Innovation & Entrepreneurship

[The following essay is a guest post from Dan Rothschild, director of state projects and a senior fellow with the R Street Institute.]

As anyone who’s lived in a major coastal American city knows, apartment renting is about as far from an unregulated free market as you can get. Legal and regulatory stipulations govern rents and rent increases, what can and cannot be included in a lease, even what constitutes a bedroom. And while the costs and benefits of most housing policies can be debated and deliberated, it’s generally well known that housing rentals are subject to extensive regulation.

But some San Francisco tenants have recently learned that, in addition to their civil responsibilities under the law, their failure to live up to some parts of the city’s housing code may trigger harsh criminal penalties as well. To wit: tenants who have been subletting out part or all of their apartments on a short-term basis, usually through web sites like Airbnb, are finding themselves being given 72 hours to vacate their (often rent-controlled) homes.

San Francisco’s housing stock is one of the most highly regulated in the country. The city uses a number of tools to preserve affordable housing and control rents, while at the same time largely prohibiting higher buildings that would bring more units online, increasing supply and lowering prices. California’s Ellis Act provides virtually the only legal and effective means of getting tenants (especially those benefiting from rent control) out of their units — but it has the perverse incentive of causing landlords to demolish otherwise useable housing stock.

Again, the efficiency and equity ramifications of these policies can be discussed; the fact that demand curves slope downward, however, is really not up for debate.

Under San Francisco’s municipal code it may be a crime punishable by jail time to rent an apartment on a short-term basis. More importantly, it gives landlords the excuse they need to evict tenants they otherwise can’t under the city’s and state’s rigorous tenant protection laws. After all, they’re criminals!

Here’s the relevant section of the code:

Any owner who rents an apartment unit for tourist or transient use as defined in this Chapter shall be guilty of a misdemeanor. Any person convicted of a misdemeanor hereunder shall be punishable by a fine of not more than $1,000 or by imprisonment in the County Jail for a period of not more than six months, or by both. Each apartment unit rented for tourist or transient use shall constitute a separate offense.

Here lies the rub. There are certainly legitimate reasons to prohibit the short-term rental of a unit in an apartment or condo building — some people want to know who their neighbors are, and a rotating cast of people coming and going could potentially be a nuisance.

But that’s a matter for contracts and condo by-laws to sort out. If people value living in units that they can list on Airbnb or sublet to tourists when they’re on vacation, that’s a feature like a gas stove or walk-in closet that can come part-and-parcel of the rental through contractual stipulation. Similarly, if people want to live in a building where overnight guests are verboten, that’s something landlords or condo boards can adjudicate. The Coase Theorem can be a powerful tool, if the law will allow it.

The fact that, so far as I can tell, there’s no prohibition on having friends or family stay a night — or even a week — under San Francisco code, it seems that the underlying issue isn’t a legitimate concern about other tenants’ rights but an aversion to commerce. From the perspective of my neighbor, there’s no difference between letting my friend from college crash in my spare bedroom for a week or allowing someone I’ve never laid eyes on before do the same in exchange for cash.

The peer production economy is still in its infancy, and there’s a lot that needs to be worked out. Laws like those in San Francisco’s that circumvent the discovery process of markets prevent landlords, tenants, condos, homeowners, and regulators from leaning from experience and experimentation — and lock in a mediocre system that threatens to put people in jail for renting out a room.

Last December, it was my pleasure to take part in a great event, “The Disruptive Competition Policy Forum,” sponsored by Project DisCo (or The Disruptive Competition Project). It featured several excellent panels and keynotes and they’ve just posted the video of the panel I was on here and I have embedded it below. In my remarks, I discussed:

  • benefit-cost analysis in digital privacy debates (building on this law review article);
  • the contrast between Europe and America’s approach to data & privacy issues (referencing this testimony of mine);
  • the problem of “technopanics” in information policy debates (building on this law review article);
  • the difficulty of information control efforts in various tech policy debates (which I wrote about in this law review article and these two blog posts: 1, 2);
  • the possibility of less-restrictive approaches to privacy & security concerns (which I have written about here as well in those other law review articles);
  • the rise of the Internet of Things and the unique challenges it creates (see this and this as well as my new book); and,
  • the possibility of a splintering of the Internet or the rise of “federated Internets.”

