How Consumer Protections Become Industry Protections

by Reihan Salam

Larry Downes, co-author of Big Bang Disruption, riffs on Seattle’s decision to (drastically) limit the number of vehicles UberX and two similar services could make available to local customers:

In regulated industries, consumer protections have a nasty habit over time of turning into industry protections—in this case, artificially keeping supply lower than demand, so drivers don’t have to improve their price or performance to stay in business. Everyone makes the same amount of money, but that means no one has any incentive to innovate. Consumers, well, up until now, consumers haven’t had a real voice in considering the trade-offs.

Put another way, it’s certainly possible that twenty four years ago, Seattle’s City Council exhaustively studied road conditions, traffic patterns, commuting and travel behavior, mass transit ridership and environmental concerns, and reached the conclusion that the city had the optimal number of for-hire vehicles on the road. And it’s possible that not a single one of these factors has changed in any significant way, or that every change was balanced in such a way that magically kept the optimal number of licenses at the number that was set in 1990.

But what seems more likely is that the incumbent license holders long ago convinced the regulators to eliminate the unpleasant side effects of a more competitive market, dressing up their arguments in high-minded principles of preserving the American Dream for drivers and keeping consumers safe from unregulated fly-by-night alternatives. Everyone’s winking at everyone else, and ramping up the rhetoric. Both the regulators and the regulated are caught in a deadly embrace of corruption, hypocrisy, and laziness.

Downes ends by arguing that new technologies that enable transparency and race-to-the-top competition might actually be better at protecting consumers than regulators:

And it may well be that the same technology that makes UberX possible has also become a far more effective regulator than out-of-touch regulators. Consumers, not bureaucrats, rate the quality of the vehicles and the rides, and do so at the time of service, not at random checkpoints. The smartphone calculates the cost of the ride and takes payment, reducing the opportunity for drivers to cheat the rules. Constantly-updated data lets everyone know where traffic is worse, and when there are more drivers than passengers, or visa-versa, optimizing the number of vehicles on the road not once every twenty-four years but in real time.

There are, of course, many domains in which we can’t substitute consumer-enabling technology and market competition for regulation. But while regulators can establish regulatory floors, market competition does a much better job of raising the quality bar. Regulators need to adapt, and to relinquish authority as other means of achieving their core goals become more viable over time. We can’t expect regulators to relinquish authority on their own — voters, and elected officials, will have to exert pressure. At the federal level, a number of lawmakers, including Virginia Sen. Mark Warner and Florida Sen. Marco Rubio, have proposed regulatory PAYGO or regulatory caps that force regulators to choose their battles by limiting the extent of the burden they can impose on the broader economy. It helps that federal regulatory agencies are required to assess the cost of their regulatory initiatives, a process that is deeply flawed in many respects, but that imposes at least some discipline. Conservatives ought to champion the use of cost-benefit analysis for new regulations at the state and local level as well — an idea that’s been proposed by (right-of-center) Harvard economist Edward Glaeser and (left-of-center) Harvard Law School professor and Obama administration veteran Cass Sunstein.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.