My kids moved out! I have two empty rooms in my apartment. Maybe I can rent them. A tourist visiting New York City could have a different experience, and save hotel money. I’d make money. Wouldn’t it be great?
No, says the government of my state.
New York recently passed a law making it very difficult for people to offer short-term rentals via popular websites like Airbnb and Roomorama, which connect room-owners and room-renters. I could be fined $25,000 if I rent to tourists through those services.
New York State Sen. Liz Krueger defended the law.
“Tenants all over the city are begging their legislators for help. They were being harassed by strangers in the middle of night entering their building, moving into the apartments next door … violating the fire code, the safety code, and harassing people, sometimes very aggressively, out of the buildings.”
Please. Of course some renters behave badly. But they can be dealt with by building owners. There’s no need for authoritarian governments to ban consenting adults from renting to each other.
Krueger says that despite these services’ rapid growth, their customers are unhappy – and that despite the online customer-satisfaction reviews and ratings that enable everyone to compare thousands of different offerings, and blacklist renters and homeowners who behave badly, customers are being duped.
“They think they’re signing up for a hotel room. They pay through a credit card. They walk into a situation that is not safe, not clean.”
This is how politicians think.
Jia En Teo, co-founder of Roomorama, has a different explanation for why businesses like hers are attacked by politicians: “Short-term rentals have been growing in popularity … that has posed competition to hotels.”
At age 26, Teo left a job at Bloomberg media to start Roomorama. She understood business – but didn’t have political pull. Big hotel chains and their unions do. They have lobbyists who pressure legislators. The Hotel Association of New York says people who use sites like Roomorama risk their safety.
But despite such fearmongering, Roomorama hasn’t been squashed. It now operates in 5,000 cities around the world. Tourists get to use empty apartments and pay less. They get a novel experience. Property owners make money. Win-win!
But Roomorama threatens the status quo. Hotels and hotel unions don’t like it. Regulators who issue permits to hotels don’t like it. So the established businesses, the insiders, work with friendly politicians to craft rules that crush the newcomers.
Economists call that process “regulatory capture.” It happened even during the New Deal. FDR railed against “the money interests” and pushed through regulations controlling what businesses could do, including establishing a minimum wage, maximum hours, agreed-upon production levels and minimum prices for each industry, to eliminate “cutthroat competition.” Working at night was forbidden. Government enforcers made surprise inspections and could seize control of businesses on the spot.
It turned out that most of those regulations were shaped by big business itself, because the established businesses didn’t want competition, and both business and regulators like predictability.
Even when regulators mean well – when they worry about safety or whether customers get basic services – regulations are based on the old, familiar ways of doing things, simply because regulators don’t know anything else. That’s great for old, familiar firms – but bad for the innovative start-up that wants to try something different. And bad for consumers who might have benefited.
The new idea might be a bad one, but if it is, it will die on its own. Market competition will kill it.
But the new idea might be the next Microsoft. Or Roomorama. Or Lyft, a ride-sharing app that helps people find cars without having to use (heavily regulated) local taxi cartels. Like a Roomorama for cars, Lyft lets most any car owner give people rides. It, too, faces regulatory opposition.
Regulators always say they must protect the “little guy.” But it’s the little guys who are most hurt by these rules.
Something can always go wrong – with businesses new or old. But unless we allow innovators and their customers to try new things, we’ll be stuck in the past.
Then the fat cats win, not the little guy.