Edward Lotterman: Airbnb shows how new technologies bring new issues

Capitalism is “a process of creative destruction” according to Austro-American economist Joseph Schumpeter. That is working out right now as new communications technologies are revolutionizing sectors like short-term housing and short-distance human transportation. I use these wordings rather than “hotel” and “taxi” because companies like Airbnb and Uber are changing the very meaning of these historic terms.

Much of this is to the good, enabling society to get more satisfaction of human needs and wants from a given set of resources. But Schumpeter’s insight that economic creation inevitably is linked with destruction still applies. Innovations also destroy outdated businesses and products. 

Airbnb is the one in the news right now as the St. Paul City Council considers new rules to limit the fraction of rental housing units that can be converted to short-term Airbnb units. That is an issue in many other cities.

Airbnb and its small competitors also raise the same issue as Uber and Lyft: How can existing highly regulated businesses like traditional motels and taxicabs survive when competitors using new technology and business models are allowed to sell essentially the same service while remaining largely exempt from similar regulation? This is a tangled mess of spaghetti.

Start with the issue at hand, which involves traditional land-use zoning. If a particular tract is already zoned for multiple-unit apartment buildings, should there be limits on renting such units to customers who will occupy them for only a few days?

The question was moot when existing zoning and rental property regulations were enacted decades ago. Then-existing information technology did not allow the easy assembly of the information needed for a traveler to select one room from a plethora of those offered. It would have required paper directories, often outdated, hours of long-distance calling, handwritten lists and much trust on both sides of the deal. Far easier to call the reservation number of a national chain.

A combination of new technologies revolutionized that. Wireless telephony, smartphones with more capabilities than a personal computer that could show photos and text, powerful search engines, cloud information storage, information security software, new electronic payment means — all these are needed to make something like Airbnb work.

In the old days, the “market failure” that weighed down owner-to-guest short-term rentals was “imperfect information.” But technology changed and now an arthritic globetrotter visiting Spain can find a $39 room on the banks of Seville’s Guadalquiver River a short walk from key tourist spots and on bus lines. And he can reserve a room in Granada directly below the battlements of the Alhambra for Saturday night. Or he could get a room within walking distance of the sheep barn at the Minnesota State Fair.

Before, the amount of time a landlord needed to arrange short-term stays was inordinately large compared to the marginal income such stays might bring in relative to traditional long-term leases. But now, renting out apartments for a few days or weeks at a time is viable, extremely viable if the property is near some key destination like a stadium or hospital or a light rail line that can bring guests to myriad such attractions.

The primary economic purpose of land use regulation is to limit imposition of external costs. If there is a block of houses and someone can purchase a lot right in the middle and open a hide tannery or boiler repair shop, the value of use of the houses as residences is lowered for their owners. And their market values fall. A single-family home that is subdivided into rooms for 12 university freshmen is almost as noxious as the tannery. Zoning laws can prevent such external costs.

That is an economic efficiency argument and it is not controversial among economists. But it opens the door to rent-seeking, the abuse of regulation by someone to take money from others. Owners of existing gas stations, payday loan operations, liquor stores or even pharmacies can lobby for regulations limiting the “density” of such businesses. If there already is one gas station or liquor seller in some defined area and new businesses of this type can be banned, it gives the existing businesses at least a bit more monopoly power.

Zoning can also make it difficult for societal-needed activities that inherently impose external costs, real or imagined. We are better off if there are half-way houses for troubled youths, recently released convicts, recovering addicts and so forth. But nobody wants one of those facilities next to their own house. Make it a “wet house” for non-recovering alcoholics or a transition program for child molesters and opposition is enormous. The societal conflicts are real. These entities fill a real need and they do impose external costs on people near them. The fights get solved in the political process with both sides using zoning rules as arguments.

The original intent of zoning was to lessen externalities. That is an economic efficiency question. But they now also are used to alleviate economic inequality. Regulations are crafted to increase the availability of affordable housing and broaden its distribution. This is an equity or fairness issue. On this, there is no consensus among economists the way there is on the efficiency aspects of zoning. Liberal economists are more likely to favor use of zoning to increase inexpensive rentals and conservative economists see it as yet another unneeded regulation burdening the economy and reducing the goods and services society can enjoy.

This issue is key in the debate before the City Council. If renting short term through Airbnb is lucrative, will that reduce the stock of long-term rental properties and the availability of units that poor people can afford?

The effects of Airbnb, and the similar firms that will inevitably arise, on existing hotels and motels is not overly on the table.  But it certainly is in the background. Any restriction on rentals through a new internet-smart, phone-based technology reduces competition for existing hospitality providers. So they will be lobbying behind the scenes in any case.

Such new technologies are not going away. And they inevitably will engender calls for regulation. The variable pricing aspect of Uber means that fares spike during Manhattan rainstorms. There already are calls for municipal regulations limiting that. So we will see interesting economic debates like this for many years.

St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.