Wasington, DC -- (ReleaseWire) -- 01/27/2015 --BENNETT: Matthew Mitchell is a senior research fellow at the Mercatus Center at George Mason University, where he is the Program Director for the Project for the Study of American Capitalism. In his writing and research, he specializes in economic freedom and economic growth, public-choice economics, and the economics of government favoritism towards particular businesses, which brings me to the question of shared consumerism and what they are doing to help to offset the rising cost of living, and with how local governments are cracking down on companies like Uber and Lyft, and whether these companies' aggressive marketing might be way too aggressive, which is where I want to start today. Matthew, welcome to Financial Myth Busting.
MITCHELL: Thanks so much for having me.
BENNETT: So, aggressive marketing tactics. Uber is arming its team with burner phones and credit cards and they're using contractors they call 'brand ambassadors'. My understanding is that Uber is requesting rides from its main competitor Lyft, and then when they get these rides, they're recruiting their drivers or dodging the ride. It's got to be difficult for Lyft to gain a foothold in the new markets. Matthew, do you see Uber's aggressive tactics as reflecting the fact that ride sharing is largely a zero sum game, and are those tactics considered illegal?
MITCHELL: Well, the tactics are considered illegal and to be fair, both Uber and Lyft have exchanged accusations, so there's some evidence that Lyft is doing the same. I need to say that this doesn't mean that ride sharing in general is a zero sum game. I mean, by no means, this is actually the reason why the sharing economy seems to have exploded along so many different dimensions, not just riding but also we know about hotels, there's 1000tools.com, where you can rent a rotary hammer if you need one, there's DogVacay, there's all kinds of different versions of this. And they are by no means zero sum games. The sharing economy creates value in a number of unique ways and we can talk about that. But this specific example where people are, it's sort of a "ding-dong ditch" in the sharing economy, that's absolutely fraudulent and it's absolutely underhanded. This is not a legitimate way to compete and there ought to be torts, where people can be found liable for this. It's fraud.
BENNETT: Matthew, you're a fellow at Mercatus, which recently published a fascinating study about the growing regulatory threat against companies like Uber and Lyft. We've been talking about the emergence of the so-called shared economy. What are these companies, why are they doing so well, and why do consumers pick a company like Uber over a traditional taxi?
MITCHELL: Yeah, there's a number of reasons why, the ways this industry creates value. For one, it revives dead capital. If you think about wherever you are, wherever your listeners are, they're surrounded by all sorts of useful pieces of capital. There's probably cars that are sitting out in the parking lot that aren't being used. They may have tools in the garage that aren't being used. Then they may have sporting equipment, they may have an extra bedroom. All this capital, this durable equipment could be put to use, could be making money for people and could be creating value for customers. And what the sharing economy does is it brings new life into this capital and it allows people to use it. So that's one thing, but it does more than that. It also enhances competition by allowing everyday people to enter the market and become suppliers of hotel rooms, or taxi services, or whatever. Cooking, say. That creates greater dynamism, greater competition, lowers prices, tends to enhance quality, but it also allows the advance of more specialized taxi services. In the ride sharing space we see firms are offering much more boutique type services. Now Uber is offering Uber Family, where you can get a car that has a car seat for kids. There's a lot more specialization now than before, it's not one size fits all. Another factor that they add is greater monitoring ability. So if you think about taxis, we've had 70 to 80 years of regulation that are designed to improve the consumer experience, and it's still a pretty miserable experience for most of us. Cabs are notoriously dirty, they are often late, the service is bad, it's difficult to get them to turn the air conditioner on in the summer. What Uber and Lyft have managed to do with this incredibly simple five star system which allows cabs, it allows drivers to tailor their service to exactly what the customer wants, but it allows the consumer a better glance to see what the last 10,000 customers have rated their drivers, and if they don't like what they see, they can cancel the ride. That really happens because Uber and Lyft monitor these themselves and so they cancel, or stop working with drivers who earn less than 4.6 out of 5.00. So it's this really sort of beautiful instrument that has managed to accomplish what decades of regulation have never managed to accomplish.
