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Let’s stop crushing entrepreneurs with reams of regulations

Car services like Uber, Lyft and Sidecar are thriving because they’ve embraced an obvious, good idea: connecting those who have spare time and wheels with people who need rides. Founded just five years ago, Uber now operates in 128 cities and on every continent but Antarctica. The company and its competitors connect riders and drivers every day across America.

But the services are also encountering stiff resistance from regulators nearly everywhere they go, including Buffalo. Last week, Manhattan Supreme Court Justice Kathryn E. Freed ruled that Lyft can continue operating in Buffalo and Rochester for now, but prevented it from launching service in New York City.

In Washington, D.C., the city council proposed a rule that would have required car services to charge at least five times what taxis charge. The proposed language openly acknowledged that the aim was to ensure these services would pose no competitive threat to cabs. The proposal failed in the face of stiff consumer opposition.

Chicago recently passed stricter rules for ride-share services, including expensive requirements for licensing and liability and a prohibition on airport pickups. Some aldermen sided with the city’s powerful taxi industry in pushing for more stringent regulations, but there, too, public outcry forced the city council to rethink the worst of these.

In Miami, where the companies are banned outright, police use sting operations to ensnare Lyft’s drivers.

The resistance from cab companies and regulators shouldn’t come as a surprise. It’s exactly what happened 100 years ago when jitney services first came into being – and then were quickly regulated out of existence.

The first recorded jitney cab ride was in Los Angeles in July 1914 when L.P. Draper picked up a passenger in his Ford Model T and drove him a short distance. He accepted a nickel (known then as a “jitney nickel”) for payment, because that was the streetcar fare at the time. Like a hybrid between a bus and a taxi, jitneys followed semi-fixed routes, but they were willing to veer from their routes to pick up passengers and to drop them off wherever they wanted.

In less than a year, the spontaneous entrepreneurial movement had spread from Los Angeles to Maine, with an estimated 62,000 jitneys operating in 175 U.S. cities. Traveling by jitney was generally an improvement over the crowded streetcar: Jitneys were faster, more convenient and often more comfortable. And the jitneys served their operators, too, allowing people – particularly those who were unemployed – to use their existing resources to earn income.

But the services soon met a wall of opposition – from powerful business interests that opposed the increased traffic, from streetcar operators who saw the entrepreneurs as a threat to their existence and from municipalities that relied on tax revenue from private streetcar companies.

Cities responded with a wave of regulations that swept the jitney movement out of existence. Jitney operators were required to drive a minimum amount of time – up to 12 or 16 hours a day – and weren’t allowed to deviate from their routes to take people directly to their destinations. Some cities barred them from operating along major urban corridors or along roads served by streetcars. And just about everywhere, jitney drivers had to pay for expensive licenses and bonding.

It became virtually impossible to operate profitably. By 1918, the number of jitneys operating across America had dropped by 90 percent, and within a few years, they were extinct.

Today’s ride-share services have some advantages over the jitneys. The new services allow riders to see how customers have rated a driver, and the companies themselves monitor customer reviews and stop working with drivers who don’t maintain high ratings. This simple system accomplishes what reams of taxi regulations are unable to achieve, ensuring clean, reliable, courteous service.

But that hasn’t stopped governments from stepping in to regulate. In California, the state’s public utility commission now requires ride-share companies to register, do background checks on drivers, inspect vehicles and verify insurance coverage.

Some Los Angeles City Council members are pushing for even stronger regulations, saying that the new companies have been given an unfair competitive advantage over traditional taxis by not having to comply with the same rules.

Of course, if regulatory equity is the goal, it would be better achieved by minimizing rather than maximizing regulations; taxis should benefit from the same minimal regulations as ride-sharing services.

Disruptive innovations are bound to challenge existing business models. When they do, city and state leaders face a choice: defer to the judgment of consumers and let the marketplace determine who survives, or side with existing firms and trap newcomers in a tangle of crippling regulations. The short life and death of the jitney in its earlier incarnation shows what happens when policymakers interfere with innovation.

Matthew Mitchell is lead scholar on the Project for the Study of American Capitalism with the Mercatus Center at George Mason University. Michael Farren is a research assistant with the Mercatus Center and a doctoral candidate at Ohio State University in applied economics.