Topic: Regulatory Studies

The Latest Travails of Rideshare Companies

Last week Uber CEO Travis Kalanick said that the technology company, which connects riders to drivers through its app, could enjoy a “record-breaking” valuation thanks to its latest attempt to raise money.

Yesterday, Bloomberg reported that Fidelity Investments “is competing to lead Uber Technologies Inc.’s new financing in a round that could value the ride-sharing service at about $17 billion.”

Bloomberg’s reporting went on to note that if valued at $17 billion, Uber would be more valuable than the car rental service Hertz and the technology and appliances retailer Best Buy.

The news of Uber’s possible $17 billion valuation comes in the wake of news highlighting how the company has run afoul of regulators and taxi drivers across the world.

Earlier this year in Illinois, both the state House of Representatives and Senate passed HB 4075 and HB 5331 by veto-proof margins. If signed by Gov. Pat Quinn, the bills would require that the rideshare service drivers pass a background check, have commercial liability insurance of at least $350,000, and be required to obtain a chauffeur’s license if they carry passengers for more than 18 hours a week. These chauffeurs’ licenses are not easy to get in Chicago, the only city in Illinois where rideshare companies operate. They require any driver to complete a chauffeur training course, pass a written test, and demonstrate proficiency in English. The manager of government affairs at Lyft, another company that offers a rideshare service, has claimed that the 18 hour per week regulation would affect the 63 percent of drivers who use Lyft in Chicago. Chicago lawmakers recently passed an ordinance regulating ridesharing, a move welcomed by Uber and Lyft, although the legislation will have to be brought into compliance with HB 4075 if it is signed into law.

Occupational Licensing In the New York Times

Yesterday the New York Times published an op-ed by Morris Kleiner making the case for occupational licensing reform. In it, Kleiner argues that there is a bipartisan case for reform, and that the real losers of occupational licensing are consumers. Kleiner notes that occupational licensing has noble aims, to protect the health and safety of the public from those who seek to defraud them. But the actual result provides more protection from competition for those in the professions rather than protection for consumers from low-quality providers.

Thirty percent of the work force requires some kind of occupational license today compared with ten percent in the 1970s. This raises costs to consumers, especially those with low incomes who do not wish to pay for the minimum level of “quality” that licensing boards claim to provide.

Kleiner proposes to replace licensing boards with optional certification programs. All individuals could legally practice in a particular profession, but individuals could choose to undergo certification to signal the quality of their training and service provision. Cheaper, uncertified professionals could provide services to those who are more price sensitive.

Kleiner has spent his career studying the decline of labor unions and the rise of occupational licensure as the U.S. economy has shifted from manufacturing to services. In 2006 Regulation published A License for Protection in which Kleiner describes this shift. I’ve also covered his work on dental hygienist regulation here, and the upcoming Summer issue of Regulation will look at his work on nurse practitioner regulation.

“Minnesota ‘Unsession’ Dumps 1,175 Obsolete, Silly Laws”

Wow, more of this please [St. Paul Pioneer Press]:

It’s no longer a crime in Minnesota to carry fruit in an illegally sized container. The state’s telegraph regulations are gone. And it’s now legal to drive a car in neutral — if you can figure out how to do it.

Those were among the 1,175 obsolete, unnecessary and incomprehensible laws that Gov. Mark Dayton and the Legislature repealed this year as part of the governor’s “unsession” initiative. His goal was to make state government work better, faster and smarter….

In addition to getting rid of outdated laws, the project made taxes simpler, cut bureaucratic red tape, speeded up business permits and required state agencies to communicate in plain language.

If lawmakers in Minnesota could identify 1,175 worthless or outdated laws that could be rooted out with little real political resistance, imagine how many other worthless or outdated laws there are that are not so easy to uproot because they work to the benefit of one group or other.

Are Americans Too Ignorant to Buy Good Mediterranean Food?

Dip maker Sabra claims that its competitors’ hummus is not “hummus-y” enough. To help consumers tricked by this horrible deception, Sabra has petitioned the Food and Drug Administration to regulate the definition of hummus. That definition just happens to coincide with the products that Sabra already sells.

I’m not an expert on hummus or the hummus business, but my guess is that many people like the idea of eating hummus more than they like the taste of traditional hummus. The result has been a proliferation of dips that contain some of the characteristics of hummus but otherwise appeal more to American tastes (such as Red Lentil Chipotle Hummus with Poblano Pepper & Corn Topping). Sabra wants the government to mandate what portion of a dip’s ingredients must be traditional hummus ingredients before a company can market that dip as hummus.

The move has been widely panned as a transparent attempt at regulatory protectionism.  

These development in the hummus industry are eerily reminiscent of recent attempts by the U.S. olive oil industry to “protect” consumers from its European competitors. The U.S. manufacturers have been trying to portray Italian olive oil as tainted and inherently untrustworthy. The U.S. firms want the federal government to impose new labeling and testing requirements on olive oil that would insulate the U.S. market and benefit domestic producers, who currently hold less than 2% of market share. 

