Freakonomics Radio - 177. Regulate This!

Episode Date: September 4, 2014

Airbnb, Uber, Lyft, EatWith, and other companies in the “sharing economy” are practically daring government regulators to shut them down. The regulators are happy to comply.

Hey, podcast listeners, our mission at Freakonomics has always been to talk about things you thought you knew but didn't and things you never thought you wanted to know but do. Well, now it is your turn to tell us something that we don't know. On Monday, October 6th in New York City, we are launching a live game show called Tell Me Something I Don't Know. And the audience, that's you, is the star. So if you have a great idea or an interesting set of facts, even a great story, and you live in New York or know somebody who does, please go to Freakonomics.com slash tell me to sign up. You could tell us about anything, food, medicine, dating and mating, brain science. All we ask is that it is interesting, at least to you, worthwhile, at least a little bit, and, well, true. There will be prizes and celebrity judges, including Malcolm Gladwell.

Again, that is Monday, October 6th in New York City. Sign up at Freakonomics.com slash tellme. I cannot wait to hear what you have got to say. You know, I just think about when years ago when I was after I graduated from college, I lived in Europe for two years and I had this dream of having a service, the business that I was going to set up, where you would basically call them, and then they would sort of like solve your problem. That's Jonathan Levin.

I'm a professor of economics at Stanford University, and I do research on microeconomics, in particular on internet marketplaces and market design issues. A few years ago, Levin was awarded the John Bates Clark Medal, which is what young economists often win before they eventually get a Nobel Prize. So what was this brilliant business idea he had while backpacking through Europe? You'd be sort of just about to get on the train to go to Paris or to go to some other city or to wherever you were going. And when you arrived, you would call them back and they would have sort of made all the arrangements for you,

because it was so cumbersome to do anything like that. Levin never followed through on his business idea, but other people did. Lots of other people. Want a private driver? You won't be surprised that there's an app for that. Uber lets you book a car with your smart phone. OpenTable, that is a restaurant booking service. Airbnb connects people who want to rent out a living space to travelers That Uber lets you book a car. Open table. That is a restaurant booking service. Airbnb connects people who want to rent out a living space to travelers who need a place to stay.

This was, well, this wasn't that long ago. Levin is now in his early 40s. He's got kids. And the idea that, like, that problem would, like, never cross the mind of my kids. They'll just get on the train and they'll pull out their phone or maybe they'll do it on their glasses. That level of convenience for regular people as opposed to just for the billionaires of the world is really remarkable. It's an amazing democratization of sort of personal service and convenience.

Now, if you were sitting back at the beginning of Internet time and you were wondering what kind of people were in the best position to exploit this amazing new technology, you might have thought it would be big institutions, multibillion dollar firms, multitrillion dollar industries, governments. After all, they had the big budgets and you might have have thought, the big incentives to keep pace with change. But it didn't work out that way. One of the things that the Internet has done is just to dramatically lower barriers of entry in many industries. It's just much, much easier to flip a switch and make your product available to people all over the country, all over the world, in a way that would have been extremely difficult before the internet. But flipping the switch didn't just let you build an online version of a brick-and-mortar business

like Amazon did to Barnes & Noble. The internet let anyone do business with anyone else. It became a lot easier to sell something that was just sitting around, forgotten or unused, like your grandmother's porcelain figurines, which you could now unload on eBay, like the extra room in your apartment, which you could rent out on Airbnb, like the backseat of your car, which is empty approximately 99% of the time, but which, as it happens, someone might pay to sit in. This kind of activity has blown up, in the last few years in particular, the peer-to-peer economy that is sometimes called, or even more hopefully, the sharing economy. It means that you can find a place to stay in some faraway city that is not a hotel, a place to eat that's not a restaurant. You can catch a ride with someone who is not a licensed taxi driver.

Uber, for instance, builds apps that let pretty much anyone with a smartphone hire just about anyone with a car. It is currently valued at about $18 billion, roughly one-third the market cap of General Motors. Uber just hired David Plouffe, the former Obama campaign manager and advisor, as its senior VP of policy and strategy. Now, to some people, this new economy, whatever you call it, is heaven. It makes the world work better. It makes good use of dormant resources. It lets more people earn a living. Not everybody sees it this way. The taxi and hotel industries, for instance, and especially the people in charge of regulating the taxi and hotel industries. So what we've got for you today, ladies and gentlemen, is a good old-fashioned smackdown.

