaborative economy is that they rely on the internet to make connections that would have been done through other means in the past. For example, the taxi services Uber and Lyft rely on people summoning cabs through the web. By using GPS systems, cars that are in the area can quickly pick up a waiting customer. Similarly, Airbnb uses the web to arrange short-term rentals for people who have a room, apartment, or house to rent.
On the face of it, the use of new technologies to better match businesses and consumers is a good thing. After all, we can all appreciate being able to reserve a hotel room on the phone as opposed to having to walk from hotel to hotel to find an open room. These web-based services are simply taking advantage of this new technology to make finding a room or a cab even easier.
That is the positive side of the story. The negative side is that these services often evade many of the regulations that apply to their competitors. For example, Uber and Lyft are not subject to a wide range of regulations that apply to traditional taxi services. These include safety inspections for the cars, insurance minimums to protect passengers and, in the United States, FBI checks for the drivers.
Traditional hotels are similarly subject to a wide range of restrictions which companies such as Airbnb are able to avoid. Some involve inspections to ensure that they do not pose a fire danger to guests. Others regulations involve issues of zoning, since many people may not have bought a home or a condominium in the anticipation of living next to a hotel. In cities that have rent controls, renting out rooms or whole apartments at unregulated prices though Airbnb can be an effective way to evade these controls.
Of course, many of these regulations may have outlived their purpose – if they ever had one. Industries often seek regulation as a form of protection. The regulations can impose barriers to entry, limiting competition in a sector. This is almost certainly the case with the taxi industry in most cities in the United States.
If these services force governments to re-examine regulations and ensure that they are appropriate to the economy as it is now structured, they will have done a useful service. But whatever regulatory structure we leave in place, it is important that it applies uniformly across providers. It doesn’t make sense to say that Uber taxis don’t have to meet the same insurance or safety standards because people order them over the web. Nor can it make sense to say that rooms rented through Airbnb are not subject to the same safety and zoning restrictions as rooms rented through more traditional channels.
The risk of dual regulatory structures is very real. Jeff Bezos, the founder and chief executive of Amazon, has managed to make himself one of the richest people in the world precisely by taking advantage of such disparities in regulation. In most states in the United States, retailers are required to collect sales tax on the items they sell. Amazon took advantage of a loophole in the law which allowed mail order outlets to avoid collecting tax on the items they shipped into a state.
Whether or not the exemption was justified for mail order outlets, lawmakers did not take much interest since they never comprised a large share of total retail sales. However Amazon is now one of the largest retailers in the world and the exemption from having to collect sales tax has made a huge difference. For its first 18 years of existence Amazon has been just marginally profitable, with the company still losing money in many quarters. The tax savings that Amazon has been able to split with its customers swamps its aggregate profits. If Amazon paid the same tax as the retail stores with whom it competes, it would at least be a much smaller company, if it managed to survive at all.
If Uber, Airbnb, and the rest provide important improvements over their older competitors they should be able to gain market share even when subject to the same regulation. If their sole advantage stems from avoiding the regulations imposed on competitors then they really don’t have much to offer. It is not a good state of the world when we tell entrepreneurs that the best way to get rich is to figure out how to evade the law.
Dean Baker is co-director of the Center for Economic and Policy Research in Washington D.C.