Privatizing the Regulation State

The American welfare state differs from its European counterpart in two ways: it still lacks a couple of major entitlement systems that have tipped European economies over the edge into perennial economic stagnation; and government's regulatory incursions into the economy are in some instances even worse here than in Europe. 

There are exceptional instances when market regulation can actually preserve the free market itself, such as to shield entrepreneurs and consumers from the destructive consequences of predatory capitalism. History is full of examples of how private businesses have used their might to drive competitors out of the market, for example by means of below-cost pricing, vertical integration to control key production inputs, etc. However, those examples do not dominate the history of capitalism and the free market - far from it - but they do remind us that the protection of economic freedom is an ongoing process, even when government is no longer its adversary.

Again, perverted exceptions from the sound practice of free-market capitalism constitute a minimal reason for government regulatory activities. The absolutely dominant reason why government is involved in regulations is that it thinks it can define the workings of an industry better than those who engage daily in that industry. Transportation services is a good example, where Uber has formidably challenged the regulatory status quo, suggesting that the industry can provide itself with appropriate regulations and customer safety standards. The latest success comes out of Forth Worth, TX. On June 29 the Star Telegram wrote (print edition):

Months of work redrafting the city's vehicle-for-hire ordinance wrapped up Tuesday night when the City Council approved new rules that require transportation companies only to register with the city. The approach chosen by Fort Worth avoids more onerous regulations - including requirements for fingerprinting drivers - that proved problematic in other cities. And it gives Uber, Lyft and others the hands-off regulatory environment they had pleaded for in the city.

Traditional taxicab companies tried their best to convince the city council to keep regulations in place. This is not surprising since the old regulations restricted competition, placing a high entrance fee between prospective entrepreneurs and the market. The more restrictive competition is on a market, the higher the market price tends to be compared to its free-competition alternative. 

From the government's perspective, the old regulatory standard was in place to protect consumers from, e.g., criminals whose presence in this kind of industry directly can put people in harm's way. To keep the public safe is a respectable argument for government regulations, but it is not a winning argument. The city of Fort Worth has decided that buyers and sellers - customers and transportation companies - can handle the safety issue themselves, and that is exactly the case. 

From the seller's side, the virtually regulation-free market allows them to decide what quality of product they want to provide. With no mandatory background checks of drivers, it is perfectly possible for a former DUI case from another state to move to Fort Worth, buy a beat-up 1988 Gran Fury and start driving people for money. It is also perfectly possible that a transportation company decides that their drivers must provide a clean criminal background check and a clean driving record as well as pass some tests to show they are reliable, responsible and customer-friendly. That company can then certify their drivers as salt-of-the-earth dependable. 

From the customer's side the absence of regulations gives them the chance to choose the $2.50 ride with DUI Joe or the $7.50 ride with Bill Anvil behind the wheel. It is entirely up to them whom they trust, what risks they are willing to take and how they spend their own money. Some people won't care and DUI Joe will make some money; others will be willing to spend more to make sure the driver is not drunk and knows how to safely take them from point A to point B.

It will be interesting to see how the transportation market in Fort Worth unfolds over the next few months. So far since it was founded, Uber has proven convincingly that both businesses and customers are adult enough to handle a low-regulation environment. Those who do not want to be driven by some amateur (me included) choose to use traditional taxicabs when necessary; others who do think there is much of a difference will use Uber and other app-based companies. 

Because of the success that Uber has had in disproving the need for government regulations, we have good reasons to work our way toward a much more reasonable regulatory environment across the economy. One of the big fights en route to fewer regulations is going to take place on the labor market, where some app-based, on-demand companies have run into serious problems precisely because government likes to define key aspects of the market. Last year YahooTech reported:

On-demand cleaning company Handy Technologies was sued this week by a worker alleging she should be classified as an employee, the latest in a debate over whether workers in the sharing economy are independent contractors or employees entitled to benefits. The proposed class action lawsuit, filed in a Massachusetts federal court on Tuesday, seeks reimbursement of expenses and minimum wages for Handy workers. The results of the broader legal battle could reshape the sharing economy, as companies say the contractor model allows for flexibility that many see as key to their success. Last month, a California labor official found that one San Francisco-based driver for ride service Uber was an employee and entitled to expenses. An ultimate finding against companies like Handy and Uber could force them to pay Social Security, workers' compensation, and unemployment insurance.

The definitions that regulate the term "employee" originate in the welfare state. When a person is an "employee" the "employer" is forced to pay taxes for entitlements that the government has decided the employer has the right to. For this reason, the regulations distinguishing a contractor from an employee will not go away until the welfare state is rolled back. That, in turn, is a much bigger battle than to roll back the over-zealous regulatory state in some individual industries. 

Nevertheless, the fight against regulations is a worthy one. With the small exception of keeping us out of the jungle of anarcho-capitalism, government has no business defining the practices of any industry anywhere in the economy. But even more importantly, the lessons from Uber's successes and challenges to regulations show us that the fight for regulatory sanity often overlaps with the fight against income redistribution (the core of the welfare state). 

Uber's success has so far been greater than that of most free-market think tanks. Let us hope they keep up the good spirit and challenge governmental incursions in other parts of the economy, such as - again - the labor market and its welfare-state regulations.