David R. Henderson  

Is the Sharing Economy a Rip-Off?

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Don't buy Dean Baker's hype

The "sharing economy" - typified by companies like Airbnb or Uber, both of which now have market capitalizations in the billions - is the latest fashion craze among business writers. But in their exuberance over the next big thing, many boosters have overlooked the reality that this new business model is largely based on evading regulations and breaking the law.

This is from Dean Baker, "Don't buy the 'sharing economy' hype: Airbnb and Uber are facilitating rip-offs," The Guardian, May 27.

Dean is too good an economist to miss the fact that the sharing economy creates huge value. He writes:

The good thing about the sharing economy is that it facilitates the use of underutilized resources. There are millions of people with houses or apartments that have rooms sitting empty, and Airbnb allows them to profit from these empty rooms while allowing guests a place to stay at prices that are often far less than those charged by hotels. Uber offers prices that are competitive with standard taxi prices and their drivers are often much quicker and more reliable - and its drivers can drive as much or as little as they like, without making a commitment to standard shifts. Other services allow for items to be used productively that would otherwise be gathering dust.

Exactly.

So what's his problem with the sharing economy? Dean argues that it allows people to evade hotel occupancy taxes and regulations on safety, taxes and regulations that regular hotels are subject to.

I will probably never persuade Dean that it's good that people can figure out a way to evade taxes. So I won't try.

It's the regulation part of his argument that is more troubling. His implicit assumption is that regulation is good. Yet he doesn't make that case. He writes:

Airbnb can also raise issues of safety for its customers and nuisance for hosts' neighbors. Hotels are regularly inspected to ensure that they are not fire traps and that they don't pose other risks for visitors. Airbnb hosts face no such inspections - and their neighbors in condo, co-ops or apartment buildings may think they have the right not to be living next door to a hotel (which is one reason that cities have zoning restrictions).

This is pretty weak reasoning. Let's separate his argument into two issues: (1) safety for customers, and (2) safety for neighbors.

(1) Users of these services are showing by their actions that they are willing to take the (I would bet small) risks in order to pay less and to have more options. Why does Dean Baker presume that he knows better than them? Moreover, he could make that same argument against my letting friends stay in my house when they visit the Monterey Peninsula. Yet I bet he wouldn't. But why not? Is my place safer than places rented by strangers to strangers?
Moreover, for a long time now, various players in the market have provided ways to help consumers protect themselves. See Daniel B. Klein, "Consumer Protection," in David R. Henderson, ed., The Concise Encyclopedia of Economics, Liberty Fund, 2008, for more. And see Daniel B. Klein, "The demand for and supply of assurance," in Tyler Cowen and Eric Crampton, Market Failure or Success: The New Debate, Independent Institute, 2002 for a lengthier version.
(2) On the safety for neighbors issue, Dean could have a legitimate claim. After all, there's a potential negative externality. But so also could the long-term residents impose negative externalities. So again, his reasoning is pretty unpersuasive.

Moreover, let's grant that evading taxes and avoiding regulation are two motives for the sharing economy. He still goes too far when he writes:

Insofar as Airbnb is allowing people to evade taxes and regulations, the company is not a net plus to the economy and society - it is simply facilitating a bunch of rip-offs.

He has no basis for this conclusion. Both of these complaints could be valid and Airbnb could still be, as I bet it is, a net plus. For why, see the second paragraph of his that I quoted.

HT: Mark Thoma

By the way, here's a review I did in 2010 of Dean's book, Taking Economics Seriously.


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COMMENTS (27 to date)
Scott Young writes:

The average voter doesn't understand the economics behind regulations. They don't understand industry capture, they don't understand market pricing or the deadweight loss such regulations can impose.

Instead, they're pushed narratives. "We need regulations to prevent [insert evil/greedy party] harming us."

This narrative is harder to uphold against the underdog startup, whom we all like to love in their fight against the big incumbent. AirBnB, Tesla and Uber are all revealing the surprising inefficiencies of many of these laws to the average person who, previously, couldn't have cared less about their destructive economic consequences.

Pajser writes:

"Why does Dean Baker presume that he knows better than them?"

He applies the same criteria he applies on the hotels. If there is a need for inspections of the hotels, and private rooms provide same service, then that same need for inspection likely exists for private rooms.

Why there is a need for inspection of the hotels? Positive externalities of the safety. I guess that Egypt wants image of country which is clean and safe place for tourists. They do not want image "it is dangerous, but if you make your own research you can find cheap and safe hotel."

