Economy & Business

Hayek in the Hill Country

(Piyapong Singbua/Dreamstime)
In Austin, a textbook case of arbitrary regulation and its costs

The easiest route to political control isn’t brute force: Sure, you can stick a gun in somebody’s face, but that’s always a risky business. The easiest route to political control is economic control. It’s cleaner, it’s safer, and it works.

There are some spectacular examples of that in India. In order to “protect” pepper farmers from being exploited by the ruthless profiteers of the free market, political bosses decided that farmers could sell their produce only to a government-approved buyers’ cooperative, the representative of which was usually — because every protection racket takes roughly the same shape — the uncle or brother-in-law of the local political boss, who often was the local money-lender, too. It’s a long and complex scheme (a story told brilliantly by P. Sainath in Everybody Loves a Good Drought) that ended in pepper farmers’ being kept in intergenerational debt bondage . . . for their own protection, of course.

Ahmad Zaatari saw a fair amount of that sort of thing growing up in Lebanon, where his well-to-do family of entrepreneurs and professionals were on the outs with the local political boss. Uncles and cousins of his father saw their factories closed on this or that pretense, and their land taken by the government. Zaatari himself ended up at a high school controlled by that same political boss, who maneuvered to make life miserable for the young man. In the end, Zaatari did what hundreds of thousands of Lebanese have done over the years: He moved to the United States. There are an estimated 3 million Americans of Lebanese origin living in the United States today; there are only 4.5 million Lebanese in Lebanon.

“My grandfather invested in real estate,” Zaatari says. “He was initially in textiles in Nigeria and the United Kingdom. Those investments saved the family, and that’s how I was able to come to the United States. I’ve always known real estate was a smart investment — it’s ingrained in me.”

Naturally, he bought a house. He bought that house in Austin, where he was involved with a number of technology start-ups after getting his master’s in mechanical engineering from the University of Texas. His wife worked as a consultant, and they had a baby, and things were looking pretty good at the start-up where he worked developing high-tech equipment for the oil-exploration business. Buying a house in the Rockdale Circle section of Austin, far from the most expensive or most fashionable part of town, wasn’t a huge stretch.

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Until the bottom fell out of the oil market, as it does, from time to time. Zaatari’s company lost a $6 million order, and pretty soon it didn’t have enough money to pay its engineers. Zaatari had a pretty good-sized mortgage and had drawn down some of his investments to make the down payment, and he is not rich. “Working in start-ups,” he says, “I’ve gained a lot of experience — not a lot of money.” Those obligations weren’t too bad for a two-income household, but they were going to be pretty rough on a one-income household.

He didn’t want to sell his house. He also didn’t really want to go get a clock-punching, steady-paycheck job, either — an energetic entrepreneur, he already had a proposal in to the National Science Foundation for an education-technology project he was developing. All he really needed was a little financial breathing room until he figured out his next step. That is one of the many faces of the so-called gig economy: It isn’t just people who can’t get a regular job, but also people who don’t want one, people who are working on something else and just need a bit of income for a while. Albert Einstein worked at a patent office, but he didn’t plan on making a lifelong career of it.

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Zaatari found the income he needed through Airbnb, the app-based service that allows homeowners to rent out their houses short-term; as Hernando de Soto might put it, it helps them to transform their property into capital. Zaatari, a born entrepreneur, kept the house but moved his family into an apartment, where the rent was a lot less than his mortgage payment. He redid the house himself, buying furniture and setting it up to make it more amenable to short-term guests, borrowing some money to get all that done. It was a good plan: Soon, he was making enough that he’d in effect halved his housing expenses, and soon after that he was in the black, generating between $1,000 and $2,000 a month in net income.

But he wasn’t done with the political bosses. Or, rather, they were not done with him.

Fresh after chasing away Uber, the ride-sharing business, as a sop to the politically powerful cartel that runs the city’s taxi business, Democrat-dominated Austin went after Airbnb users and other short-term rental entrepreneurs. They passed an ordinance explicitly designed to shut down many of those businesses, one that included truly outrageous and invasive measures. Short-term rentals (STRs) that are not owner-occupied will be outlawed entirely by 2022. If two couples are sharing a two-bedroom vacation rental and they want to invite four people over to a dinner party, they’re breaking the law if dessert and coffee goes past 10 p.m., no matter if it is served in complete silence. Renting a vacation home on two acres and planning a cookout for seven people on a Sunday afternoon? That’s against the law, too. Want to rent out your ten-bedroom, 5,500-square-foot spread to a visiting delegation of twelve representatives of the Women’s Republican Club coming to visit the state capital for a week? Nope. Got a problem with the city springing an unannounced inspection on you at 2 a.m. with no cause or complaint? Too bad.

