Tag Archives: Adam Thierer

Why regulations that require cabs to be painted the same color are counterproductive

A few weeks ago, my colleagues Chris Koopman, Adam Thierer and I filed a comment with the FTC on the sharing economy. The comment coincided with a workshop that the FTC held at which Adam was invited to speak. Our comment, our earlier paper (forthcoming in the Pepperdine Journal of Business Entrepreneurship and the Law), and a superb piece that Adam and Chris wrote with MA fellows Anne Hobson and Chris Kuiper, have been getting a fair amount of press attention, most of it positive.

I want to highlight one piece that seems to have misunderstood us. I highlight it not because I blame the author, but because I assume we must not have described our point well. Paul Goddin of MobilityLab writes:

Their argument seems valid, but an example they use is New York City’s rule that taxicabs be painted the same color. They argue this regulation is a barrier to entry, yet neglect to mention that Uber also requires its drivers to adhere with automobile standards (although these standards have been loosened recently). As of this article, Uber’s drivers must possess a late-model 2005 sedan (2000 in some cities, 2007-08 in others), with specific color and make restrictions for those who operate the company’s Black car service.

A rule that requires everyone in an industry to use the exact same equipment, branding and paint color is, I suppose, a barrier to entry. But that isn’t why we raised the issue. We raise it because—more importantly—it is a barrier to signaling quality.

It is a good thing that Uber and Lyft require their drivers to adhere to standards, just as it is a good thing that TGI Fridays and CocaCola set their own standards. Walk into a TGI Fridays anywhere in the world and you will encounter a familiar experience. That is because the company sets standards for its recipes, its decorations, its employee’s behavior, its uniforms, and much else. Similarly strict standards govern the way CocaCola is packaged, and marketed. Retailers that operate soda fountains are all supposed to combine the syrup and the carbonated water in the same way. If they don’t, they may find that CocaCola no longer wants to work with them.

These practices ensure quality. And they help overcome what would otherwise be a significant information asymmetry between the buyer and the seller. But notice that these signals only work because they are tied to the brands. Imagine what would happen if Chili’s, Outback Steakhouse, and Macaroni Grill were all required by law to adopt the same logos, the same decor, the same recipes, and the same uniforms as TGI Fridays. Customers would have no way of distinguishing between the brands, and therefore the companies would have little incentive to provide quality service in order to protect their reputations. Who cares about cooking a T Bone properly if the other guys are likely to get blamed for it?

So here in lies the problem with taxi regulations that require all cabs to offer the same sort of service, right down to the color of their cars: If every cab looks the same, no one cab company has an incentive to carefully guard its reputation.

The Sharing Economy and Consumer Protection

(It has been a busy few weeks and I haven’t had much time for blogging).

In early December, my colleagues Chris Koopman, Adam Thierer, and I published a piece on the sharing economy and consumer protection regulation. Here is a summary.

A few days later, I was on the Diane Rehm Show talking about the sharing economy with Alvaro Bedoya (@alvarombedoya) and Nancy Scola (@nancyscola). Alvaro is the executive director of the Center on Privacy and Technology at Georgetown University Law School and Nancy is a reporter covering the intersections of technology and public policy, politics, and governance for The Washington Post.

During the course of our conversation, Diane also spoke with Sunil Paul, the co-founder and CEO of Sidecar and with Donna Blythe-Shaw, the spokesperson for the Boston Taxi Drivers’ Association.

It was a great conversation and I very much enjoyed meeting Diane, Alvaro and Nancy.

You can listen to it here.

Also check out Adam’s comments on the sharing economy at a Congressional Internet Caucus Advisory Committee here.

The Sharing Economy

Over at the Tech Liberation Front, my colleague Adam Thierer has sketched out a few themes in the debate over the sharing economy. His discussion of leveling the regulatory playing field is particularly important. Here is my favorite part:

Alternative remedies exist: Accidents will always happen, of course. But insurance, contracts, product liability, and other legal remedies exist when things go wrong. The difference is that ex postremedies don’t discourage innovation and competition like ex ante regulation does. By trying to head off every hypothetical worst-case scenario, preemptive regulations actually discourage many best-case scenarios from ever coming about.