John B. writes:

Ok, so basically saying, it is better to depend on impersonal and overpriced services, just because it is necessary to pay taxes. If we drop the narrative about hotels or taxis, isn't sharing one of the most common ways how social contacts are established and maintained? Isn't it exactly the fact that everything is now viewed as a commodity to be the most perverted assumption in the human history? If we talk about the named companies, I do not trust them. But there are many more initiatives out there, web pages with people simply offering their services for free or for other service, that directly bypass the economic mantra of taxation and market exchange of goods. In the current situation, many of us are left behind without the means to buy or to have. It is only the community, not the state, who helps them survive their everyday life of struggle.

Nick writes:

Felix Salmon put it best:

I disrupt
You disintermediate
He's engaged in regulatory arbitrage

James writes:

Pajser,

You can only claim that the positive externalities justify hotel regulations if those regulations are adding value after accounting for the costs of those regulations. Neither you nor Baker has done that.

ThomasH writes:

The argument that a business model based on evading a tax or regulation can be profitable proves nothing one why or the other

The emergence of these "sharing" services are an opportunity to re-examine existing regulation and taxation of the legacy providers of existing services. Is there an argument for requiring drivers who charge for their services to be insured or whatever differently than those who do not? If so the regulation should apply to Uber, too. If not, it should not apply to taxis. Taxation of hotel rooms mutatis mutandis. Regulation based on cost benefit analysis is an issue on which liberals and libertarians should agree. That does not overcome status quo bias or opposition by vested interests, but at least it should clear things up conceptually.

S writes:

I am not the type to think that the consumer is king and that all regulation should exist to maximize the welfare of consumers. BUT, if you are going argue that regulation avoidance "rips off" consumers, then you should at least avoid examples where the sole purpose of the regulation in question is to rip off consumers.

Joe Teicher writes:

The notion that cool silicon valley startups should get to evade taxes and regulations just because seems short sighted to me. Now the hotels and taxis have to write down the value of the capital they put in to the businesses based on the assumption of a level playing field. That will also discourage further investment in those industries. Next, everyone else has to think about whether some new entrant into their industry will be able to get away with flouting the law and they have to modify their capital allocation strategies accordingly.

If the government decided to open a hotel chain that would not have to comply with any regulations or pay any taxes, would you applaud that? I don't see why it is better to let a private entity get away with the same thing.

Tom West writes:

Regulation based on cost benefit analysis is an issue on which liberals and libertarians should agree.

That depends. I suspect that the consumer basis for much regulation (besides regulatory capture) is the desire to not have to be responsible for one's own safety.

Personally, I like being able to assume that any store won't sell me unsafe food without having to check the reputation of the shop or the manufacturer.

When there's a large enough group of people who feel that way (along with some high profile incident), then we're likely to get a situation where freedom and choice are removed.

For the Libertarian who values choice, this is a net negative. For a consumer who values time and effort, this is a net positive.

Now one can argue effectiveness of regulation, etc. But assuming regulation *is* effective, depending on utility functions, you can come up with radically different answers from the same facts.

Also, I suspect AirBNB is in trouble the first time a murder that gets national attention occurs. Could it occur in a regular hotel? Of course. But regulation at least attempts to make people safer, and I think for most, intent matters perhaps even more than actual outcome.

Michael Stack writes:

Articles like Dean's are proof to me that humans have a deep-seated mistrust of markets.

For example, if I were to have my friends over for a dinner party, nobody would object. If instead I charged them $50 each, there would be folks insisting I need to be inspected for food safety. Of course in both cases there is absolutely NO difference. In fact if anything I have a bigger incentive to exercise good food safety if I'm making money from my dinner parties.

All of the arguments Dean makes (as David pointed out) apply equally well to somebody having guests over at their house, but as soon as we involve trade and *gasp* charging people, suddenly AirBnb is a big problem.

Dan W. writes:

I concur with Michael Stack. What makes this paranoia all the more interesting is it is far more extreme in the market for services than it is for the market for goods. Consider that eBay and Craigslist are generally lauded for creating opportunities for sellers to sell stuff to interested buyers. One man's junk is another man's treasure, so they say. But Craigslist has come under attack for selling "unregulated" services and the attacks are all the more vicious for the mentioned freelance room and shuttle businesses.

The facet of these service businesses I find most interesting is how little the supplier of the actual service earns, especially compared to capital gains collected by investors in the host business. The economic gains of network effects are real. But the financial gains derived from those economic gains seem to be based on an illusion. Perhaps this is a factor that justifies the mistrust.



