Wednesday, June 8, 2016

DC Considers Cracking Down on Short-term Rentals

A new article at the Foundation for Economic Education discusses how local politicians in Washington DC are considering imposing new requirements on short-term rental providers. Per FEE author Iain Murray, the new proposed regulations would require an owner to:
*Submit their properties to a full inspection to ensure compliance with fire, health, building, and zoning codes, and ensure that the property complies with Americans with Disabilities Act requirements; 
*Send a notification letter to neighbors about their intent to rent out their property;
*Operate the license under their personal name and not through a corporate entity;
be present throughout the visitor’s stay; and 
*Only advertise through a hosting platform like AirBnB if they have a business license.
The best part is that, if these regulations are violated, they can be punished by fines or imprisonment (!) up to six months.

It seems clear that, if passed, these regulations would be sufficiently onerous to be effective. And of course, that's precisely the problem. The new regulations would discourage private room-sharing, eliminating (or reducing) a source of income for many property owners in the area and raising the cost of visiting DC for many would-be travelers. Meanwhile, the likely beneficiaries are the established interests--primarily hotel chains and possibly some DC residents, who are opposed to having a guesthouse in their neighborhood.

In a way, this is a small issue. Even if the proposed bill is passed, it only affects DC and it only affects one industry within DC. But in another way, it's nearly a perfect archetype of a bad regulation. Indeed, it has almost every attribute we would expect from a new economic regulation, namely the following:

  • Regulation pushed by special interests. Costs are shared widely, mostly among consumers
  • Creates artificial competitive advantage for existing businesses relative to new competitors.
  • Preexisting legal remedies should have been sufficient to address any actual problems that existed.
About the only thing this regulation is missing is that it doesn't appear to disproportionately harm poor people like most such regulations. Still 3 out of 4 is pretty good score.

So let's run through the key elements.

Pushed by Special Interests
In this case, the main interest groups are hotels and their labor unions, as noted in the article. It's not difficult to see how they would benefit from such rules. If AirBnB can't operate in DC, that means more revenue for hotels and more job security for their employees. This much is straightforward.

The reason such groups are strong enough to get legislation like this seriously considered may be less obvious. There are many more people that benefit from AirBnB (travelers, businesses catering to tourists, and property owners that rent spaces out) than those that would stand to benefit from this legislation. So how is it that rules like this can possibly gain traction?

Well, economists would argue the problem is one of concentrated benefits and diffuse costs. The net impact of the regulation is likely to make us all, on balance, worse off, and more individuals will be harmed and helped. The trouble is that the harm that each individual experiences (a slightly higher vacation cost, for instance) is much smaller than the benefit that can be gained by the hotel industry by eliminating their competition legislatively. As a result, the hotel industry has a much stronger incentive to hire lobbyists pushing this bill than anyone else has to oppose it. For the hotels, it's a huge issue; for us, it's a minor inconvenience. So hotels can easily win.

And of course, it goes without saying that the resources the hotels and unions expend on lobbying to get a bill past are basically wasteful for the economy as a whole. Lobbyists of this sort do not create value for anyone. Instead, they are just trying to transfer market share to their clients, away from a superior competitor in AirBnB and other short-term rental services. In other words, it's like that old adage: "If you can't beat them, hire K Street to get politicians to outlaw their business model."

It Benefits Established Interests
It's not a coincidence that hotels would already meet most of the requirements that would be expected of the short-term rentals, like getting a fire inspection or having a proper business license. Superficially, these may seem like reasonable enough requirements, but each one raises the costs of participating in the markets and thus gives a relative advantage to businesses that already meet them.

The same dynamic plays out with most new economic regulations. People often assume that businesses despise new regulations, and on a personal level, that may be true. But most of the time, new regulations have the unintentional (or intentional, depending on your cynicism) consequence of strengthening the relative position of the larger companies in the industry. For example, if new costly regulations got imposed on app developers tomorrow, the major casualties won't be Apple or Google. They already have large compliance and legal teams that can deal with whatever the government decides to throw at them. Instead, it's the small business and the start-up that gets hit--because now they're forced to hire a new resource or spend time complying with a new rule instead of refining or selling their product. So all businesses may hate regulations, but it's typically the small businesses that bear the brunt of the consequences.

It's Completely Unnecessary
This is probably the most important point of all. One of the apparent catalysts for the push to regulate DC's private short-term rental market was a high-profile rental that was used for extravagant celebrity parties, much to the chagrin of the neighbors. To the extent that local politicians aren't just looking for donations from the hotel lobbies, this is the good intention the regulation aims at--ensuring tranquility in the neighborhoods and preventing abuses from rowdy tourists, or something like that.

But there's no need for explicit regulations to address this need. In general, enforcing the legitimate property rights of the neighbors should be sufficient. Property rights already protect me from having a next door neighbor that decides to play loud music till ungodly hours of the morning. That's why I can, just as the neighbors did in DC, call the cops and file complaints against unduly loud residents in my area. And if the behavior persists, I could conceivably sue the property owner for damages because they have violated my property rights. On the contrary, if the short-term tenants are doing nothing to violate my property rights, I have no legitimate or legal way to object to their presence. That is how it should be.

It's equally important to note that while most interpretations of property rights would offer legal protection against disruptive and unduly obnoxious neighbors, requiring a fire inspection and a business license would do nothing at all to solve this problem. Nor would requiring the owner of the property to be a particular type of legal entity. Other than preventing short-term rentals altogether, there's really no plausible mechanism for how the new regulations would prevent the abuses observed.

And if we wanted to remove any ambiguity from what's included in property rights, individuals could also negotiate homeowners' agreements (HOAs) within their neighborhoods. Such agreements are already widely used and would stipulate explicitly the acceptable uses of the property, noise restrictions, etc. As with property rights, enforcement of HOAs doesn't require a new regulation. It just requires the government to enforce private contracts, which it is already empowered to do.

In other words, the basic powers of government are already designed to solve any of the actual problems created by short-term rentals. And the new regulations being proposed are nothing but the cynical ploy of an industry that is unable or unwilling to compete legitimately.* In this way, this small example from DC showcases the attributes common to economic regulations in general. And like most (if not all) other economic regulations, the justification for DC's short-term rental regulations quickly falls apart.

*The hotel industry might be able to make a case that the existing regulations on them actually prevent them from competing fairly right now. But even if that's true, that's an argument for lifting regulations on hotels, not making things worse for everyone.

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