Let's get ready to rumble! In this corner, fighting primarily out of their home gym in Silicon Valley. You know, 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. Many times the regulator is a little bit behind to catch up with technology. We're not advocating that there shouldn't be rules, just saying that things have evolved and it's worth taking a fresh look from the ground up. And in this corner, representing the biggest, baddest government of all, New York. 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. The problem is companies come in, they say, we're not interested in whether or not our conduct is in violation of the law. We may very well, in fact, as a strategic matter, decide to break the law with the hope or expectation that through means of pressure, we won't enforce the law. All right, podcast listeners, are you ready to rumble? Welcome to the internet versus the state. From WNYC, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dupner. If you had to pick one company that at this moment personifies the battle of the internet

versus the state, it's probably Airbnb. I'm Nathan Blacharczyk, co-founder and CTO of Airbnb. Blacharczyk started writing code when he was a kid. He studied computer science at Harvard, and he helped start Airbnb with his friends Brian Chesky and Joe Gebbia. Airbnb was started and inspired by an event that happened in October 2007. Back then, the three of us, Joe, Brian, and myself were roommates, and the rent on our apartment was raised 25%. And I decided to move out. The other two guys did not have enough money to pay for the

rent, but they're both designers. And they saw that an international design conference was coming to San Francisco and that all the hotels were sold out. So they got this idea to rent out the extra bedroom to designers who needed a place to stay. And that weekend they hosted three designers and they made over a thousand dollars, thus allowing them to pay rent. Well, fast forward a couple months later, the three of us got together and decided we should do this for other people in other situations. This turned into a lot of people,

a lot of situations. On any given night this summer, roughly 350,000 people are staying on Airbnb. We've serviced 17 million guests to date over the last six years. What's crazy is that it took four years to service our first million guests. And now each month, we're servicing a million more. So that gives you a sense of the exponential growth and how it's progressed. In terms of properties, we now have 800,000 properties in 192 countries, 35,000 different cities. So tremendous inventory. When Blacharczyk says we now have 800,000 properties in 192 countries, you may be tempted to think of Airbnb as a big hotel chain like Hilton. Airbnb doesn't own any hotels, nor does it have to hire housekeepers or bellhops. Uber, similarly, doesn't own fleets of cars, doesn't employ drivers. In other words,

these companies are not the kind of companies that many people think of when they think of what a company does. All they are really are cloud-based platforms that establish a market between individuals. They pretty much just open the spigot and let the water flow downhill. They let supply find demand. That fold-out couch in your fourth-floor New York City walk-up? It is now on the market, just like a room at the Hilton. It's apples and oranges, yes, but they're both fruit. Hilton has a market cap of roughly $25 billion. Airbnb, which is privately funded, has been evaluated at $10 billion.

Not bad for just opening a spigot. Now, with hindsight, it's easy to think that Airbnb's success was inevitable. But imagine you're an investor at the very beginning. You want me to give a few million dollars to a company whose sole business is to get strangers to room up with other strangers? Yes, that was certainly an absolutely crazy idea back then. And over the first year, we approached many investors pitching them on this concept and explaining the story of what we had experienced and what we were trying to do. And none of the investors could see it. They couldn't see themselves using the product. And they thought, even if there were people who would do this, it would certainly be a small

market, a niche product, and not something that they were interested in investing in. So for our entire first year, we ran this company using our own savings account or, in fact, credit cards. But Charzik thinks some investors were also cautious because the Great Recession was just taking hold. On the other hand, the recession may have helped the actual business get going. Back then, there were a huge number of people who were really trying to make ends meet and could not afford to stay in their homes. And we have anecdotally heard hundreds,

if not thousands of these stories. So I do know that we provided a lot of people relief during this period. So it must have been a help. There's another reason why platforms like Airbnb and Uber were able to take off when they did. The internet had been around long enough by now that most people, enough people at least, were willing to trust a stranger on the other end of an app. What's happened is that people are comfortable with online identities. There was a time before Facebook where people's online

profiles were often completely fictitious, right? And there was no trust assigned with an online identity. Then Facebook came along and started requiring people to upload their real names, pictures, et cetera. And everyone started participating. And that allowed these profiles to gain more legitimacy. So who loves Airbnb the most? What category of people? Is it the people who travel, the people who rent out? I mean...

Well, I think both, frankly. It takes two to make this transaction happen. Okay. On the flip side then, who hates Airbnb the most? Or maybe hate's not the right word. Maybe fear is a better word. I don't know. How about misunderstands? There's still a vast majority of people who have not used Airbnb themselves. They only hear about Airbnb through headlines. And I think there's so much controversy right now that it's easy for people to get the wrong impression.

