Tag Archives: VA

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.

Small steps in VA occupational licensing reform

On July 1, hair braiding in Virginia will be deregulated. People will be free to braid hair without any license from the state saying that they are qualified to do so. The final requirements will be lifted after a 2004 move which reduced the requirement for hair braiders from a 1,500-hour course required of other cosmetologists to a 170-hour course.

The policy change came on the recommendation of the Governor’s Commission on Government Reform and Restructuring, which also recommended deregulation of landscape architecture, interior design, polygraph administrators, and mold inspectors, but only the recommendation with respect to hair braiding was adopted.

In Utah, however, hair braiders still face a much higher occupational hurdle. The Institute for Justice is suing the state in the U.S. District Court for requiring a 2000-hour cosmetology course for anyone who wants to braid hair in the state. As IJ explains:

Jestina Clayton, a college graduate, wife, mother of two and refugee from Sierra Leone’s civil war has been braiding hair for most of her life.  Now she wants to use her considerable skills to help provide for her family while her husband finishes his education.  But the state of Utah says she may not be paid to braid unless she first spends thousands of dollars on 2,000 hours of government-mandated cosmetology training—not one hour of which actually teaches her how to braid hair.  In the same number of class hours, a person also could qualify to be an armed security guard, mortgage loan originator, real estate sales agent, EMT and lawyer—combined.  Such arbitrary and excessive government-imposed licensing on such an ordinary, safe and uncomplicated practice as hairbraiding is not only outrageous, it is unconstitutional.

Unsurprisingly, cosmetologists favor keeping the law in place to protect their own investment and to restrict their potential competition. The case represents the absurdity of occupational licensing requirements and their detrimental impact on economic growth. However, the requirements that remain after streamlining efforts in Virginia beg the question of why we need licensing for just about any profession. Every exchange carries a risk that the consumer will be disappointed with her purchase, but by stifling competition we hurt consumers rather than helping them.

Occupational licensing requirements seem to be designed behind the idea that sub-par businesses are out to get their consumers. This is exactly the type of business that competition, rather than regulation, successfully eliminates. Selling consumers a poor service one time is not a winning business model, and online review services like Yelp are making it less and less possible to stay in business without providing a service that consumers love.

The case could be made that consumers can suffer irreparable damage from poor services, such as contracting an infection from an unsanitary manicure (though this type of risk seems unlikely in hairbraiding or interior design). Even so, the correct policy angle to take isn’t whether consumers would be harmed in a perfect world, but whether or not government does a better job eliminating this harm than competition and consumer choice among salons. Furthermore, without occupational licensing, consumers have legal recourse to sue in cases of damages, acting as an additional incentive for businesses to provide quality services.

In all but the most extreme cases, it’s clear that occupational licensing makes consumers worse off and limits job growth and economic productivity for the benefit of limiting competition for existing firms. Virginia offers a successful model of standing up to vested interests in favor of market competition but still has much room for improvement.

Fiscal Tactics and the Columbia Pike Trolley

The Columbia Pike Trolley does not have a reputation for popularity among some local residents of Arlington County, VA. In a previous post, I noted the concerns voiced on local blogs and community boards that the $261 million trolley is several times more expensive than the alternatives. In addition, it is feared the trolley will not relieve congestion but will interrupt spontaneous economic development. The Green Party calls it, “the urban renewal trolley for the rich.” Part of the economic development plan involves demolishing older apartment buildings, raising rents.

How will officials try to finance the streetcar?  The plan requires the majority of funds come from local sources (seed money is being provided by a federal program). One possibility is they will dodge voter approval by raising revenue bonds instead of general obligation bonds (GO bonds). The reason is that in order to issue GO debt (which is backed by the full faith and credit of the government), the County would need to put the bond issue on the ballot. But they are worried about voters rejecting it. Revenue bonds don’t require voter approval since they are backed by an independent revenue stream; in this case, future revenues from the government’s surcharge on commercial real estate.

Locals may not have their chance to approve or reject the project, however. The Arlington Sun Gazettte reports that according to Virginia law Arlington as a county – not a city – government, “does not have the power to have a referendum on a topic or subject matter, like cities [do].” The decision to move forward or stop the project thus rests with the County Board.

Map of proposed Columbia Pike streetcar system

The plan is an example of what I define as “fiscal evasion.” These are maneuvers governments employ to defer or obscure the full costs of spending by evading rules or constructing loopholes. Not to be confused with venal gimmicks, fiscal evasion is often built into the rules. It is undertaken by, “circumventing statutory or constitutional budget rules, or through the weak design of such rules.”  In other words this approach is perfectly legal. Since revenue bonds don’t need voter approval revenue bonds present the “funding path of least resistance,” from the viewpoint of trolley advocates.



Welcome Ben Vanmetre

Neighborhood Effects readers may have noticed a new author has joined us. Ben Vanmetre has already contributed a couple of excellent posts. Ben is a Mercatus MA fellow. Like many fellows, he has already developed an impressive CV in his nascent career. You can read Ben’s published papers, book reviews, and OpEds at his personal website. And you can learn more about the Mercatus Masters or Ph.D. programs at the Mercatus Graduate Student Programs website.

Note to readers: Ben joined us at an opportune time as I spent much of last week in the picturesque mountains of New Mexico not blogging (and, unfortunately, not catching any fish). I should be resuming my regular pace as soon as I adjust to the lack of sunshine in Arlington, VA.

Assorted Links

Evidence from Germany: When the federal government bails out state governments, unsound fiscal policies emerge.

Tax Less but Spend More in Millburn, N.J. “Taxes have grown with people’s expectations of what local government should provide.” (The average homeowner pays $18,195 in property taxes.)

“No revenues left to share.” Rhode Island likely to cut funds to local governments again.

Against the tide: Atlantic City to expand outlet mall, “The Walk” with a $9 million loan from the Casino Reinvestment Development Authority.

Tax District forming  in NOVA to extend DC Metro to Dulles Airport; Fairfax, VA will pitch in $90 million.