Why We Regulate

June 2016
By Mark Funkhouser  |  Publisher
Former mayor of Kansas City, Mo.

In his feature on Uber in this issue, J.B. Wogan reports that while many local government leaders thought the ride-sharing phenomenon was breaking local transportation laws, they were reluctant to take action because they wanted their cities to be seen as welcoming places for innovative businesses.

I understand the dilemma, but when the issue is framed correctly, there is a role for government regulation that allows for disruptive new business models without stifling innovation. It seems to me that there are a couple of things that public officials need to think through.

First, what is the innovation that “sharing economy” companies have brought to the table? It is not the idea of treating workers as independent contractors and thus avoiding taxes and other traditional employer responsibilities. That has been attempted for years by lots of companies. FedEx has been fighting lawsuits over the classification of its drivers as independent contractors since at least 2000. And as The Economist has reported, in 2009, the year Uber was founded, 88 percent of all taxi drivers were already contractors.

The second thing is to be clear about the real purpose of regulation, which, generally speaking, is consumer protection. Think of the Pure Food and Drug Act of 1906, which was pushed through by President Theodore Roosevelt to protect the public from the unsanitary meat processing described in Upton Sinclair’s muckraking classic, The Jungle. The idea is for government to use its role to redress an imbalance of power between the corporation and the individual. Companies usually resist regulations vigorously, but once they are enacted, those same businesses embrace them as a barrier to competition. That’s why when Uber first arrived on the scene most of the protest was from the established taxi and other driver-for-hire industries.

The challenge for government officials is to recognize when regulation is needed to protect individuals from real threats, such as unsafe food, and when it is simply being used as a tool to limit competition. The key is to look at the power relationships.

Wogan reports, for example, that Seattle has responded to Uber by passing an ordinance allowing ride-sharing drivers to form a union and participate in collective bargaining. The U.S. Chamber of Commerce responded by suing, contending that the ordinance violates federal antitrust laws. Were he around today, Roosevelt would look at the power relationships between the drivers and Uber -- a multibillion-dollar corporation -- and see right through that argument.