Adam asks for comments and additional reading suggestions. In that spirit, here are my own additional talking points on the issue:

  • Reviving dead capital: Something that Dan Rothschild has emphasized in a lot of his writings and that I’ve tried to stress when I can is that the “peer production economy” breathes life into otherwise dead capital. Cars, tools, apartments, planes, kitchens, and even dogs are now creating value for people when they otherwise would just be collecting dust (or fleas). This may help to explain the extraordinary value investors see in firms like Uber.
  • Exposing regulatory failure: Another—though not mutually-exclusive—view is that these new firms are making lots of money not because they are doing anything particularly revolutionary. Instead, they are doing well because they have found a way around traditional regulations which have rendered incumbent services truly abysmal and consumers are rewarding them for this. In this sense, Uber is profitable because it isn’t a cartelized taxi company. This is generally the view that Mike Munger expresses in his EconTalk with Russ Roberts. This is probably more applicable to Uber and Lyft than to AirBnB or 1000Tools.com since the ride-sharing firms compete with an industry that has obviously captured its regulator.
  • Transitional gains trap: The whole experience offers us an opportunity to illustrate one of Gordon Tullock’s most-valuable and least-appreciated points. When regulators contrive some artificial exclusivity, they allow incumbent firms to earn above-normal profits (rents). But often these firms are only able to earn above-normal profits for a time (a transitional period). That’s because eventually, the value of the rent is “capitalized” into whatever assets must be purchased in order to enter the industry. These assets may include taxi medallions, specially-outfitted cabs, well-connected lobbyists, or any other asset that is necessary to gain access to the exclusive club. This is important because it means that many of the current incumbents had to pay large sums of money for their exclusive position and, net of these payments, they really aren’t cleaning up. Just as Adam is right to say that “regulatory asymmetry is real” we should also acknowledge that, in many cases, taxi regulations that started out as privileges are now more like burdens.
  • Value is subjective: No two customers have the same values and interests. I may want the windows down on a hot day and you may want them up. It’s simply absurd to think that regulators could devise an objective quality-control checklist for firms to follow or that they could properly vet cab drivers better than consumers. Yet that is exactly the approach they’ve taken (see here for just how clumsy it’s been in VA). The customer rating systems are really revolutionary because they collapse these subjective, multidimensional quality scales down to one simple 5-point rating that captures a driver’s ability to tailor his or her services to the subjective needs of each customer. Your Uber ride begins with a conversation between you and your driver about what is important to you (music, temperature, windows, speed, route, etc.) and ends with a 1 to 5 rating. It’s as simple as that.
  • True competition is a discovery process: Regulations “lock in” the status quo technology (again, because they attempt to objectively state every possible quality that customers might care about). But this misses the whole point of competition. As Hayek taught us, true competition is about discovering things you never knew (and never knew you didn’t know), such as that customers like being able to order cars from their smartphones.
  • Empowering Diffuse Interests: Traditional public choice models predict that small, concentrated interests such as an incumbent taxi industry willtypically prevail in a political battle with a large, diffuse interest such as taxi customers. This time may be different though. Wherever it goes, the peer-production economy has quickly developed a large and happy base of tech-savvy customers. Since the firms themselves have tended to innovate without asking for permission, this has often meant that a city will have tens of thousands of loyal peer-production customers long before its regulators can say “cease and desist.” So in a number of places, we’ve seen regulators move to shut down the peer production economy, then we’ve seen customers protest en masse and regulators withdraw their proposals.
  • Safety: Uber and Lyft drivers carry no cash. Customers have an electronic record of the ride and their driver. Drivers have an electronic record of the customer. These simple solutions accomplish what reams of taxi regulations never could: they ensure that both the customer and the driver are as safe as possible.
  • Flexibility: Because they don’t work for the companies, Uber and Lyft drivers work when they want to. Most of them seem to report that this is one of the best features of the job.
  • Beware of Uber too!: As Milton Friedman put it, one must be careful to distinguish being “pro-free enterprise” from being “pro-business.” The goal here is not to allow Uber to be profitable but to allow competition which will enhance the customer experience. We have already seen that when given the chance, Uber—like most firms—will take an exclusive privilege when one is offered. We must be very careful that Uber isn’t let inside the regulatory velvet rope only to put it back up behind them.

Embrace Change

Kaiserin_Maria_Theresia_(HRR)Whenever someone suggested a new innovation or an improvement, Empress Maria Theresa had a favorite response: “Leave everything as it is.” As the sovereign of most of central Europe during the 18th Century, the Habsburg Empress epitomized absolutist rule, claiming that her powers had no limit.

