This isn't the answer.

Photographer: Geoffroy Van der Hasselt/Anadolu/Getty Images

Don't Strangle Uber and Airbnb

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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If you traveled to Japan in the 2000s as I did, you remember how difficult and expensive it was to find a place that was both nice and cheap. Hotels were pricey and often booked. A multiweek stay involved moving from place to place, since few hotels were available for large blocks of time. Then a few years ago, something changed: Airbnb. Japanese homeowners and property management companies alike have been renting out their empty space at large and growing rates. Not only did Airbnb make travel to Japan much easier, it has given many normal Japanese people a much-needed boost to their income in an era of falling wages. Meanwhile, the explosion in subletting has helped accommodate the increase in the Japanese tourism industry, which will only grow as the 2020 Tokyo Olympics approaches.

But now Airbnb is under threat in Japan. New regulation by the Shinzo Abe administration threatens to kill most of the subletting website’s business in that country. The key provision would require that Airbnb not offer rentals for less than one week. That wouldn’t affect travelers like me who tend to stay for longer periods, but it would cut down a lot on usage of the service by many tourists, whose numbers are far larger.

There are some good reasons for this. When you buy a condo or rent an apartment, you’re not just paying for the space you occupy -- you’re also paying for the neighborhood. You expect to live around certain kinds of people, and you generally pay for the privilege. This kind of consumer behavior can be bad for society -- for example, it can help perpetuate racial segregation. But it can also make a lot of sense. For example, I might need peace and quiet for my insomnia or my work, and I might pay a premium to live in a sleepy, quiet apartment building.

Airbnb messes with this formula. My quiet, sleepy neighbors may sublet their rooms to a band of raucous tourists, and I have no way of knowing ahead of time whether they’ll do this. So I can never be certain I’m getting what I paid for. Many so-called gig economy companies have spillover effects like this. The ride-hailing service Uber, for example, might increase the number of cars on the roads, causing congestion and pollution.

So the Abe administration has some legitimate concerns about Airbnb. But more worrying is how the hotel industry played a major role in the push to regulate Airbnb. Hotels have a point that Airbnb represents unfair competition, since it is much less regulated. But the push by the hotel lobby underscores the strength of vested interests and their ability to squash new technologies through arm-twisting and favorable regulation.

The problem isn't limited to Japan. In New York City, it was also hotel industry lobbying that stymied Airbnb with a rule that would require minimum rentals of one month unless the owner is also present. Uber has been more successful in its battle against the taxi lobby, but other cities have been much more hostile.

This is a worrying trend. Smartphones and the Internet represent new technologies that often allow production to be efficient at much smaller scales -- instead of a few large hotel chains dominating the market, lots of little lodging providers can now compete effectively. In a way, it’s the opposite of what happened when Wal-Mart and other big chains destroyed small mom-and-pop retailers across the country. Now, technology gives an advantage to the little guy.

If regulators ban services such as Uber and Airbnb at the behest of powerful incumbent industries, it limits the degree to which new information technologies can contribute to productivity.  If we block the channels by which IT creates improvements in productivity, we will limit the degree to which it causes the same kind of growth as earlier technological revolutions.

That doesn’t mean we should leave services like Airbnb and Uber unregulated, of course. The problems -- externalities, asymmetric information, moral hazard and all the other reasons that markets break down -- are still present. Uber’s internal driver ratings are not enough to protect customers from criminal drivers, who only need to strike once to have a devastating impact. Airbnb’s renter ratings system won’t prevent noisy tourists from disturbing the insomniac next door.

Instead, what we need is for regulation to work with “gig economy” services in order to make them sustainable industries. Yasuyuki Tanabe, the head of Airbnb in Japan, puts it well when he says that “Rather than…hotel laws, we’d like to think about creating a new rule from scratch that applies to platforms like Airbnb.” Old regulation evolved to meet the needs of the day -- it allowed taxis and hotels, which were both technological innovations at one time, to operate without hurting customers or ruining neighborhoods.

Airbnb and Uber might serve the same market as hotels and taxis, but they are fundamentally new technologies and need regulations to match. For example, Japan might make a law mandating that tenants of an apartment complex be notified when Airbnb is allowed in their building. Uber drivers might be subject to stringent government-mandated background checks.

Economies can’t progress if policy makers assume that the industries of tomorrow will have to look just like the industries of today. With smart regulation, we can make room for the good qualities of the new technologies while minimizing their bad aspects.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net