Daublin writes:

Michael's dinner party example is a very good one. To follow on to it, does it change matters if everyone brings a dish or a bottle of liquor?

We ought to look at economic exchange as a way that people work together.

awp writes:

I allow my girlfriend to borrow my yard tools, and often do the labor for her for free. Is this a ripoff because she can avoid paying sales and payroll taxes, and I don't have to bonded and pay income taxes?

Tom West writes:

If I were to have my friends over for a dinner party, nobody would object. If instead I charged them $50 each, there would be folks insisting I need to be inspected for food safety.

Of course.

As a provider, in the first instance, all your incentives lie in providing safe food (at least if you're a good friend). In the second, there are incentives in both directions (going cheap means more profit), so people are suspicious.

As a customer, you spend a fair bit of time evaluating your friends. Most people wouldn't feel completely safe eating at a random person's house for free. However, they *do* expect to be able to eat at any commercial eatery without risk. They do not want to have to make a judgement call on food safety.

David R. Henderson writes:

@awp,
I allow my girlfriend to borrow my yard tools, and often do the labor for her for free. Is this a ripoff because she can avoid paying sales and payroll taxes, and I don't have to bonded and pay income taxes?
Good question, and I think Dean Baker would have to answer “yes.”
@Tom West,
Most people wouldn't feel completely safe eating at a random person's house for free. However, they *do* expect to be able to eat at any commercial eatery without risk. They do not want to have to make a judgement call on food safety.
Nothing I disagree with here. But note the implication: if “most people” don’t want to make a judgment call and if the market provides no ways of helping (which, as noted with my links to Klein, is highly doubtful), then “most people” won’t use this service. Problem solved.
And, by the way, as I’m sure you know, there’s always risk at a commercial eatery. Read George Orwell.

Yancey Ward writes:

Just wait until one of these "sharing economy" companies start impacting a major supporter of Republican politics- you will see Dean Baker reverse himself shamelessly.

Andrew writes:

If this had been my first exposure to Mr. Baker's writings, I would have suspected satire. Sadly, as I have stated previously, Mr. Baker is simply responding to the incentives and market available for his writings. You can see a similar evolution for Economist Krugman to Pundit Krugman.

J.D. writes:

"I will probably never persuade Dean that it's good that people can figure out a way to evade taxes."

I don't think this is what you are actually trying to say. Tax evasion is illegal. Tax avoidance/mitigation is perfectly legal. I think you meant the latter.

Legalize capitalistic acts between consenting adults, for the good of the poor!

On almost any day but Sunday, either Bolo or a crew of three or four other men are working under the hoods of cars, vans and trucks in the parking lot at 73rd and Bancroft avenues. Drivers buy the parts at the AutoZone, and for a few bucks get their oil tank topped off, fuses changed or taillight replaced.
For a few more bucks, a motorist can get a new water pump, a timing belt or an oil change. If things get really serious, motorists drive to a secluded spot where their cars can be jacked up for brake replacements or transmission work.
"I can do anything," says George, a man in his 40s who said he has been fixing cars on the black market for 14 years. "Change out heads, your alternator, fuel tanks."
The men consider themselves entrepreneurs, hustling to make ends meet in a part of Oakland where the unemployment rate for young people is roughly 35 percent.
But the city and neighbors see them as a nuisance.

Michael Stack writes:

@Tom West

You have a good point about competing incentives but as David mentioned, at the end of the day if customers aren't comfortable with the risks, they won't patronize the establishments that can't validate their food safety protocols. Also it's not just commercial cooks with competing incentives - people cooking for their friends have a myriad of incentives as well - trying to get food cooked quickly, not washing their hands as often because they are too busy, etc. The competing incentives thing works both ways. Empirically, food safety at most restaurants is very good.

Personal notes: I worked in food service when I was younger and I can tell you that restaurants are EXTREMELY paranoid about food safety issues. I guarantee the average fast food store prepares their food much more carefully than you do at home. Remember Jack in the Box? One store out of thousands did a bad job of managing food safety and all the stores paid the price. The costs of poorly managed food are extreme - the market punishes you swiftly (punishes perhaps even too hard).

Also my wife's 2 year-old niece died of e coli so I am pretty sensitive to food safety issues, but when I think of food safety, I am more comfortable eating at a restaurant than at a friend's house. I mention this not to shut down the debate via the victim card but to point out that yes, I'm aware of the risks and to me they are all too real.

Michael Stack writes:

@Dan W

You make a really intersting points about goods vs. services. It is interesting that Criagslist/Ebay/et al can sell goods on their site with no calls for regulation at all, but then as soon as services are for sale there is an uproar.

