Defending the On-Demand Economy, Part I

by Reihan Salam

Haven’t we said everything that can be said about Uber and Lyft? I’m as enthusiastic about the newish ridesharing services as your next champion of the market economy. But after debating their virtues for some time now, I had assumed the debate had been settled. I was wrong.

Last week, Catherine Rampell of the Washington Post offered a critique of ridesharing services like Uber and Lyft. First, she argued that medallions and other regulations designed to limit the number of taxis can benefit the public by reducing the number of vehicles driving around in search of passengers, as too many vehicles on the road can exacerbate congestion and pollution. Her evidence for this proposition is that Uber drivers will complain from time to time on message boards that they aren’t finding enough customers, and that Uber and Lyft have no incentive to limit the number of drivers who join their networks. Rather, they have a strong incentive to keep the number high, to ensure that customers will have short wait-times.

This strikes me as a very unusual way to approach the problems of congestion and pollution. If we want to tackle the negative externalities that flow from congestion, including pollution, we ought to use congestion pricing, which will apply to all vehicles, not just those making use of ridesharing services. Or we could pursue some other strategy, like auctioning off the right to drive within a given jurisdiction to keep the number of vehicles under some cap, whether these vehicles are operated by cab drivers or other drivers. Limiting the number of taxis makes little sense in itself, especially if it encourages more drivers to use their own vehicles.

Second, Rampell dismissed the notion that the rise of ridesharing services — which, keep in mind, are still in their infancy — has reduced car purchases. She cited a transportation study which finds that while ridesharing services have attracted passengers from traditional taxis, they’ve also attracted them from public transit, among other modes. One thing is certain: if we limit the development of ridesharing services, they will never displace private automobile ownership. But if we allow them to continue to develop, and if we allow prices to fall as, say, lighter, more fuel-efficient vehicles emerge, or as driverless vehicles take hold (at some distant point in the future), ridesharing services could definitely reduce car purchases, particularly in the densest regions. If ridesharing services are taking some number of passengers from other modes of transportation, they are also reducing congestion in these other modes, thus making them more attractive. Leaving that aside, if I choose to use Uber rather than take a twenty minute walk, I presumably had some good reason to do so.

Finally, Rampell argued that Uber and Lyft are becoming bullies themselves, which exploit their drivers and which engage in sharp practices in competing with each other. Yet as Adam Ozimek observes, Uber and Lyft are software platforms that drivers freely choose to use to gain access to consumers. Though it is true that, due to the power of their brands and their technological prowess, they benefit from the network effects associated with having a large consumer base, it isn’t difficult to imagine other firms entering the market if Uber and Lyft prove too burdensome to their drivers. Indeed, though the rise of Uber and Lyft has put pressure on traditional car services, it hasn’t driven them all out of business, presumably because some nontrivial number of drivers prefer to stick with what they know. Just as Facebook displaced MySpace, another business that profited from network effects, and that seemed to have entrenched itself, Uber and Lyft’s work in creating a ridesharing market will allow future competitors to keep them in check should they grow unresponsive to the needs of drivers and passengers alike.

Ozimek emphasizes the fact that the business models of Uber and Lyft demand less regulation, as “users and drivers rate each other in public forums, allowing each to screen each other,” thus addressing the vulnerabilities that older regulations were designed to address. Larry Downes, writing in the Washington Post in March, also touched on this theme. He noted that apart from empowering consumers to rate the quality of vehicles and rides in real time, these services calculate the cost of rides and take payment, minimizing the potential for friction and fraud. Constantly-updated traffic and consumer demand data give drivers valuable information to make decisions about where to go, or indeed whether to bother getting on the road. Crankiness on forums notwithstanding, it seems difficult to deny that the number of Uber and Lyft drivers increases when demand is high, not least because many drivers are part-time drivers who often have other sources of income. Johana Bhuiyan of Buzzfeed adds that while legacy taxi regulators have failed to successfully combat “destination bias,” in which cab drivers refuse to head to certain neighborhoods, Uber and Lyft appear to have greatly reduced it.

But Rampell’s is not the only critique of Uber, or rather of what Katie Benner of Bloomberg View calls “the on-demand economy.” According to Benner, “people are attracted to on-demand gigs because more solid full-time work is still hard to come by in a U.S. economy that has rebounded for everyone but average workers.” This is certainly one reason people are attracted to on-demand gigs. Yet there are other reasons as well. For example, a rising share of young adults are enrolled in higher education, and working part-time as an Uber driver or as an Instacart shopper or as a TaskRabbit errand-runner can be a convenient way to make a modest income while keeping unconventional hours. Similarly, one might want to devote most of one’s time to raising children or caring for an aging parent while still earning some spending money. Even if the labor market continues to tighten, there will be many workers who will prize this kind of flexibility. Almost all of the on-demand employees Benner surveys are people with tragic stories. Almost all of those I’ve encountered have more optimistic ones. This could reflect our respective biases, or the regions in which we live. But it is foolish to deny that workers have a range of experiences with these services, not all of them negative. 

What I find peculiar about Benner’s tone is that she seems to blame the various on-demand start-ups for the fact that there are workers residing in this country who are willing to take on this kind of flexible work. She ends her piece by suggesting that if the economy improves, these firms will find themselves in a bind, as “the on-demand economy is an offshoot and a beneficiary of the fact that many U.S. workers are struggling.” It’s not at all clear that this is true. If the U.S. economy were in better shape, these services would have more and more affluent consumers, who’d be willing to pay more to workers who prefer to maintain flexible schedules to deliver their groceries, drive them to and fro, and much more. These services are drawing on technologies that have been available for some time, yet which have matured in recent years and which can now be recombined in new, more useful ways. Their business models are based not on desperation, but on the fact that we are living in a diverse society defined by rising female labor force participation and, yes, labor market polarization, in which high earners benefit from outsourcing household production and people with limited skills find that their most attractive employment opportunities are in services. This is the same reason, incidentally, that the U.S. has been a magnet for less-skilled workers, for better or for worse. (Interestingly, while 14 percent of U.S.-born adults age 16 to 65 have limited skills according to the OECD’s Survey of Adult Skills, the same is true for 40 percent of foreign-born adults. This is a subject to which we’ll return.) To suggest that there is something morally suspect about helping supply meet demand is a bit much.

The Agenda

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