And remember, six years ago when we started this company, everybody thought it was a crazy idea. Prostitutes are using Airbnb to set up cheap temporary brothels on the fly. I rented my apartment out to a man who said he needed it for his brother and sister-in-law and instead came home to found about 20 people hosting a filthy orgy. A DC woman discovered the guys who used Airbnb to rent her apartment were using it for their erotic massage service, charging up to $300 per hour. Left behind in her apartment? This red clown knows. They are so excited about getting you to participate in their making money that they don't actually care that they're breaking laws or that they're encouraging you as potential hosts

or guests to be breaking laws. That's Liz Kruger. She is a New York state senator, represents the east side of Manhattan, which includes a lot of apartments and a lot of hotels. She has been called Airbnb's doubter-in-chief. I don't know where that title came from. It's a little amusing. Okay, here's where the title came from. In 2010, Kruger was the primary sponsor of legislation that came

to be known as the illegal hotel law, which has made it harder for people to legally use Airbnb in New York. She says she got involved after receiving calls, lots of calls from her constituents. All of this was coming from people who lived in the same buildings and were calling their elected officials complaining, saying, there are total strangers with keys to the doors of my building. How is that possible? There are airport shuttles showing up from the airport on Thursday afternoons, dropping off large numbers of people with luggage and coming back on Sunday afternoons to take them away. This isn't a hotel. What are they doing here?

There were complaints from neighbors that there were loud, wild parties going on in the middle of the night. And when you would go and knock on the door and say, hey, this is a private residence, turn the music down, they'd be filled with groups of tourists having a good time, which is what I want tourists to do. I'm not anti-tourism, really, really, really.

But no, tourists aren't supposed to be living in residential units next to my grandmother partying all night. New York City is Airbnb's number one destination, at least at the moment. Nathan Blacharczyk tells us that Paris will take that spot soon. So, Nathan, you are familiar, I'm guessing, with New York State Senator Liz Krueger, yes? Of course, yes. Not our biggest fan. Yeah, not your biggest fan. So we spoke with her, and she brings up various concerns.

I'd like to bounce them off you and see how you respond. So one is that she estimates two-thirds of all Airbnb's business in New York City is illegal. If it's a multi-family dwelling, you are not legally allowed to do short-term rentals under 30 days unless you, miracle of miracles, live in a building where a landlord has decided to write a lease that says you can do short-term rentals. It's a violation of your lease. If you live in a building where a landlord has decided to write a lease that says you can do short-term rentals, it's a violation of your lease. If you live in rent-stabilized housing, it's illegal. If you live in a building that is zoned residential, it's technically illegal. We have not seen any bylaws that allow it. So when I say two-thirds, that's a conservative estimate. Well, I think that's exactly our point and why the existing regulation needs to be re-evaluated. These rules go way back prior to Airbnb. They were

written 30 to 100 years ago. So what we're saying is that these should be re-evaluated in the 21st century context. Kruger says that Airbnb helps facilitate criminal activity, including specifically, and I quote, moving drug dens, quote, moving houses of prostitution and illegal gambling operations. What do you know about that? There's no data that would support that. So there's certainly one-off anecdotal stories that have occurred. And this will happen when you're dealing with a scale of 350,000 guests per night. And this certainly is something that will happen in hotels. And this will certainly happen in apartment buildings, irrespective of Airbnb. Senator Kruger also argues that Airbnb makes it harder for New Yorkers to find affordable housing because it entices landlords to convert long-term rentals into de facto hotels.

I don't think the numbers add up there. So New York has over 1 million housing units. And in New York, we have a total of about 20,000 properties. Now, almost half of those or one third of those are people renting out an extra room in their home. So those are certainly not available housing units. The vast majority of people are renting out the home in which they live and therefore doing it on a part time basis. So once you kind of peel off all these layers, there's actually a very small number of units that could even possibly be resulting in housing being taken off the market.

But what about hotels? As Blacharzyk told us earlier, Airbnb currently lists some 800,000 properties worldwide. Let's pretend we were describing a hotel chain with that many rooms. How many employees do you think that hotel chain would have versus and how many employees does Airbnb actually have? A hotel with that many rooms would certainly have tens of thousands, if not 100,000 employees. Airbnb has about 1,000 employees. You don't have to think too hard to see where this is going, do you? In New York, like most big cities, the hotel industry is an important one. State Senator Liz Krueger again.

I love that Airbnb or whomever always keeps saying somehow that I and others are shilling for the hotel industry. Now, is it growing to the level where, yes, this does appear to be competition with some in the hotel industry? It really seems to vary with what type and level of hotel. Yes, I'm not anti-business competition, but I'm also a believer in a fair playing field

where the same rules apply to everybody. So if there's someone saying, well, we should be able to run an alternative hotel model to what is the existing structure, then I'd say, well, are we meeting the same fire standards? Are we meeting the same fire standards? Are we meeting the same safety standards? Are we putting people out of business and decreasing the number of jobs in the economy with a new model? Because we're very conscious of having union jobs that pay well here in the city of New York. You have to admit, for someone who says they are not a protectionist, that last bit. We're very conscious of having union jobs that pay well here in the city of New York.