BENNETT: Many people think that if cabs could operate without any restrictions, cities like New York would have too many and with the resultant traffic, we would not get anywhere. Do you think that's true?
MITCHELL: There are very few—there is almost no evidence that restricting supply ever leads to a greater enhanced service for customers. When you restrict supply, of course, you raise prices. New York has something like 14,000 licensed cabs; this is by the way 7,000 fewer than there used to be back when they were 1 million fewer people in New York City.
BENNETT: Why do you think there are fewer there today?
MITCHELL: Well, that's relatively easy to explain. If you limit supply or raise prices, which of course is bad for consumers, this is great for producers, and this is something that the taxis themselves have lobbied for. There's a phenomenon known as regulatory capture where agencies that are responsible for regulating industries end up serving the industries that are responsible for overseeing. They don't want to rock the boat, they are often populated by people from the industry. They get most of their interaction and most of their comments from the industry, not from customers. So after a short period of time, often regulatory bodies end up seeing the world through the eyes of producers and that's serving the producers.
BENNETT: Politicians have argued that we should be regulating things like the taxi market, for fear of customer safety. I know the Mercatus study takes that argument apart. Explain why you think customers don't need the government to enjoy safe taxis?
MITCHELL: Sure. So go back to the original rationale for regulation. The original rationale is that consumers are at a disadvantage relative to firms because they can't evaluate the quality of a car as it's zooming by, right?
MITCHELL: And whether or not this was valid 30 or 40 years ago, it's just not valid now. As I said, we've got the rating systems. You can see how the last 10,000 customers rated it. But the other thing is you have digital records that can tell you exactly where your driver took you. You can see on the GPS where he is taking you at the time. This allows you to protest if you think that you got a raw deal, that you were taken out in the wrong direction. It also allows you to keep records, so it's much easier to protest later. The fact that it's digital means that the driver himself does not carry cash, that makes it a much safer experience for the driver. But then the other thing is just think through all the ways in which the traditional method, though it was intended to protect consumers, ended up hurting consumers. So this idea of limiting the number of drivers—well, of course when you limit drivers that means that you have less competition, and that means that they don't have to pay as close attention to consumer value, consumers' interests. They have also limited prices and that's sort of a natural response because when you limit quantity, price tends to go up, so then they had regulate price. Then, when they start regulating price, then thery start to compete on services, so then you have to regulate exactly what the services are, so one regulation begets another. The regulations themselves have also harmed the consumer experience.
BENNETT: Many shared economy companies like AirBnB, or FlightCar, or TaskRabbit are likewise operating in spaces traditionally requiring government licenses to participate, and yet consumers aren't complaining that non-licensed hairstylists, for example, are ruining their hair. They're just doing the research before they hire a hairstylist. Is the government simply afraid that this new way of doing business ruins their whole claim of importance?
MITCHELL: I think there's definitely something to that, and one of the things is, in a lot of license industries that you mentioned before—you mentioned hairstylists. They are licensed in many states, florists are licensed in some states. I think in Louisiana, you have to put together a bouquet and be judged by those who are already in the industry over whether you have put together a bouquet—
BENNETT: Your competitors.
MITCHELL: --whether it will poke somebody's eye out or something.
BENNETT: Right. So silly.
MITCHELL: But in most of those industries, though, we never get to even complain about it, because the people who would enter the industry encounter these barriers at the entry and just never go to the trouble. They just stop. What's kind of interesting about Uber and Lyft is the companies frankly have a lot of chutzpah, where they just have gone in and they haven't asked permission, they've just gone in and signed up 10-20 thousand happy customers. And by the time the regulators have come around to stop them, these companies have been able to activate their network of pretty happy customers, also pretty tech-savvy customers, and they found that the customers sort of revolt against the regulators. So when Uber came to DC a few years ago, the DC City Council proposed legislation that said Uber could charge no less than 5 times what taxi cabs charge. Now, they actually, in a pretty amazing display of candor, the City Council had in the portion of legislation called explanation or rationale, they said this is just to make sure that these ride sharing services remain a luxury item that does not compete with taxis. They viewed their goal was to protect taxis from competition.
