April 27, 2016

This Is How You Regulate Uber

Michael D. Farren

Research Fellow
Summary

This month, Detroit’s operating agreements with Uber and Lyft will end, placing ride-sharing in the Motor City in legal limbo. Over the last two years, 32 states have passed ride-sharing laws and another 15 are currently considering legislation, including Michigan.

This month, Detroit’s operating agreements with Uber and Lyft will end, placing ride-sharing in the Motor City in legal limbo. Over the last two years, 32 states have passed ride-sharing laws and another 15 are currently considering legislation, including Michigan.

Ride-sharing legislation offers a great opportunity to show how working people can benefit from a few simple policy principles: generality of application, low barriers to entry and permissionless innovation. On the other hand, taxi regulations provide a frustrating counter-example of how ignoring these principles can harm an industry and the customers it serves.

Laws and regulations should not discriminate between different people or companies. Everyone and every business should face the same set of legal requirements. To do otherwise provides a government-granted privilege to whomever a policy favors, or to whomever benefits when a competitor is restrained.

Michigan’s current transportation regulations apply different rules to taxis, limos, buses and shuttles. The Michigan Department of Transportation has called for a better approach. Rather than creating yet another category of regulations for Uber and Lyft, MDOT urged the Legislature to instead apply a single set of regulations to every transportation provider.

But even generality of application can go wrong when it results in roadblocks to new drivers or companies seeking to enter the industry. Barriers to entry restrict competitive challenges from entrepreneurs, protecting established or well-connected companies, and giving them a degree of monopoly power.

Transportation regulations contain an endless variety of barriers to entry, like Detroit’s limit of 1,310 taxi bond certificates, which has led to horror stories like that told by famous consumer advocate Ralph Nader after his visit to the city in 1992. He told of taxis with holes in the floor, malfunctioning exhaust systems and shocks so worn that “I thought I was on a toboggan ride.” Such experiences would have never happened if Detroit’s taxi regulations had allowed for competition to drive out the bad service providers.

Entrepreneurs shouldn’t have to ask regulators for a permission slip before trying something new, as long as it’s within reason. Rather than setting the specific business practices of current companies in regulatory stone — such as mandating a cab driver’s uniform or a taxi’s paint job — regulators must emphasize the real goal: for example, ensuring public safety in for-hire transportation.

Simple, outcome-based regulations, like holding companies accountable for the safety of their drivers and vehicles, allow businesses the creative space to find new and better ways to meet those goals. It incentivizes companies to focus on what the law is actually trying to achieve, rather than simply conforming to a bureaucratic checklist.

Lastly, sunset clauses, which require a law to be reauthorized every five years or so, should be a requirement for all ride-sharing legislation. This offers policymakers the opportunity to double-check whether they’ve unintentionally stifled the industry and avoid repeating the mistakes of past taxi regulation.

Michigan is ahead of the curve so far, but other states and cities haven’t set the bar very high. If policymakers adhere to these principles, they can fix the decades-long malaise in the transportation industry.