It sounds a bit protectionist. From their narrow perspective, I understand the concern. It's Jonathan Levin again, the Stanford economist. It may be that it does injure some businesses in the hotel industry. I think probably now mostly businesses that are operating relatively low-end hotels and not more upmarket hotels. If you ask from a kind of broader perspective, is it eliminating jobs overall? That's much less clear to me because it may be that some people who are working in hotels might lose their jobs if a hotel shut down. But on the other hand, you're creating new jobs for

people being entrepreneurs by renting out their home. So it's not obvious that the net effect on jobs is negative. It's no surprise that an economist looks at this from a different angle than a politician or a unionized hotel worker. One of the tenets of economics is the notion of creative destruction. New industries destroy old ones. New jobs replace old ones. But the person who held the old job may not necessarily get one of the new jobs, nor will the new job necessarily pay as well. Yes, there will be winners, but there will also be losers. Airbnb, as you've heard, is a winner. Nathan Blacharczyk, 31 years old, is one of the youngest billionaires in the world. But he argues that Airbnb is helping a lot of people make money.

In 2014, we will generate $768 million worth of economic impact in New York. So roughly one-third of that will go to hosts. And hosts, these are people trying to pay their mortgage or their rent. So this is much-needed income for them. But two-thirds of that will be spent out and about shopping, dining, etc. And what's really interesting is that over 70% of the properties are outside of major tourist districts. And so perhaps an unintended consequence of Airbnb is that huge tourism dollars are flowing to neighborhoods that don't normally see the benefit of tourism.

So it's actually a really good thing for the local economy. According to Airbnb's numbers, New York City hosts, as they are called, will take in roughly $250 million in 2014. When a hotel in New York takes in $250 million, it pays a big chunk of that money in taxes. But the city doesn't see much tax revenue from Airbnb. Well, first off, I'd like to clarify that Airbnb pays all the taxes that Airbnb is responsible for. That may be true. But again, Airbnb isn't a hotel company. It just makes the market. Airbnb earns its money by taking a cut of each transaction. So our business model is to take between 6 and 12% from the guest and 3% from the host. So on average, a little above 10%.

So the hosts take in roughly 90% of the dollars, which they are legally obligated to pay taxes on, but they rarely do. Why not? One reason is that it's pretty tempting and easy to not pay taxes on peer-to-peer transactions. But Blacharczyk argues there's at least one more reason. A lot of hosts are afraid because they aren't sure if they are allowed to rent out their homes on a short-term basis. And so they fear that if they pay the tax that is due and in doing so, give away their identity, that they'll be called on the

carpet for violating a short-term rental law. And so these two issues really go hand in hand. And it's hard to solve a tax problem without also allowing people to stop hiding. So if I ask you to build into your site a way to, let's say, automatically collect sales and hospitality and any other applicable taxes within way to, let's say, automatically collect sales and hospitality and any other applicable taxes within that transaction, even though you, Airbnb, are not really responsible for that? Would you do that? And why not, if not? Yes, we are willing to do that. That does represent a great deal of effort for us, but we're happy to partner with cities and to have a constructive relationship. And we've actually done this already starting at

the beginning of July with the city of Portland. So we're now collecting tax on behalf of the city of Portland. We're doing this automatically such that hosts don't even have to fill out any paperwork. Now, I think for us to be able to do this in all the different cities that we operate, and remember, we're in 35,000 different cities and certainly well over 100 cities where we operate at major scale. We need to make sure we implement these systems in a standardized way. Otherwise, we'll be left in a place that's unsustainable in terms of operating this complex process. Right. So you're helping Portland collect taxes. Is Airbnb operating entirely legally in Portland? Well, there's simultaneously a review of the regulation going on. And so that is happening in multiple stages. Right. But short answer, and I realize that for legal reasons, you may not want

to say these words, but I can. Short answer is you're not operating legally yet in Portland. You can cough if someone has a gun to your head, Nate. So, again, this is something that is evolving. Airbnb itself is definitely operating legally. The individual cases of our hosts varies very much based on what kind of building they're in, what part of the city they're in, et cetera. Since we spoke with Blacharczyk, Portland city commissioners voted to legalize Airbnb rentals for guests staying less than 30 days as long as hosts get a permit and submit to some safety inspections,

which gives a bit more leverage to Airbnb's general position, which is essentially, hey, we're not doing anything illegal, even though we facilitate transactions that may in in some cases, be illegal. But if only these old-fashioned government regulators would wake up and smell the creative destruction, we would happily help send millions of dollars in lost tax revenues their way. We just need to partner up on this. Portland's doing it. Why can't New York City? After hearing from Airbnb's Nathan Blacharczyk and New York Senator Liz Krueger, you get the sense that Krueger may not be the partner that Airbnb is looking for in New York. Krueger, you will remember, was behind the recent illegal hotel legislation. I don't think the laws we've passed are strict enough.