But as her statement demonstrates, she clearly understood that her powers were limited by new and disruptive innovations. Her husband, Holy Roman Emperor Francis I understood this as well. Daron Acemoglu and James Robinson relate that when an English philanthropist suggested some social reforms for the benefit of Austria’s poorest, one of Francis’s assistants replied: “We do not desire at all that the great masses shall become well off and independent….How could we otherwise rule over them?” (A&R, 224).

This is why these Habsburg rulers did everything they could to stand athwart innovation. As Acemoglu and Robinson put it:

In addition to serfdom, which completely blocked the emergence of a labor market and removed the economic incentives or initiative from the mass of the rural population, Habsburg absolutism thrived on monopolies and other restrictions on trade. The urban economy was dominated by guilds, which restricted entry into professions. (A&R, 224).

Francis went so far as to block new technologies. For instance, he banned the adoption of new industrial machinery until 1811. He also refused to permit the building of steam railroads. Acemoglu and Robinson inform us that:

[T]he first railway built in the empire had to use horse-drawn carriages. The line…was built with gradients and corners, which meant that it was impossible subsequently to convert it to steam engines. So it continued with horse power until the 1860s. (A&R, 226).

Unfortunately, history is replete with examples of despots who stood in the way of innovation. In Russia, Nicholas I enacted laws restricting the number of factories and “forbade the opening of any new cotton or woolen spinning mills and iron foundries.” (A&R, 229). And in the Ottoman Empire, sultans banned the use of printing. So stultifying was the effect that “well into the second half of the nineteenth century, book production in the Ottoman Empire was still primarily undertaken by scribes hand-copying existing books.” (A&R, 214).

The centuries and the miles that separate us from these episodes give us some objectivity and allow us to see them for what they are: the naked exercise of government force to obstruct innovation for the benefit of a few entrenched interests. But how different are these episodes, really, from the stories we read in today’s newspapers? Are they all that different from New Jersey’s refusal to allow car companies to sell directly to consumers? Are they any less silly than the anti-Uber laws cooked up by a dozen U.S. cities? We like to think that our own political process is more enlightened but right now, federal, state and city policy makers are working to block the development of promising innovations such as wearable technologies, 3D printing, smart cars, and autonomous vehicles.

book-cover-smallFor a thoughtful and forceful discussion of what might be called the anti-Maria Theresa view, everyone should read Permissionless Innovation by my colleague Adam Thierer. It is a well-researched and well-argued defense of the proposition that our default policy should be “innovation allowed.” You can find Kindle and paperback versions on Amazon. Or you can check out the free PDF version at the Mercatus Center. For a nice overview of his book, see Adam’s post (and video) here. Please read it and send (free) copies to any modern-day Maria Theresas you may know.

The Precautionary Principle vs. Glow in the Dark Plants

http://www.thecroodsmovie.com

In “The Croods,” a box office hit cartoon showing a family of cavemen, the father issues daily warnings to his family that everything new is bad. He explains to his inquisitive daughter that they have survived for so long in their dangerous world by doing exactly the same thing every day and eschewing innovation. In our times, we would call his approach “the precautionary principle.”

The precautionary principle was on display when environmental activists petitioned a startup fundraiser Kickstarter to shut down the Glowing Plant Project, calling it “a new biotech threat coming from Silicon Valley.”  As its name suggests, the project aims to create plants that will glow in the dark using synthetic biology. And while the idea may sound like a fad, it may have practical applications, e.g. living streetlights that would use their own energy to illuminate our cities.

Under pressure, Kickstarter amended its rules to ban startups from rewarding their donors with genetically modified products. The environmental activists further called on the regulators to subject similar projects to independent risk assessments. So far various agencies claimed that the issue is outside their jurisdiction.

The idea of making organisms glow is not new. A few years ago, FDA certified that there was no evidence that the Glofish, produced using similar technology, “pose any more threat to the environment than their unmodified counterparts.” But this will hardly satisfy the environmental groups who believe synthetic biology poses a major threat to conservation and sustainability of biological diversity.

There is logic to the precautionary principle. Innovation can and often does bring new risks. There were no driving related fatalities before the invention of cars and certainly fewer greenhouse gas emissions. And it would take a lightening strike to get a fatal electric shock before the invention of powerful electricity generators. Cars, electricity, vaccines and many other innovations came with substantial risks. But just imagine how riskier and poorer the world would be if we had used a precautionary principle to stifle innovation in those technologies.

