The sharing economy: promise or scam?

Sensemaking / The sharing economy: promise or scam?

The sharing economy should not be allowed to rip off the traditional economy, says Dean Baker.

By Dean Baker / 01 Mar 2015

The rapid growth of services like Uber, Lyft, and Airbnb has led many to tout the new age of the ‘sharing economy’, just as many touted the ‘new economy’ during the Internet boom of the late 1990s. In both cases there are real innovations that offer substantial benefits to society. But in both cases the story of a whole new economy or society will prove largely fanciful.

The basic story for the sharing economy businesses is to use the Internet to better deliver services. Uber and Lyft use the Internet to allow people to order cabs and to track their progress through GPS. Airbnb is a service that uses the Internet to allow people to rent out rooms in their apartment or house, or whole apartments and houses.

None of this is completely new. The positive side of these services is that they facilitate connections between potential customers and potential sellers, in the same way that newspaper want ads facilitated connections 150 years ago. By reducing the costs on both sides of the transaction, they will result in more people taking cabs or renting rooms in houses.

The downside is that these services are trying to use their claim to being new and different as a way to escape regulation. There is a long list of regulations for both cabs and hotels that has developed over the years. While many of these regulations may have outlasted their purpose, or may only exist to protect incumbents in the industry, many do serve a purpose.

For example, requirements that cab drivers pass special driving exams and background checks are meant to ensure the safety of drivers. The same is true of insurance requirements and safety inspections for the cabs themselves. It may the case that the current regulations are too strict, but it doesn’t make sense to say that they don’t apply if you order the cab over the web.

Similarly, hotels are supposed to be inspected for fire safety. They also bear responsibility to ensure that their staff doesn’t assault guests. It doesn’t make sense to say that Airbnb is not liable for its clients’ safety because people book their rooms on the web. The taxes that hotels pay – both general business taxes, and in many jurisdictions special hotel taxes – should apply to Airbnb as well. And, if apartment and condo buildings prohibit tenants from subletting, then Airbnb should be responsible for ensuring that it is not a party to violation of contracts.

In short, to a large extent the sharing economy is about ripping off the traditional economy. While it does boast some real innovations, it is likely that a large percentage of its current and expected future profits are due to evading regulations, just as much of Amazon’s success has been about evading state sales taxes.

It will be important to quickly modernize regulations in ways that account for these new firms. That may take away most of their profit and astronomical market capitalizations, but it will ensure that they actually provide services rather than prey on the rest of society.  

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC.

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