So I want to look at more enforcement, perhaps increased fines and penalties. I do have a very serious frustration that the kind of law I think 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, because the real impacts on real people are actually not in the cloud. They are very real in communities all over, actually, the world at this point. Coming up on Freakonomics Radio, the ride-sharing service Lyft has a head-on collision with New York regulators.

They interpret laws one way and are trying to do their job. And we interpret laws another way and are trying to innovate. And we send one of our producers to eat in a restaurant that's really just a guy cooking in his apartment to see if he gets poisoned or worse. I mean, given that they, you know, eat with has kind of narrowed it down to people that have actually passed the not psycho test. Yeah. You guys passed the not psycho test. Yes.

Yes. We like to think like we did. One more thing. If you do not already subscribe to Freakonomics Radio, well, let me say this peer to peer-peer, I think you should. Just sign up for free at iTunes and you will get the next episode in your sleep. From WNYC, this is Freakonomics place to stay to anyone else, and government regulators like New York State Senator Liz Krueger. I'm surely not saying I think the model is mostly used by people intending to do illegal activity. But this model also is fabulous if you're planning on doing something illegal, because most of the units in New York City end up being in apartment buildings without cameras or staff. So if you want to run a moving drug den, this is a fabulous

model to find yourself locations. It's a very easy way to operate moving houses of prostitution. Apparently, it's also very convenient for running illegal gambling. Our producer Greg Rosalski interviewed Kruger. Given her concerns about Airbnb, Greg asked her one last question. It's not just Airbnb. There's all these other sharing apps and one that's gaining popularity in New York, and I think actually in your district is called Eat With. And Eat With is basically the Airbnb for restaurants. Private citizens invite people into their homes and their apartments and people come in and they eat and they pay for a restaurant experience in somebody's home. Could you just tell me what your

thoughts are on that? I actually have not heard from anybody about that. I mean, right off the bat. So you're letting strangers into your apartment. So you are potentially facing some kind of personal liability or risk. There's New York City law about health inspections. And I'm really hoping that you aren't putting in illegal restaurant type ovens. If I get food poisoning, are they liable? I guess I would want to ask that question conceivably if I was the one eating. How do I know you're not poisoning me, and what's the liability?

What are you making here? This is hibiscus ginger sauce. What is that pungent smell I'm smelling? The ginger. The ginger and the hibiscus are really strong flavors. I think that both of them are going to do a great mix together. We have some more guests here. Hey, I'm Rafa. Carla. Nice to meet you.

My name is Max Stryler. And I'm Rafa Saga. And we're actually right now at our place. Rafa's a chef. He works in restaurants. And, you know, he always wanted to show people what he can create and offer. And, you know, when you work in a restaurant in a restaurant, you're limited by a menu. So this is for him a platform where he can expand his creativity and knowledge and try what he likes,

what he believes is good. At the end of the day, they say that chefs are like artists. So it's a way for him to express through his dishes what he thinks. So I grabbed the meat of the ostrich, ground it, and made a mousse with Dijon, some mezcal, parsley, and the sausage, hibiscus, ginger sauce. Drunk ostrich.

Drunk ostrich. For me, you know, it's also like a business, you know, because I manage at the end of the day the whole website, all the guest relations, going back and forth with emails, calls, texts. I manage all the financial part of the little business here. And I'm the host as well. I have dinner with you guys and sit down. And I enjoy the experience about sharing a moment in a know, random people that you've never seen before.

If you're comfortable, again, this is your home. Enjoy. If you need something, water, wine, tequila, mezcal, just feel free to ask, and enjoy. Enjoy. Welcome home. If you don't see me eat that much today, it's because I was sick during the week. I had some food poisoning.

Wait, so where did you get food poisoning? You're not subject to health inspections by the government, also fire safety inspections, and you don't get the letter grade in the window. So how do I know you're not poisoning me? I have a question for that question. How do you know you're not going to get poisoned in the restaurant? And if your answer is going to be, oh, well, because it's regulated by the health department,

then I ask you this question. How do you know who's cooking for you in that restaurant and what he's doing behind that kitchen? And in contrast with what we do here, you do know who is cooking and what he is doing in the kitchen. This is just for the love of good food and make people happy with food. And how can you make people happy if you're poisoning them? I have a tilapia filet, and I did a crust of chia. Chia is a Mexican seed that is very, very rich in vitamins.

