The gig economy could defy regulation

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Austin, Texas, has been taking a lot of heat after passing a proposition that essentially regulated Uber, Lyft and other ridesharing companies out of town. This is unfortunate for many of the city’s residents, as well as for those who had hoped to make money as full- or part-time drivers.

Facing the inevitable future of the sharing economy, Austinites behaved like the spoiled child who, when not getting his way, presses his palms to his ears and starts screaming “la, la, la” at the top of his voice.

In the weeks since the vote, buyer’s remorse has set in. The city government, rushing to close the barn door after the proverbial equine escape, has started talking about a wholesale revamp of local taxi regulations to spark more competition. As a political sop to the hundreds of Austin Uber and Lyft drivers now without means of income, the city held a job fair. The biggest draws were other rideshare companies.

Meanwhile, in a portentous development, Austin residents and former Uber drivers are turning to sites like eBay and Craigslist to connect. Residents are conducting peer-to-peer transactions without a platform in the middle.

That Austin’s ridesharing services can continue despite attempts to suppress it exposes the elemental flaw in the approach that governments, from local up to the federal level, are taking to the so-called “gig economy.” Even in cities where Uber is operating, regulators treat it as a taxi company. In reality, Uber, Airbnb, TaskRabbit and others like them are brokers, connecting suppliers with customers.

For a visual model, consider an hourglass: individual consumers and suppliers at each end, with a common platform at the bottleneck that connects them. As long as that identifiable point of connection exists, governments can create a framework for regulation and enforce compliance. In Uber’s case, regulators have essentially set down rules the company must use to qualify drivers—background checks, vehicle inspections, license and so on. This model works as long as Uber remains the tangible third-party link between drivers and passengers.

Yet this hourglass model may be transitory. As Austin is learning, regulating Uber out of the market did not end ridesharing services. It just drove them underground or, at least, under the radar, as buyers and sellers turned to other means. Now, eBay and Craigslist may be cumbersome for ridesharing, but they serve as a harbinger for the next stage of the gig economy—direct peer-to-peer transactions.

Blockchain, waiting in the wings, stands to be a major disruptor. The platform, dubbed “the trust protocol” by authors Don and Alex Tapscott, is currently the verification tool used in bitcoin transactions. But its utility extends well beyond cryptocurrency.

Simply explained, blockchain allows for trusted, verifiable, yet fully encrypted electronic transactions to occur between two parties without the participation of a third party, such as a bank, to verify both ends. With no third party, government loses it regulatory pressure point. Once individual consumers adopt applications that use blockchain to verify the validity of their vendors, and vendors use blockchain to verify the validity of a funds transfer, gig economy services will prove extremely difficult to regulate without cracking down significantly on individual freedom to enter voluntary transactions.

Given the calls for gig-economy regulation, which have been heard at the local level up to Democratic presidential candidate Hillary Clinton, I’m not sure how much lawmakers appreciate the enforcement challenge. How far will cities and towns be willing to go to halt economic activity between citizens using their own property and resources? Moreover, the traditional “public goods” arguments used to justify regulation of gig-economy services are falling flat. Instead, much of the public sees such regulation—rightly—as attempts to protect politically connected taxi cartels or big hotel chains and the local tax revenues they provide.

In the past year, several cities in California – including San Francisco, San Diego and Santa Monica – have passed laws against short-term rentals in an effort to crack down on spacesharing. But enforcement has been spotty. Based on news coverage (here, here and here), police and city inspectors seem to rely on the old East German Stasi model—neighbors willing to inform on a host. In other cases, city personnel are spending hours of work time sifting through thousands of Airbnb and VRBO listings to try to identify local violators (listings generally hide addresses), or going door-to-door to look for lockboxes and other signs that a home is being sublet.

Santa Monica claims it spent only $190,000 enforcing its anti-Airbnb ordinance since it went into effect last June, but other estimates place the cost as high as $410,000. Aside from the expenditure of limited taxpayer resources on such work, I want to believe that most police officers and city inspectors, rather than harassing retired schoolteachers, would rather spend their time catching criminals or investigating code violations that actually pose a danger.

The gig economy is indeed changing the nature of work and the way people monetize their talents and resources. Regulation, by definition, limits freedom. It’s easy to get behind it when the target is a faceless corporation. It becomes more difficult to support when it deprives you, your friends, neighbors and fellow constituents of a legitimate means to make a living. Governments, from the city council to Congress, should be careful as to how intrusive they allow enforcement can become.

Over the long term, regulation of the gig economy may not be possible. Worse, it may end up snatching digital-economy opportunities from the very people displaced from the former industrial economy. Economic activities—be they ridesharing, spacesharing or housecleaning—that are legal in the brick-and-mortar world will be driven underground. This would create lawbreakers and scofflaws out of honest citizens. It will be a high price to pay to assuage a subset of lawmakers who are uncomfortable with the gig-economy disruption.

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