Capitalism is to the left like homosexuality is to the right - they don't like it, and can't come up with a cogent argument as to why it is bad, but they Just Know. Another reason I snort when I hear somebody on the left call the right 'anti-science'. I am reminded of this Mencken quote:

In a democracy, each party devotes its chief energies to trying to prove that the other party is unfit to rule — and both commonly succeed and are right.

Yup, and left/right are equally 'anti-science' (and equally 'pro-science'), just with different topics.

Ricardo writes:

@JD,

You might be surprised to learn that tax mitigation/avoidance is not always legal. A business decision action taken strictly to avoid taxes can be judged to lack economic substance and thus illegal. This doctrine was regulatory until 2010 when it was made part of the PPACA.

Dean Baker writes:

David,

I don't think we are that far apart on this one. I want a level playing field. If the hotels have to pay taxes, then people who lease their place through Airbnb should have to pay taxes. In terms of the safety regulations, they should be comparable. We may over-regulate hotels (don't know, but it is certainly possible), but if we feel fire standards are necessary for hotels, then why shouldn't it be for someone who rents out a room on a regular basis? (I'm willing to ignore the occasional one-night stands, which from data I've seen are the exception on Airbnb.)

Tom West writes:

I want a level playing field.

The trouble is that the costs of conformance to regulation are prohibitive to small (one room) operations.

I suspect that AirBnB could survive some regulation meant specifically for that sort of service, but (1) I suspect the incumbents will do their best to prevent it and (2) it would have to be fairly carefully worded to prevent the incumbents from restructuring themselves to fit those regulations.

Tom West writes:

@Michael Stack

I guarantee the average fast food store prepares their food much more carefully than you do at home.

I do recognize that, but (1) I think a fair bit of regulation is response to voter demand, so the fact that voters are distrustful leads to regulation and (2) I do think fear of regulation keeps a lot of smaller operations more significantly safer than they would otherwise be. Whether that outweighs the substantial cost of regulation is something I'm not qualified to answer, but I do know that the regulation makes me *feel* better, which, from a voting perspective is what really counts.

@David Henderson

if the market provides no ways of helping (noted with my links to Klein, is highly doubtful), then “most people” won’t use this service.

I think the market would certainly help - however, I think there's significant voter desire for there to be no way to make a mistake. There seems palpable outrage when someone is injured that a product was "allowed to be sold", even if warnings are given.

Of course, this is tempered by cultural norms, obvious inconvenience at the regulations, etc.

I think AirBnB and other sharing services aren't going to feel the same voter demand for regulation until such point as people start confusing them for their regulated counterparts.

Then comes the "how dare they allow a product to be sold that can injure people."

An interesting point is that services like this *may* lead to reduced regulation in the regulated counterparts by making voters aware of the cost of regulation (possibly a lot) and the relative increase in risk (possibly a little).

I have my doubts, but I think it's a possibility, and anything that allows people to weigh cost and benefit is always for the good.

Michael Stack writes:

@Dean Baker

Can you help me to understand why you feel the way you do? Consider 2 scenarios:

Scenario A: I have my friend over and he stays with me for a week in a spare bedroom.

Scenario B: I have a stranger over and rent a room to him for a week.

Why does scenario B require (or at least, benefit from) regulation, but scenario A does not? I'm of course assuming you feel that scenario A wouldn't benefit from regulation but maybe I shouldn't.

Thanks!

Mark Bahner writes:
...but if we feel fire standards are necessary for hotels, then why shouldn't it be for someone who rents out a room on a regular basis? (I'm willing to ignore the occasional one-night stands, which from data I've seen are the exception on Airbnb.)

There are so many reasons why hotels are not the same as homes, so that rules that apply to hotels shouldn't apply to homes. Just a few include:

1) Hotels often have many floors. It's possible to break out a window in a single story home, or even from the second floor of a two-story home, and jump out without dying. The same can't be said for a hotel room on the 3rd floor or higher...particularly if there is a parking lot below.

2) Even single-story hotels often have long hallways...so it's necessary to travel significant distances to doors to the outside.

3) Hotels are more likely to have heating/cooling units that are built into the wall of the room. These are potential sources of fires.

4) Almost all hotel rooms have TV sets...another potential source of fires. They may also have refrigerators, coffee-makers, and microwaves, also potential sources of fires.

In any case, fires in both hotels and homes are very rare sources of deaths, and are declining fairly rapidly:

U.S. fire death rates


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