Actually the first time that Rafa told me about this idea I was like, what are you talking about? Like, are you crazy? Like, I was just worried. Because you're opening your house to a bunch of people that you've never seen in your life. But at the end of the day, you know, like, you're open minded and, you know, you like crazy things and you live in New York, you know, like it's one of the things that you say, OK, let's give it a try. It's kind of a cross between a dinner party at a good friend's place and the best neighborhood restaurant ever. Like you're a little neighborhood joint where, you know, you see people that you know or maybe meet new people and it's just, you know. There's intimacy. Yeah, there's intimacy.

Exactly. You actually had to sign up and apply and then there was a vetting process. Yeah, you get an interview, a Skype interview, then they come into your house, then they come into your house then they dine with you and they go through your profile and your personality and you go oh now you're a whole uh neat with host and that's it i mean given that they you know eat with has kind of narrowed it down to people that have actually passed the not psycho test yeah you guys passed the not psycho, yes, we like to think like we did. People review you. Honestly, if you don't have any reviews or any stories,

people are not going to eat with you. My name is Javier, and my sister, whom I came with today, is Daniela. And we were looking for some cool, fun stuff to do in New York while he's in town, so he was looking up on TripAdvisor. And he found this really interesting bit. It's called Vol. 8th. Do you mind me asking, are you also staying with Airbnb? Yeah, like right now we're staying in an apartment here in the Lower East Side.

So you guys are like mascots for the sharing economy. So you're staying at Airbnb, you're eating at Eat With. Did you come here in Uber? We actually did. Yeah, we did. Last question. I mean, does anybody feel poisoned at this table? No. If you go tomorrow to eat dinner with friends or friends of friends, obviously nobody is expecting the health department to come in and to regulate this kitchen. That's Guy Michelin, the CEO and co-founder of Eat With. Nobody in the world is actually using the health departments to regulate what's going on in homes. I think that

if you operate on a commercial level and you have employees that are interacting with the food and not just the owner himself, there are large volumes of people coming in. It's commercial quantities. I guess it makes sense. Michelin started the company in Tel Aviv. Today we're in 32 countries and we're adding new countries basically every month now. Eatwith was inspired by Airbnb.

Michelin got the idea while on vacation. The idea started almost three years ago. I was traveling with my wife to the island of Crete. And like many times when you travel, we fell into every possible tourist trap. And so after a few days, I remembered that I once met in a conference a guy from Crete, and I actually emailed him and I asked him, where do the locals eat? And instead of just giving me a tip about a restaurant, he invited me home to a Friday dinner with his family, which turned out to be by far the best thing that happened to us on this trip.

I think that by interacting with the locals, by staying with the locals, by eating with the locals, it just changes your whole experience. You don't feel like a tourist anymore. You feel almost like a local for a few days. And so when I went back home, I met with my co-founder and we said there has to be a way to replicate this magic and to share it with other people around the world. And that's what we did. Eatwith is now based in San Francisco, of course. We asked Michelin if he's run into any resistance from regulators. Thank God, no. But I probably should say not yet. I'm sure it will happen. I think that sometimes, or actually many times, the regulator is a little bit behind to catch up with technology. It's interesting.

So I used to work for the government in Israel. I used to work for the state attorney's office. and look at the original reason why this law was put in place and all the different interest groups that are involved. And if you think about Airbnb, it's obvious that this is a phenomenon that's not going to go away. So obviously the regulator will need to come in and hopefully in a dialogue with all the different constituencies adapt or create a new regulation that fits the

reality. And I think Lyft did it very, very nicely here in California. That's Lyft as in the rideshare service. My name is John Zimmer. I'm the co-founder and president of Lyft. All right. And Lyft, L-Y-F-T, cars with pink mustaches. For those who don't know what Lyft is all about, can you explain it from the ground up? So Lyft is born out of the idea that transportation is really inefficient today. And you can see that in the fact that 80% of seats are empty at all times. So Lyft is now in over 65 cities across the country.

We've done over 10 million rides. And it's a peer-to-peer network for people in your community to give each other rides in a safe way. We use a mobile application to connect drivers and passengers who have extra time or extra seats in their car to give rides at the lowest possible price point. Lyft is not as well- as Uber nor as well endowed. It's currently valued at roughly $1 billion compared to Uber's $18 billion. They are rivals, but Lyft seems to have a different view of itself. I think what oftentimes people focus on in what we're doing, they say, oh, is this another taxi app that just kind of dresses it up?