MITCHELL: So Uber alerted their customers and within 24 hours, the DC City Council had more complaints than they have ever received in the history of the city government. It was literally inundated with tens of thousands of phone calls and complaints and texts, and within, I think 48 hours, the proposed legislation was withdrawn. That kind of phenomenon has actually played out in a number of places. It played out about a year later in the State of Virginia, it's playing out in Pennsylvania. I think there's six states that banned or six municipalities that banned ride sharing altogether and only two reversed themselves later.
BENNETT: There are places out there that are actually are asking for these companies to be banned. Do you think it really is the American people or is this simply the government acting on its own?
MITCHELL: I think it's a combination of entrenched taxi monopolists and interests. They have been very vocal in opposing these ride sharing companies and using government as a very handy tool. If you can't compete in the marketplace, it's very helpful to get a government regulator to allow you to compete better by closing down your competitors. It's typically not at the federal level though. It's a different body in every single jurisdiction, in some cases it's City Council and in some cases it's the Taxi Commission, in other cases it's the Public Utility Commission. In Virginia, it was actually the Department of Motor Vehicles. I think in New Mexico it was Department of Motor Vehicles. So it's often a different regulatory body, city to city, but they're often local. And in fact, actually, the federal government, the Federal Trade Commission, they have a division that is aimed at promoting competition, they actually have been pretty vocal advocates for defending the ride sharing companies and criticizing local governments for limiting competition.
BENNETT: Is it possible that local and state governments, maybe even the national government, are nervous because there's a lot of income earned from these types of shared economy enterprises that's easier to hide from tax collectors?
MITCHELL: Actually, I don't think that's a major motivation because in a lot of these industries since it's electronic, it's actually easier to monitor. Uber has receipts and they know exactly how much every single partner has been paid, and so it's actually a much harder to hide that than it is a cash service, like taxis. So I don't think in many cases that's the major motivation.
BENNETT: Again, if these new services are so popular, why are so many localities banning them?
MITCHELL: So I think it's a combination of things. One, of course, is that taxis are sort of paradox in social science and economics, which says that the small concentrated interests often prevail over large diffused interests, and I think that's a great illustration. Any time you have a policy that's going to discriminate against new entrants and consumers for the benefit of incumbent firms, theory would predict that the incumbent firms are going to win and the reason is, if you and I and a million other people are charged a little bit extra every time you get a taxi, we're not going to get organized. You and I are not going to form a political action committee, we're not going to hire a lobbyist, we're not going to start knocking door to door, calling senators and representatives and City Council members, we are just not going to bother, because it's not worth it. But, that same policy may enhance the profitability of a firm by millions of dollars a year, and they are absolutely going to hire up a lobbyist, form a political action committee, get a government affairs office going. It's much easier for them to overcome what social science calls a collective action problem, and it's much easier for small concentrated interests to prevail in those kinds of fights. So that's part of it. Another thing is—it has to do with, I think, sort of a fear of the new. The Europeans call this the precautionary principle, it's basically the idea of presuming any innovation is illegal until proven otherwise.
BENNETT: Can you expand on that?
MITCHELL: So, in Europe, there is a philosophical and legal doctrine known as the precautionary principle, which is, basically any time you can tell a story of the worst case scenario possible, negative consequences on the new innovation, we ought to foreclose it and stop it ahead of time, preemptively. In the U.S. we have traditionally not assumed that approach. We said, no, that anything goes. We have what my colleague Adam Fair has called permission with innovation, the idea that if you come up with a new idea, it's not presumed illegal until proven otherwise. And that has allowed us to develop a much more dynamic and robust economy, particularly in the tech sector and particularly in those less-regulated aspects of the market place. But, I think that, unfortunately, there is a sort of precautionary principle thinking that has crept in, in a lot of ways, in the American psyche, and there is a bit of... those who want to shut down the new companies in the name of protecting incumbent interests have found their fellows in the form of academics and intellectuals who are worried about anything that's new.