The panel was expertly moderated by Ross Schulman, Public Policy & Regulatory Counsel for CCIA, and also included remarks from John Boswell, SVP & Chief Legal Officer at SAS, and Josh Galper, Chief Policy Officer and General Counsel of Personal, Inc. (By the way, you should check out some of the cool things Personal is doing in this space to help consumers. Very innovative stuff.) The video lasts one hour. Here it is:

Give us our drone-delivered beer!

That’s how the conversation got started between John Stossel and me on his show this week. I appeared on Stossel’s Fox Business TV show to discuss the many beneficial uses of private drones. The problem is that drones — which are more appropriately called unmanned aircraft systems — have an image problem. When we think about drones today, they often conjure up images of nefarious military machines dealing death and destruction from above in a far-off land. And certainly plenty of that happens today (far, far too much in my personal opinion, but that’s a rant best left for another day!).

But any technology can be put to both good and bad uses, and drones are merely the latest in a long list of “dual-use technologies,” which have both military uses and peaceful private uses. Other examples of dual-use technologies include: automobiles, airplanes, ships, rockets and propulsion systems, chemicals, computers and electronic systems, lasers, sensors, and so on. Put simply, almost any technology that can be used to wage war can also be used to wage peace and commerce. And that’s equally true for drones, which come in many sizes and have many peaceful, non-military uses. Thus, it would be wrong to judge them based upon their early military history or how they are currently perceived. (After all, let’s not forget that the Internet’s early origins were militaristic in character, too!)

Some of the other beneficial uses and applications of unmanned aircraft systems include: agricultural (crop inspection & management, surveying); environmental (geological, forest management, tornado & hurricane research); industrial (site & service inspection, surveying); infrastructure management (traffic and accident monitoring); public safety (search & rescue, post-natural disaster services, other law enforcement); and delivery services (goods & parcels, food & beverages, flowers, medicines, etc.), just to name a few.


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Some recent tech news provides insight into the trajectory of broadband and television markets. These stories also indicate a poor prognosis for a net neutrality. Political and ISP opposition to new rules aside (which is substantial), even net neutrality proponents point out that “neutrality” is difficult to define and even harder to implement. Now that the line between “Internet video” and “television” delivered via Internet Protocol (IP) is increasingly blurring, net neutrality goals are suffering from mission creep.

First, there was the announcement that Netflix, like many large content companies, was entering into a paid peering agreement with Comcast, prompting a complaint from Netflix CEO Reed Hastings who argued that ISPs have too much leverage in negotiating these interconnection deals.

Second, Comcast and Apple discussed a possible partnership whereby Comcast customers would receive prioritized access to Apple’s new video service. Apple’s TV offering would be a “managed service” exempt from net neutrality obligations.

Interconnection and managed services are generally not considered net neutrality issues. They are not “loopholes.” They were expressly exempted from the FCC’s 2010 (now-defunct) rules. However, net neutrality proponents are attempting to bring interconnection and managed services to the FCC’s attention as the FCC crafts new net neutrality rules. Net neutrality proponents have an uphill battle already, and the following trends won’t help. Continue reading →

Google’s announcement this week of plans to expand to dozens of more cities got me thinking about the broadband market and some parallels to transportation markets. Taxi cab and broadband companies are seeing business plans undermined with the emergence of nimble Silicon Valley firms–Uber and Google Fiber, respectively.

The incumbent operators in both cases were subject to costly regulatory obligations in the past but in return they were given some protection from competitors. The taxi medallion system and local cable franchise requirements made new entry difficult. Uber and Google have managed to break into the market through popular innovations, the persistence to work with local regulators, and motivated supporters. Now, in both industries, localities are considering forbearing from regulations and welcoming a competitor that poses an economic threat to the existing operators.

Notably, Google Fiber will not be subject to the extensive build-out requirements imposed on cable companies who typically built their networks according to local franchise agreements in the 1970s and 1980s. Google, in contrast, generally does substantial market research to see if there is an adequate uptake rate among households in particular areas. Neighborhoods that have sufficient interest in Google Fiber become Fiberhoods.

Similarly, companies like Uber and Lyft are exempted from many of the regulations governing taxis. Taxi rates are regulated and drivers have little discretion in deciding who to transport, for instance. Uber and Lyft drivers, in contrast, are not price-regulated and can allow rates to rise and fall with demand. Further, Uber and Lyft have a two-way rating system: drivers rate passengers and passengers rate drivers via smartphone apps. This innovation lowers costs and improves safety: the rider who throws up in cars after bar-hopping, who verbally or physically abuses drivers (one Chicago cab driver told me he was held up at gunpoint several times per year), or who is constantly late will eventually have a hard time hailing an Uber or Lyft. The ratings system naturally forces out expensive riders (and ill-tempered drivers).