But the reality is, no, that's not what we're building. That's not what our vision is. The taxi market is, in the US, $11 billion market. We're going after a trillion dollar opportunity, which is the owning and operation of a car by every American household. And on an individual level, owning and operating a vehicle at $8,000 to $9,000 a year is the second highest household expense in America, second only to owning a house. And then you have the environmental impact, 20% of CO2 emissions are coming from this system. And so we also believe that there is an ability to redesign our cities, not just for buildings and cars and roads, but for people and people interacting. The inspiration for Lyft and a predecessor called Zimride came from a college lecture. So in 2006, I went to Cornell Hotel School and in my senior year, took a class in city planning in the architecture school.

And the class was called Green Cities and had this amazing professor. The professor was Robert Young. His first lecture is The History of the World in 30 Minutes. The eighth lecture, as Zimmer recalls, was on the history of transportation. And he talked through the evolution from canals to railroad to highways. And I saw images of these networks of these physical infrastructure systems that he put up on the board. And I started thinking when he lays it out so simply as, you know, step one, step two, step three, there's got to be a step four. And I started

racking my brain thinking, what would be the fourth infrastructure that is built? And at first thought it would have to be physical because everything else that I saw on the screen was physical infrastructure system. And then, you know, using the main metric that we think about in the hotel school being occupancy, I asked, what is the occupancy of the seats within this system, within this network? And the professor said it's under 20%. If you are a hotel with 20% occupancy, you go out of business. If you're driving a car with 20% occupancy, well, you're just a typical American. And there was an interesting fact that the average car occupancy in Los Angeles is 1.1. And if it was 1.3, traffic in LA would be eliminated. And I got really excited. And I thought, well, if we could build the next

infrastructure, and it would require nothing physical, and it was only information based people that have cars or have seats or are giving rides and people that need a ride, that would be incredible. We would solve for the economic, the environmental and the social problems associated with this transportation system we've built. So John Zimmer and his co-founder Logan Green have a grand vision for changing how people get around. But as they've rolled out Lyft in city after city, they find that regulators often don't share that vision. They interpret laws one way and are trying to do their job. And we interpret laws another 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, you know, 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 for this new industry that we believe benefits drivers, passengers, and cities, then we wouldn't be operating anywhere. And so as, you know, someone who isn't purposely trying to be antagonistic, but someone who really believes in the change that we're trying to create, we need to push forward and we need to, you know, that friction will happen because both sides are trying to do their jobs and their jobs are different. Yes, friction will happen. For Lyft, it happened, perhaps not surprisingly, in New York City. Lyft was scheduled to begin service in New York City today, in Brooklyn and Queens,

but legal challenges could put those plans on ice. New York Attorney General Eric Schneiderman and Financial Services Superintendent Benjamin Lossky are seeking a court order to stop Lyft. In the spring of 2014, Lyft began operating in upstate New York, in Rochester and Buffalo, but it hadn't cleared the path with the state's attorney general. We were having conversations with them to try to understand what exactly they were doing in Buffalo and Rochester and whether an enforcement action would be merited. And in the midst of those conversations, they decided to launch in New York City,

potentially in violation of those same laws. That's Micah Lasher. And I'm the chief of staff to the New York State Attorney General, Eric Schneiderman. Lyft argued that because it is a ride-sharing app and that its fares are technically suggested donations, that it shouldn't be subject to the sort of rules that govern taxis. New York regulators disagreed. So as Lyft prepared to launch in New York City, the government went to court to stop them,

arguing that Lyft had, quote, thumbed its nose at the law and that the company's legal strategy was, quote, based on audacity and pretense. Micah Lasher personally tweeted that Lyft and John Zimmer were, quote, not just disruptive, but also personally dishonest in their dealings with regulators. And upon going to court after the first court proceeding, they did delay their New York

City launch. And here again is John Zimmer from Lyft. It became very clear that there wasn't going to be a fruitful path forward. So Lyft had to adapt its model. For instance, they agreed to use only drivers and vehicles licensed by the Taxi and Limousine Commission, which means that even though Lyft is operating in New York City, it's not really operating like Lyft. It's not fulfilling John Zimmer's grand vision for a new transportation model. It is also not posing much of a threat to the city's huge taxi and car service industries.

I think it's just very complicated because there's so many regulatory agencies. And, you know, many of them want to do their job correctly and protect public safety. But then there's also others that are protecting an existing industry. And one of the conversations that we often have with the regulator is, okay, let's talk about where we want to get to. Are we talking about protecting public safety or are we talking about protecting an existing industry and making sure that we do things exactly the same way into the future as we've done in the past. And when people say, you know, look, our priority is protecting public safety, we can have a really productive conversation. The notion that the attorney general is carrying water for the taxi industry is laughable.