My colleague Adam Thierer writes in his recent law review article:

New technologies help society address problems that are associated with older technologies and practices, but also carry risks of their own. A new drug, for example, might cure an old malady while also having side effects. We accept such risks because they typically pale in comparison with the diseases new medicines help to cure. While every technology, new or old, has some risks associated with it, new technologies almost always make us safer, healthier, and smarter, because through constant experimentation we discover better ways of doing things.

He further notes:

The precautionary principle destroys social and economic dynamism. It stifles experimentation and the resulting opportunities for learning and innovation. While some steps to anticipate or to control unforeseen circumstances and “to plan for the worse” are sensible, going overboard with precaution forecloses opportunities and experiences that offer valuable lessons for individuals and society.

So take it from the Croods – if we didn’t take risks and innovate, we’d still be living in caves.

When Politicians Encourage Rent Seeking

In the second appendix to the Pathology of Privilege, I list a number of questions for further research. One question is:

Do governments pass out privileges because firms have developed ties with political decision makers? Or do firms get close with political decision makers because they are passing out favors?

My colleague Adam Thierer recently uncovered a remarkable example of politicians encouraging firms to get close with decision makers so that they might hand out favors:

I was flipping through the latest copy of “The RCA Voice” which is the quarterly newsletter of what used to be called the Rural Cellular Association, but now just goes by RCA. RCA represents rural wireless carriers who, among other things, would like increased government subsidies for–you guessed it–rural wireless services. Their latest newsletter includes an interview with Rep. Don Young (R-AK) who was applauded by RCA for launching the Congressional Universal Service Fund Caucus, whose members basically want to steer even more money into the USF system (and their congressional districts). Here’s the relevant part of the Q&A with Rep. Young:

RCA VOICE: “How important is it for carriers serving rural areas to be engaged with their members of Congress on USF issues?”

REP. DON YOUNG (R-AK): “The more carriers engage with both their Representatives and Senators, the better. While the early bird may get the worm, the bird that doesn’t even try definitely won’t get any worms. The same applies to Congress.”

In Adam’s words,you gotta admire chutzpah like that! It pretty much perfectly sums up why universal service has always been a textbook case study of public choice dynamics in action.”

 

How Receptive is the “Left” to Public Choice Arguments About Cronyism?

Arnold Kling writes about our new project on cronyism:

You can think of the project as having two goals. One goal would be to clarify for conservatives the distinction between being pro-market and being pro-business. I think that some progress toward this goal is possible.

The other goal would be to persuade liberals that deregulation can be a way to reduce the power of big business. On that goal, I am much less optimistic. You can talk all day about regulatory capture and how big government serves entrenched interests. And what the liberals will come back to you with is, “Yes, that is why we need campaign finance reform and to elect politicians who believe in stronger regulation.”….

I picture liberals as having an unshakable belief in the power of moral authority. That is, if you exert enough moral authority, you can overcome any problem. Or, to put it in negative terms, if any problem exists, it is because not enough moral authority has been exerted to try and solve it.

A post by Matt Yglesias from last October would seem to support Arnold’s claim that liberals are unlikely to be persuaded:

The observation that malgovernment is a major source of human ills is quite correct, but embracing fatalism about it only exacerbates the problem. What’s needed are efforts to push societies in the direction of taking honor and civic obligation more seriously, not less so. You want politicians and civil servants to feel worse, not better about behaving cynically.

Call me naive, but I still think that some liberals are open-minded enough to be receptive to the public choice view. Why? Because many liberals don’t apply moral-authority arguments when they talk about conventional economic problems. There, like others, they think about incentives.

When a liberal (or at least a liberal economist) sees a tragedy of the commons, he doesn’t waste his time begging fishermen to pretty please stop overfishing. Instead, he plans accordingly. He thinks about the incentives that these fishermen face and comes up with solutions (for example, Pigouvian taxes or the assignment of property rights). As I wrote back in October:

The idea is much the same with public choice. Armed with empirical and theoretical reasons to think that politicians might do bad things, we should plan accordingly by placing some things—such as the establishment of religion—beyond the reach of politicians. I suppose we could ask Congress to pretty please not establish a religion but in my view it is better to make it illegal for them to do so.

James Buchanan, Gordon Tullock, and the other founders of Public Choice and its close-cousin Constitutional Political Economy didn’t stop their analysis after they found that politicians sometimes behave badly. Like James Madison before them, they thought of constructive ways to make political actors behave better, sometimes by placing certain decisions beyond their reach.

