Uber, Airbnb And The Conflict Between Policy’s Ratchet Effect And Tech’s Accelerating Speed

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One day before New York’s city council was about to vote on capping Uber’s growth, the company and Mayor Bill de Blasio reached a last-minute agreement for a four-month study on the company’s impact on city congestion. Likewise, here in San Francisco, Airbnb and a group of property owners and affordable housing activists will butt heads through an initiative on the November ballot.

These conflicts aren’t necessarily about what Uber or Airbnb are today. They are about what these companies are under pressure to become, given their respective and recent $50 billion and $25 billion valuations. Moreover, it’s about what those pressures imply for public infrastructure like roads and the city housing stock, which are inherently much harder to scale than software.

Throughout last week, Uber accounted for just a little over 3,200 drivers per hour in New York City, or about a quarter of the number of the city’s licensed taxis, according to data it released this morning. The company argues this is a drop in the bucket relative to the 2.7 million vehicles that enter the city every single day. However, transit researcher Charles Komanoff ran Uber’s own data this morning through his model of New York City traffic, and calculated that the service probably slows speeds by 7.7 percent in Manhattan’s city core.

In response to Uber’s accelerating pace of growth, the city’s deputy mayor Tony Shorris met with Uber’s team, including former Obama strategist David Plouffe, early last week. They had questions about fees, as taxis are required to pay a 50 cent surcharge per ride toward public transit and the MTA, giving the system $90 million in funding every year. They also had questions about disability access, as well as worker and passenger rights.

But the bigger question was about Uber’s expected rate of growth, which the company balked at.

“There’s a real difference of ideology here,” said a source close to De Blasio’s impact study. “You have a company that believes that the free market will essentially correct any negative externalities. What if there are so many drivers that nobody can make a living or that there are so many drivers and vehicles that we have unbearable congestion? There is a world in which Uber is still making money while our traffic moves at five miles per hour.”

They added that the city instituted medallions during the Great Depression eighty years ago when 30,000 drivers trawled through the streets to earn money. “There were so many people driving cars for nickel fares that nobody could make any money. The congestion became unworkable, so Mayor [Fiorello] LaGuardia installed medallions because we had a tragedy of the commons.”

But on the converse side, policy and laws have an unintended, and sometimes nasty, effect of sticking around for years or decades even as circumstances clearly change. It’s called the ratchet effect, and it’s much easier to ratchet in favor of limits than it is to push for growth.

For instance, New York City’s cap on medallions remained unchanged at 11,787 from the end of the Great Depression on through 1996, an imposed level of scarcity that has made medallion values skyrocket to north of $1 million each until Uber arrived. Those values enabled the taxi industry to be one of De Blasio’s sources of political donations, with hundreds of thousands of dollars in contributions.

Likewise, if we look at the hotel and housing shortage in San Francisco, it was much easier to downzone the city in the early 1970s through 1980s than it has been to upzone space through neighborhoods plans that happen one by one and take several years each. Because of the city’s historical and cultural aversion to height, developers are now pushing for aggressive subdivisioning through new “co-living” or group housing projects. It’s also made Airbnb hosting increasingly attractive as it costs anywhere from $300,000 to $1 million to construct a new hotel room.

Now Airbnb’s growth has raised concerns that the service will eat into San Francisco’s limited housing supply without proper control. A San Francisco Chronicle study found that at least 350 units appear to be permanently rented out on the platform. That doesn’t sound like a lot compared to the city’s total housing stock of about 380,000 units.

But every time the city loses a permanent residential housing unit to short-term rentals, it has a net negative economic impact of $250,000 to $300,000, according to the city economist and UC Berkeley professor Ted Egan. This easily adds up to more than the roughly $1 million per month in taxes that Airbnb remits to the city. And every time the city wants to build a new affordable housing unit to replace one that is lost through a no-fault eviction, it has to dredge up several hundred thousand dollars in subsidies from elsewhere. This heightens the city’s current paralysis over building the right mix of subsidized and market-rate housing.

“Technology has been challenging policy makers and government as these products facilitate the rapid scaling of rather old ideas like couchsurfing or subletting into practices that any almost individual can easily participate in,” said city supervisor Jane Kim in a vote on Airbnb last week. “As we as policy makers race, or not, to keep up with the technology that depends primarily upon city infrastructure — our density, the tourism attractions we already provide here, our roads — to create products that generate profit for these private companies, we have decisions to make.”

Those decisions are tough if no one trusts each other.

How can companies really believe that purportedly temporary measures don’t become set in stone forever?

And on the other side, how can city governments work with companies that only selectively share data on their impact when it’s politically convenient, and which resist for months and years to pay basic taxes which sustain the public infrastructure that makes their businesses possible?

As John Markoff, who has covered Silicon Valley since the 1970s, put it last week, “You have this crumbling public infrastructure, and now the Internet has made it possible to essentially skim the cream.”

There are other ways though. Nick Grossman over at Union Square Ventures favors a more modernized regulatory approach, which is permissive upfront in exchange for transparency and access to data. He has written an entire white paper about it here.

Unfortunately, these companies don’t do this. In San Francisco, both Lyft and Uber don’t share data with the city that would help it understand whether trips are merely substituting for MUNI or BART rides instead of replacing additional car traffic. Airbnb also doesn’t share data with the city, so the planning department has to resort to scraping the company’s website and using forms that are self-reported by hosts once a year.

Because of this, the regulatory process devolves into a game of brinksmanship around rigid caps and controls, which is what we all saw this week.