Is the Sharing Economy a Rip-Off? By David Henderson

Don’t buy Dean Baker’s hype

The “sharing economy” – typified by companies like Airbnb or Uber, both of which now have market capitalizations in the billions – is the latest fashion craze among business writers. But in their exuberance over the next big thing, many boosters have overlooked the reality that this new business model is largely based on evading regulations and breaking the law.

This is from Dean Baker, “Don’t buy the ‘sharing economy’ hype: Airbnb and Uber are facilitating rip-offs,” The Guardian, May 27.

Dean is too good an economist to miss the fact that the sharing economy creates huge value. He writes:

The good thing about the sharing economy is that it facilitates the use of underutilized resources. There are millions of people with houses or apartments that have rooms sitting empty, and Airbnb allows them to profit from these empty rooms while allowing guests a place to stay at prices that are often far less than those charged by hotels. Uber offers prices that are competitive with standard taxi prices and their drivers are often much quicker and more reliable – and its drivers can drive as much or as little as they like, without making a commitment to standard shifts. Other services allow for items to be used productively that would otherwise be gathering dust.

Exactly.

So what’s his problem with the sharing economy? Dean argues that it allows people to evade hotel occupancy taxes and regulations on safety, taxes and regulations that regular hotels are subject to.

I will probably never persuade Dean that it’s good that people can figure out a way to evade taxes. So I won’t try.

It’s the regulation part of his argument that is more troubling. His implicit assumption is that regulation is good. Yet he doesn’t make that case. He writes:

Airbnb can also raise issues of safety for its customers and nuisance for hosts’ neighbors. Hotels are regularly inspected to ensure that they are not fire traps and that they don’t pose other risks for visitors. Airbnb hosts face no such inspections – and their neighbors in condo, co-ops or apartment buildings may think they have the right not to be living next door to a hotel (which is one reason that cities have zoning restrictions).

This is pretty weak reasoning. Let’s separate his argument into two issues: (1) safety for customers, and (2) safety for neighbors.

(1) Users of these services are showing by their actions that they are willing to take the (I would bet small) risks in order to pay less and to have more options. Why does Dean Baker presume that he knows better than them? Moreover, he could make that same argument against my letting friends stay in my house when they visit the Monterey Peninsula. Yet I bet he wouldn’t. But why not? Is my place safer than places rented by strangers to strangers?

Moreover, for a long time now, various players in the market have provided ways to help consumers protect themselves. See Daniel B. Klein, “Consumer Protection,” in David R. Henderson, ed., The Concise Encyclopedia of Economics, Liberty Fund, 2008, for more. And see Daniel B. Klein, “The demand for and supply of assurance,” in Tyler Cowen and Eric Crampton, Market Failure or Success: The New Debate, Independent Institute, 2002 for a lengthier version.

(2) On the safety for neighbors issue, Dean could have a legitimate claim. After all, there’s a potential negative externality. But so also could the long-term residents impose negative externalities. So again, his reasoning is pretty unpersuasive.

Moreover, let’s grant that evading taxes and avoiding regulation are two motives for the sharing economy. He still goes too far when he writes:

Insofar as Airbnb is allowing people to evade taxes and regulations, the company is not a net plus to the economy and society – it is simply facilitating a bunch of rip-offs.

He has no basis for this conclusion. Both of these complaints could be valid and Airbnb could still be, as I bet it is, a net plus. For why, see the second paragraph of his that I quoted.

HT: Mark Thoma

By the way, here’s a review I did in 2010 of Dean’s book, Taking Economics Seriously.