Regulate This! (Ep. 177)

Airbnb graffiti in the New York subway.

A battle is being waged between the Internet and the State, and this episode of Freakonomics Radio gives you front-row seats. It’s called “Regulate This!” (You can subscribe to the podcast at iTunes, get the RSS feed, or listen via the media player above. You can also read the transcript; it includes credits for the music you’ll hear in the episode.)

At issue is the so-called sharing economy, a range of services that facilitate peer-to-peer transactions through the Internet. Companies like Airbnb, Uber, and Lyft have seen rapid growth and eye-popping valuations, but as they expand around the world, they are increasingly butting heads with government regulators.

In this episode, you’ll hear from Nathan Blecharczyk, the co-founder and CTO of Airbnb (now valued at roughly $10 billion), and one of the youngest billionaires in the world. Blecharczyk tells Stephen Dubner the story of Airbnb’s founding, how it initially struggled to find investors, and what kind of obstacles it still faces daily. In New York City, for instance, it’s estimated that about two-thirds of its business activity is illegal. That’s a big concern for New York State Senator Liz Krueger, known as “Airbnb’s doubter-in-chief.”

In 2010, Krueger was the chief sponsor of legislation that came to be known as the Illegal Hotel Law, which has made it harder for New Yorkers to legally rent out their rooms through Airbnb. Blecharczyk argues that it’s time for lawmakers like Krueger to recognize the reality of Airbnb, which he estimates will bring in $768 million worth of annual economic activity in New York:

BLECHARCZYK: We’re not advocating that there shouldn’t be rules. We’re just saying that things have evolved and it’s worth taking a fresh look from the ground up.

Krueger, meanwhile, argues that current laws aren’t strict enough:

KRUEGER: I want to look at more enforcement, perhaps increase fines, and penalties. I do have a very serious frustration that the kind of law that we really need needs to be federal because the state is superseded by federal law when it comes to regulating online business. Some people seem to think that if you’re a business model that’s on the internet it’s like magic and hocus pocus. It’s just business. And there’s a reason for government to regulate business, whether it has a physical site somewhere or whether it’s in the cloud.

Inspired by Airbnb, the entrepreneur Guy Michlin co-founded EatWith, which enables cooks to convert their homes into restaurants. EatWith has yet to clash with regulators, but he’s bracing for the inevitable:

MICHLIN: I think that sometimes, or actually many times, the regulator is a little bit behind to catch up with technology… And if you think about Airbnb, it’s obvious that this is a phenomenon that’s not going to go away…. Obviously the regulator will need to come in and hopefully in a dialog with all the different constituencies, adapt and create a new regulation that fits the reality.

The ride-sharing company Lyft, meanwhile, has engaged in high-profile showdowns with state regulators around the country. John Zimmer, its co-founder and president, explains:

ZIMMER: They interpret laws one way and are trying to do their job. And we interpret laws another way and are trying to innovate. And those two things are at odds, and the timelines are at odds. And if we took the approach of, “Hey, let’s wait and see what the government does to create a path that is very, very clear … then we wouldn’t be operating anywhere.

Lyft recently got into a head-on collision with New York State regulators, including the office of Attorney General Eric Schneiderman (which has also clashed with Airbnb). Schneiderman’s chief of staff Micah Lasher tweeted that Lyft and Zimmer were “not just ‘disruptive’ but also personally dishonest.”

It might be easy to conclude that state regulators are clamping down on these companies in large part to protect the entrenched hotel and taxi industries. Lasher says this isn’t the case, that the A.G.’s office isn’t against innovation or competition, but is instead just looking out for the public:

LASHER: One of the big issues is the question of externalities and external impacts. In other words, if my next-door neighbor is using their apartment as a hotel room, they’re not just running a risk of their apartment getting trashed, they’re having an impact on me. Similarly, in the case of Lyft, if one of those drivers gets into a car accident, doesn’t have appropriate insurance, that can have an impact on a whole bunch of folks who did not sign up for that.

Throughout the episode you’ll hear from award-winning Stanford economist Jonathan Levin, who specializes in Internet marketplaces. Levin tells us a story about a brilliant business idea he had as a kid — and how mobile Internet beat him to the punch.