There is nothing fatalistic about that.

When it comes to government-granted privileges to entrenched interests, we shouldn’t wring our hands and beg governments to pretty-please stop pandering to the wealthy and well-connected.  We should plan accordingly. We should think of the incentives of politicians and come up with institutional solutions (for example, by forbidding politicians from handing out particular favors to particular firms or industries). If there are liberals who understand the power of incentives when it comes to microeconomics, I believe there are liberals who will understand the power of incentives when it comes to special interest politics.

There’s one more reason to be optimistic. My colleague Adam Thierer has assembled an interesting compendium of expert opinions on regulatory capture. The quotes show experts interested in grappling with incentives, not lecturing on the basis of moral authority. It is telling how many of the experts are more-naturally categorized as left-of-center than right-of-center.

———————

Update: Arnold Kling responds here.

Why Would Light Bulb Manufacturers Want to Be Regulated?

Image courtesy of "posterize"

NPR’s Peter Overby had an interesting (pre-holiday) story on recently-passed legislation to save the incandescent light bulb. In Robert Siegel’s intro he tells us:

Last weekend, Congress passed a trillion-dollar budget bill. Among its provisions, plenty of things not related to spending. One of these so-called riders is aimed at saving the hundred-watt incandescent light bulb. But as NPR’s Peter Overby tells us, the move by Republicans is more about politics than light bulbs.

Here is Overby:

Old-fashioned incandescent bulbs waste a lot of energy. So under federal law, they’re being slowly phased out. And the first to go, starting on New Year’s Day, is that old reliable of home lighting: the 100-watt bulb. But what looked like energy efficiency when President George W. Bush signed to law four years ago now looks like oppressive big government to many conservatives.

So the conservatives made sure that the spending bill had a rider which says the Energy Department cannot spend money to enforce the phase out of the 100-watt bulb. Here is where things get interesting. Overby went and talked to industry representatives and found that few if any actually wanted to repeal the ban:

But from the perspective of the lighting industry, this rider is several years too late to make a difference, and they don’t want Congress changing things now….

companies long ago started changing their product lines from traditional incandescents to halogens, compact fluorescents and LEDs.

The National Electrical Manufacturers Association’s Joseph Higbee tells Overby:

Delaying enforcement undermines those investments and creates regulatory uncertainty.

So far, so interesting. The companies being regulated actually want the regulation and getting rid of it would create uncertainty. So, “the move by Republicans is more about politics than light bulbs.”

But is this really the whole story? I think it would be natural to ask just a few more questions. If the ban were lifted, nothing would keep the companies from making the newfangled bulbs anyway, right? So why in the world would a firm favor legislation that limits its options? Why would it expend scarce resources lobbying Congress to keep the ban? Overby says that they “spent months giving show-and-tell demonstrations to lawmakers.” That must have taken up a fair amount of company time. But why do it?

My guess is that it has less to do with the firms wanting to limit their own options and more to do with them wanting to limit the options of would-be competitors who haven’t made investments in the newer technologies. They must worry that there is still a market for the older bulbs and they’d prefer that other firms be forbidden from serving that market.

Economists will recognize this as a simple story of regulatory capture. As Barry Mitnick put it in his classic study, The Political Economy of Regulation:

Much relatively recent research has argued that regulation was often sought by industries for their own protection, rather than being imposed in some ‘public interest.’ Although the distinction is not always made clear in this recent literature, we may add that regulation which is not directly sought at the outset is generally ‘captured’ later on so it behaves with consistency to the industry’s major interests, or at least has been observed to behave in this manner.

When I used to teach capture theory to my students, I’d often encounter incredulity. It sounds like formalized conspiracy theory. Are we
really supposed to believe that all regulations come about because industries have somehow greased the palms of politicians? Well, no. Sometimes it’s that obvious. But often, it is subtler.

As the light bulb story illustrates, some regulations come about because some politician has some well-meaning belief that the regulation will improve lives. But once the regulation is on the books, it tends to favor incumbent firms. So even if it proves to be inefficient, the incumbent firms are willing to exert a great deal of pressure to keep it there lest the market be opened up to others with different business models.

For a helpful and enlightening compendium of observations about capture, see this post by my colleague, Adam Thierer. It is interesting to note that progressive thinkers have often been the first to uncover these stories.