Property-owners are held responsible for any violations, which would be totally reasonable — if the rules were reasonable, too.

#share#You may be shocked to hear it, but Austin, which is home to something like 100,000 college students in total (UT alone has 51,000 students, 40,000 of them undergraduates), also has a lot of rental arrangements that are not entirely on the up-and-up. It is a city that gets a great many visitors for events such as South By Southwest and happenings that attract lots of young people who do not necessarily have lots of money. The dirty hippie commune that once was home to yours truly was part of a student-owned co-op that made extra money renting spare rooms during spring break and summer vacations, thereby subsidizing the cost of our educations. As I recall, things got a little loud from time to time.

Austin has noise ordinances, and many of those now under the thumb of heavy new STR regulations complain that they often go unenforced, meaning that there’s relatively little downside to being a bad STR landlord — if you are unlicensed. And most of the complaints that preceded the new regulations had to do with unlicensed STRs. Airbnb landlords are licensed, and both landlords and renters are constrained by the app’s reputation system. If you’re an unruly renter, you get a low rating from your landlord, and others will not rent to you; if you’re a problem landlord, you get a low rating from your renters, and lose business. It’s a self-policing system that in practice works reasonably well.

Uncertainty and shifting political winds make it difficult or impossible to make long-term business plans, and hence to make effective long-term investments.

“They’re creating regulatory solutions that don’t have problems,” says Rob Henneke, formerly the elected county attorney of Kerr County, Texas, and an assistant attorney general before joining the Texas Public Policy Foundation, where he now works as general counsel and is helping the Zaataris and several other families fight Austin’s intrusive new ordinances. “The myth is that they had to step in and do this because there are short-term rentals that are Animal House, old-school fraternity houses with keggers every weekend, creating public disturbances every weekend. We’ve looked at all of the public records regarding short-term rentals and, in the four years they’ve been licensed, there have been only five complaints referred to municipal court for action.” Of the complaints and incidents that did not make it that far, the majority — 57 percent — were simply for operating without a license. Less than 10 percent were noise complaints and the like.

“We’re not saying that there shouldn’t be any kind of regulation, but the heavy-handedness of this ordinance is way out of bounds,” Henneke says. Ironically, the city cited problems at unlicensed rentals to argue for stricter — invasive, and probably illegally invasive — regulation of licensed operators. “What’s contrary to the stated purpose of the city ordinance is that the city is incentivizing people to act illegally. They’re punishing people like my clients, who are licensed, responsible, law-abiding property owners.”

They are taxpaying property owners, too. Zaatari pays nearly $10,000 a year in property taxes, and then pays the hotel-occupancy tax on the income he makes from that property. Other parties to the lawsuit have even steeper bills.

That’s a lot of money to pay to a city that explicitly plans to drive you out of business.

For Zaatari, this is a case of the rules being changed in the middle of the game: After he’d moved out of his house, after he’d gone into debt setting up his new business, after he’d rearranged his professional and family affairs around what was, at the time, a perfectly legal and reasonably regulated business proposition.

“Having known what they were going to do ahead of time would have been nice,” he says. “But they didn’t tell anybody what their intentions were. Council members were assuring us that people who were actually paying their taxes and following the rules wouldn’t be punished, but that’s what they went around and did, anyway. I especially resent the fact that they lied to our faces. I have personal experience with politicians lying to your face, when I was in Lebanon. That isn’t supposed to happen here. That’s part of what makes this country what it is: You can make investments and find opportunities and take risks, and if it pays out it pays out.”

They need some Hayek in the Hill Country. This is a classic example of the sort of uncertainty that F. A. Hayek and others wrote about, shifting political winds that make it difficult or impossible to make long-term business plans, and hence to make effective long-term investments. Zaatari likes to talk about seeking “disruptive” technologies and business models, but here it’s the politicians doing the disrupting, and not in a good way.


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