October 16th, 2017


Robbing Uber to subsidize the taxi industry

Megan McArdle

By Megan McArdle Bloomberg View

Published August 25, 2016

The Closing of the American Mouth

Ronald Reagan famously summed up the logic of government thusly: "If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

Uber and Lyft move, so naturally, the state of Massachusetts wants to tax them. And since taxis aren't moving nearly as much as they used to, the state wants to hand about a quarter of the tax -- five cents out of a 20-cent per-ride levy -- to the taxi industry.

This is a shamelessly unjustifiable giveaway to a special interest, paid for by taxing a competitor that's eating their lunch. If our 19th-century forbears had tried to run the economy this way, I would be writing out this column longhand, by the light of a whale-oil lamp.

Now, to be sure, a fee of 20 cents is probably not going to put Uber and Lyft out of business. On the other hand, such fees have a way of metastasizing over time. They start out as a tiny fee that no one could possibly object to, and then, when no one's looking, they're raised a little bit. And then a little bit more. And then you eventually find they're hefty enough to make the new service expensive and inefficient -- as expensive and inefficient as the old service that it replaced.

This, to me, is one of the underdiscussed risks to Uber and Lyft, or at least the more outlandish claims made by people who think that the sharing economy is going to revolutionize the way we live. At the moment they're operating in a sort of regulatory dead zone. "Neither fish nor fowl nor good red herring," they don't quite fit neatly into any of the existing regulatory categories, which means that they can often elude the onerous regulatory requirements and taxes that make existing services so expensive.

The problem is that there's a reason for all those regulations. I'm not saying those reasons are good, mind you; I think a lot of them are quite irrational. But there are political reasons if not economic reasons, and I see little evidence that this political logic has changed simply because we all now have smartphones.

After all, many heavily regulated services were once young, and enjoyed all the boundless freedom and possibility that characterizes youth everywhere. Over decades, however, regulators brought them to heel -- not all at once, but with a slow and steady accretion of taxes and rules that limited how much they could charge, who they could serve, how they could pay the people who worked for them, and so forth. Every one of these was imposed by elected politicians in response to some perceived problem. The solutions might not have been good ones, but the most important thing for a politician is not that proposals actually solve problems, but that they be perceived as doing so by the voting public.

Consumers, of course, complain about the end result: Heavily regulations make it hard for new entrants to get into a market, allowing protected incumbents to charge high prices, give you stuff you don't want, and maybe not be so attentive to quality. And yet, we should not simply cast regulators as the bad guys, colluding with special interests to rip off the consumer. Often consumers, in their role as voters, demand the very conditions that allow companies to keep ripping them off.

I mean, sure, they hate the local cable monopoly, but they will bitterly complain if the city council allows any Tom, Dick or Harry who wants to sell them cable service to spend two years ripping up all the streets in their neighborhood. They hate expensive, dirty cabs, but they get mad about excess traffic, and the first time someone is killed by a taxi driver, they will demand tougher licensing and background checks, whether or not there's evidence that this would have prevented the death in question, and whether or not they would really prefer to pay more for every ride in order to be 0.00001 percent safer from extremely rare events. They loathe the cost of hotel rooms, but they don't want their neighbors to be allowed to run a rooming house or a bed and breakfast next door, for fear that this will "ruin the character of the neighborhood."

Over time, consumer/voters are the ultimate engine of the regulatory cycle that begins with a fledgling startup and ends with a behemoth utility that treats you like dirt if you manage to get someone to take your phone call. And of course, over time, companies learn to like it. At some point, they're already so heavily regulated that the regulations themselves become a form of competitive advantage: The existing dominant players know how to negotiate that sea of red tape, and new incumbents don't have good charts. Sometimes these upstarts encourage consumer calls for more regulation, and consumers oblige.

As I've suggested, this cycle does not necessarily end in the death of the new sharing services; on the contrary, I think Uber and Lyft probably are more likely to survive and prosper if they can get themselves into position as heavily regulated incumbents. But it does mean the death of the idea of the sharing economy as some revolutionary force that is going to provide us an endless supply of formerly luxury goods (hotel rooms, chauffeured rides) at bargain-basement prices. The sharing economy, at the moment, is being subsidized by two things: the lack of regulation, and a flood of venture capital. Neither of those is a permanent condition.

Thus, I suspect that the future of sharing is more likely to look like the past than the Future oft predicted by enthusiasts. History doesn't necessarily repeat itself, of course. But it tends to return to the same few thoughts over and over and over again, just like the humans who act it out.

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Megan McArdle is a Bloomberg View columnist who writes on economics, business and public policy. She is the author of "The Up Side of Down." McArdle previously wrote for Newsweek-the Daily Beast, the Atlantic and the Economist.