Last year, Sallie James and I wrote a Cato policy analysis identifying some red flags that can help us identify protectionist regulations. Two of the most obvious ones are industry support of the proposed regulation and lack of a plausible theory of market failure. Basically, if a firm is asking the government to make the firm better serve its own customers for their own good, don’t believe it. The firm is looking for something else—probably to disadvantage its competition.

One of the best ways to get the government to stifle your competition is to frame your anticompetitive policy preference as advancing some altruistic public cause. The altruistic cause in the hummus case seems to be protection from tasty dips that are not made by Sabra.

Tim Cavanaugh at National Review astutely points out that Sabra, which is owned by PepsiCo and is by far the largest provider of retail hummus, is much more capable of dealing with the compliance burdens of FDA regulation than its competitors. He notes, “The claim that getting the FDA involved will promote a ‘spirit of fairness’ is a crock. And the crock is not filled with hummus.” 

Hopefully, Sabra will decide to dedicate itself to making and marketing competitive products–something it apparently does well–and stop trying to regulate away its competitors.

More Competition Would Lower Health Insurance Premiums

I know, not exactly a shocking revelation! Nevertheless, here’s an article from today’s Washington Post:

With much of the focus on Obamacare now on how much individual premiums could increase next year, a new analysis suggests there’s one way to keep them in check — more competition. That’s the conclusion of a new report from economists Leemore Dafny, Christopher Ody and Obamacare architect Jonathan Gruber.

If every insurer that had sold individual policies in 2011 participated in Affordable Care Act insurance marketplaces this past year, average premiums for a benchmark exchange health plan would have been 11.1 percent lower in 2014, the economists found.

Big insurance companies generally took a cautious approach to the new exchanges in 2014, limiting their participation in the health-care law’s first year amid concerns about too many sick patients signing up for coverage. The Affordable Care Act exchanges were created as a way for people to buy their own insurance if they couldn’t find affordable options elsewhere, like through an employer.

The Affordable Care Act exchanges are supposed to fuel competition in the individual market, which hasn’t traditionally been all that competitive. Before the health-care law, a single insurer covered more than half of the individual market in 30 states, according to the Robert Wood Johnson Foundation.

A point I’ve been trying to make for a while is that there is a large untapped source of competition out there which could help lower prices: foreign insurance companies.  With or without ObamaCare, American consumers would be better off with more companies in the market, and the nationality of those companies does not matter.  Unfortunately, my sense is that foreign companies are not all that interested in entering the U.S. health insurance market.  Maybe it’s too daunting a prospect (it’s a highly regulated market), or maybe they just haven’t thought of it.  In case it’s the latter, I’m going to keep putting the idea out there, in the hopes that it reaches the right person.

FCC’s Net Neutrality Rules

On May 15 the FCC announced a proposed rule that would govern the relationship between content providers and internet service providers.  Consumer groups argued the proposed rule was not strong enough because it did not ban differential arrangements between them.

The underlying economic issues are several.  Should the government concern itself with the relationship between the “creators” of things and the “transporters” of them?  In particular should economic profits go just to the creators of things?  Is it “wrong” for the transporters to extract some as well?  What if a creator of content and a transporter want to vertically integrate or enter into a long-term contract to end the costly dispute between them over the division of any economic profits?  Should such arrangements be forbidden because of the possibility such an entity would refuse to transport the content of a different creator?

These issues are not new.  In fact they first arose between railroads and the creators of “content” i.e. farmers, mines, steel mills etc. in the 19th century.  The political resolution of these issues was the Interstate Commerce Act of 1887.  It took about one hundred years for the experiment in transportation common carrier rate regulation to end.  Scholars have concluded that rate regulation raised rather than lowered transportation prices.  And the public has come to the same conclusion because in the quarter century since the end of transportation rate regulation, prices have decreased dramatically.  For a discussion of the rise and fall of transportation regulation see this article by Thomas Gale Moore.

In “Antecedents to Net Neutrality” Bruce Owen explicitly makes the link between the concerns of traditional transportation common carrier regulation and the contemporary notion of “Internet neutrality.”  Net neutrality policies could be implemented only through detailed price regulation, an approach that failed to improve consumer welfare in the transportation sector. History thus counsels against adoption of most versions of net neutrality.  Christopher Yoo has written a detailed history of how difficult common carriage regulation was to implement in traditional telecommunications regulation.  A shorter version will appear in the summer issue of Regulation.

The public debate over net neutrality also does not reflect the increased variation in the price and quality of its services that already exists.  Innovations such as private peering, multihoming, secondary peering, server farms, and content delivery networks have caused the Internet’s traditional one-size-fits-all architecture to be replaced by one that is more heterogeneous. Related, network providers have begun to employ an increasingly varied array of business arrangements and pricing. These changes reflect network providers’ attempts to reduce cost, manage congestion, and maintain quality of service. Policy proposals to constrain this variation risk harming these beneficial developments.