That's Michael Lasher again, the AG's chief of staff. It is certainly the case that there are entrenched interests who, as a matter of their own self-interest, want to stop new innovators from entering the marketplace. It's laughable and frankly a rhetorical tactic by some of the companies we've had to deal with for them to group Attorney General Schneiderman into that. The New York Attorney General's office has also fought a long legal battle with Airbnb. But again, Lasher says, it isn't the hotel industry the office is trying to protect. It's public. 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 the 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 and doesn't have appropriate insurance, that can have an impact on a whole bunch of folks who did not sign up for that. The problem is, as companies come in, they say, we're not interested in whether or not our conduct is in violation of the law. We may very well, in fact, as a strategic matter, decide to break the law with' resistance to Lyft and Airbnb and say, well, they're just stuck in the past. Even if they're not purely protectionist, they're certainly anti-innovation. Lasher insists that is not the case.

I think we've demonstrated our ability to work with innovative companies to come up with new ways to look at things. With Uber, for instance. We did have an investigation into Uber with regard to whether or not their surge pricing violated New York State price gouging laws. Surge pricing. That's charging more for a ride on a Saturday night, for instance, or during bad weather. It's a standard practice for Uber and for Lyft as well. And in that case, Uber cooperated with our office and we were able to negotiate a resolution that maintained the integrity and the application of the state's price gouging laws, but did it in

a way that was thoughtful and that didn't interfere with what Uber was doing. And in fact, it was a model that they've now applied across the country. The compromise in that case, Uber could adjust prices to fit demand, but it had to set a price ceiling. It couldn't spike its prices the way it did during a snowstorm in New York in 2013, charging $35 a mile with a minimum ride of $175. As for Lyft, John Zimmer was frustrated that Lyft could only bring to New York a neutered version of itself. We believe that regulations can make sense, but that current regulations were created at a time when they couldn't have predicted the type of solutions that we have today. I like to think about what is a positive way of coming out of all this and what is a way that we could fix that friction. And I think that's something that hasn't been

solved and something that hasn't been figured out. How could a company approach this in a way that wouldn't ruffle the regulator's feathers in the same way? Lyft has had an easier time in some other cities. I mean, we've had mayors call us and ask us to come to their city. Pittsburgh, the mayor has been extremely welcoming. The mayor in Albuquerque, you know, came and visited the office and said, we really need this. This is what creative destruction looks like. This is the way the world moves forward, how economies move forward. A new technology is invented by someone for some purpose, and then it's repurposed by a whole bunch of energetic people moving in many different directions faster than anyone could have imagined.

Most of their attempts will fail, but some will work. And some work so, so well and happen so fast that if you're even a little bit old guard, it begins to look like the sky is falling. You imagine the worst about this new technology. You dwell on the dangers and the destruction of the old way of life. Here's the economist John Levin. If you take a longer term perspective on that, you think about just over the last 100 years, the U.S. economy has doubled in size every 30 years or so in terms of per capita GDP. And what that means is that there's been just a remarkable amount of change in pretty much everyone's lifetime,

my parents' lifetime, my grandparents' lifetime, and my lifetime. And a lot of that change has been disruption of existing industries and the creation of new industries. A huge fraction of the U.S. labor force used to be in agriculture, and now it's just a minuscule fraction. Someone listening to this program in the future might find it quaint to hear people arguing about which human being is going to drive you from point A to point B. I think the more fundamental threat to taxi drivers in the long run

as a way to be employed is almost certainly autonomous cars. In 20 years, it may be that there actually aren't people in the front seat of the car. And if autonomous vehicles really work, what about all the other people who drive for a living? Nearly 3% of the United States workforce, about 3.6 million people, feed their families by driving taxis, buses, delivery trucks, tractor trailers, and other vehicles, what are they supposed to do when this new technology starts to obliterate their livelihood? Well, at the very least, there should be a lot of job openings as government regulators. Hey, podcast listeners. On next week's show, let's say a pharmacist has a headache.

What do you think she will buy? The name brand Bayer Aspirin or the much cheaper store brand? They, by and large, take the store brand. So in the context of Headache Remedies, about 92% of the Headache Remedies pharmacists buy our store brand. And we see that very consistently across nurses, doctors, and so on. They're all buying way more store brand than the rest of us. The rest of us spend up to $2 billion extra each year just on brand name Headache Medicine. So is this just the triumph of marketing or

something more? When is the time to go generic? Maybe for the college education? That's next time on Freakonomics Radio. Freakonomics Radio is produced by WNYC and Dubner Productions. Our staff includes David Herman, Greg Rosalski, Greta Cohn, Caroline English, Susie Lechtenberg, and Chris Bannon. If you want more Freakonomics Radio, you can subscribe to our podcast on iTunes or go to Freakonomics.com,

where you'll find lots of radio, a blog, the books, and more.