BENNETT: Uber has a very bold way of operating. It's notoriously aggressive and it fights back against the government and those groups that you were talking about, which I think is unusual for U.S. companies in this day and age. Last week, for example, Uber opened in Portland despite the city having already outlawed it. How is this aggressive strategy serving them?
MITCHELL: Well, for the most part it is serving them relatively well. They have just been valued some $40 billion and this is much higher than many rental car companies. They have expanded across the globe, into hundreds and hundreds of cities in, I think, over 50 countries. But it is also, in many cases, in the last month or so, of course, it's gotten them into some trouble. There is a report—again the conversation with Uber and Lyft, "ding-dong ditching," calling one another and then there have also been stories of Uber executives floating the idea at media parties of digging up dirt on reporters. These are underhanded attacks and ironically, these are part and parcel of the sort of tactics that have been attempted to be used against Uber. A nice way I think to think about them is it pays to be exclusive, exclusivity pays, where people who are exclusive producers can earn really high income. So that's great, that pushes firms to innovate and to differentiate their products from one another. But contrived exclusivity whereby firms either use fraud or force or government with the aid of some government regulators to shut down the competitor, that sort of contrived exclusivity is—it does pay, at least in the short run, but it is enormously socially destructive.
BENNETT: There is a saying in Silicon Valley that says, 'Culture eats strategy for breakfast.' Since Uber seems to have a win-at-all-costs approach to building the business, do you think that they are buying into this philosophy?
MITCHELL: Well, they may not be, we will see. I'm not convinced that Uber is—that the company is the one that benefits the most through the sharing economy. Often you see pioneers are not the ones who end up dominating field decades later. I think the sharing economy is here to stay, but if Uber fails to create that culture that customers value, it may be Lyft, and maybe somebody else who takes it over.
BENNETT: If Uber's brand becomes associated with bad behaviour, what's to stop people from choosing its rival Lyft. Or even just going back to hailing your taxi?
MITCHELL: Well, ironically, maybe regulations would stop them. Of course, Uber and Lyft are now advocates of limited regulation, but once they become the dominant players, they too are probably going to be advocating for the rules that benefit them at the expense of new entrants.
BENNETT: Uber is growing ridiculously fast, much like Facebook. Do you think they are mature enough to know when they need to make a change.
MITCHELL: You know, I don't know. Like I said, that's a question really for the company itself. I don't know enough about their players to know whether they are mature enough or not.
BENNETT: While politicians love power, I wonder if they fear being unpopular when they go against companies like Uber and Lyft?
MITCHELL: Yeah, you know, this is one where again the traditional political science idea that small concentrated interests will win over large defused interests turns out to some degree to have not been true, because these companies are just so popular and it is so obvious that they provide better service.
BENNETT: Thank you, Matthew. Matthew Mitchell is a senior research fellow at the Mercatus Center at George Mason University, where he is the Program Director for the Project for the Study of American Capitalism.
All data sourced through Bloomberg
Securities offered through Western International Securities, Inc., Member FINRA & SiPC. Bennett Group Financial & Western International Securities, Inc. are separate and unaffiliated companies.
Bennett Group Financial Services LLC, based in Washington, D.C., is a comprehensive financial services firm committed to providing opportunities to clients' as they seek long-term financial success. Its customized programs are designed with the potential to help grow, lower overall risk and conserve client assets by delivering a high level of personalized service and skill.
For more information, call 866-286-2268 or visit http://www.bennettgroupfinancial.com
Securities offered through Western International Securities Inc. (WIS), member FINRA/SIPC. BGFS and WIS are separate and unaffiliated entities.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or email@example.com