Interestingly, support and opposition for Uber and Google Fiber cuts across partisan lines (and across households–my wife, after hearing my argument, is not as sanguine about these upstarts). Because these companies upset long-held expectations, express or implied, strong opposition remains. Nevertheless, states and localities should welcome the rapid expansion of both Uber and Google Fiber.

The taxi registration systems and the cable franchise agreements were major regulatory mistakes. Local regulators should reduce regulations for all similarly-situated competitors and resist the temptation to remedy past errors with more distortions. Of course, there is a decades-long debate about when deregulation turns into subsidies, and this conversation applies to Uber and Google Fiber.

That debate is important, but regulators and policymakers should take every chance to roll back the rules of the past–not layer on more mandates in an ill-conceived attempt to “level the playing field.” Transportation and broadband markets are changing for the better with more competition and localities should generally stand aside.

Last night, I appeared on a short segment on the PBS News Hour discussing, “What’s the future of privacy in a big data world?” I was also joined by Jules Polonetsky, executive director of the Future of Privacy Forum. If you’re interested, here’s the video. Transcript is here. Finally, down below the fold, I’ve listed a few law review articles and other essays of mine on this same subject.

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When Google announced it was acquiring digital thermostat company Nest yesterday, it set off another round of privacy and security-related technopanic talk on Twitter and elsewhere. Fear and loathing seemed to be the order of the day. It seems that each new product launch or business announcement in the “Internet of Things” space is destined to set off another round of Chicken Little hand-wringing. We are typically told that the digital sky will soon fall on our collective heads unless we act preemptively to somehow head-off some sort of pending privacy or security apocalypse.

Meanwhile, however, a whole heck of lot of people are demanding more and more of these technologies, and American entrepreneurs are already engaged in heated competition with European and Asian rivals to be at the forefront of the next round Internet innovation to satisfy those consumer demands. So, how is this going to play out?

This gets to what becoming the defining policy issue of our time, not just for the Internet but for technology policy more generally: To what extent should the creators of new technologies seek the blessing of public officials before they develop and deploy their innovations? We can think of this as “the permission question” and it is creating a massive rift between those who desire more preemptive, precautionary safeguards for a variety of reasons (safety, security, privacy, copyright, etc.) and those of us who continue to believe that permissionless innovation should be the guiding ethos of our age. The chasm between these two worldviews is only going to deepen in coming years as the pace of innovation around new technologies (the Internet of Things, wearable tech, driverless cars, 3D printing, commercial drones, etc) continues to accelerate.

Sarah Kessler of Fast Company was kind enough to call me last night and ask for some general comments about Google buying Nest and she also sought out the comments of Marc Rotenberg of EPIC about privacy in the Internet of Things era more generally. Our comments provide a useful example of the divide between these two worldviews and foreshadow debates to come: Continue reading →

James Barrat, author of Our Final Invention: Artificial Intelligence and the End of the Human Era, discusses the future of Artificial Intelligence (AI). Barrat takes a look at how to create friendly AI with human characteristics, which other countries are developing AI, and what we could expect with the arrival of the Singularity. He also touches on the evolution of AI and how companies like Google and IBM and government entities like DARPA and the NSA are developing artificial general intelligence devices right now.

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Robert Scoble, Startup Liaison Officer at Rackspace discusses his recent book, Age of Context: Mobile, Sensors, Data and the Future of Privacy, co-authored by Shel Israel. Scoble believes that over the next five years we’ll see a tremendous rise in wearable computers, building on interest we’ve already seen in devices like Google Glass. Much like the desktop, laptop, and smartphone before it, Scoble predicts wearable computers represent the next wave in groundbreaking innovation. Scoble answers questions such as: How will wearable computers help us live our lives? Will they become as common as the cellphone is today? Will we have to sacrifice privacy for these devices to better understand our preferences? How will sensors in everyday products help companies improve the customer experience?

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“Selfie” was selected today as the word of the year by the Oxford English Dictionary’s editors, beating both “twerking” and “bitcoin.” Bitcoin’s company in that word list makes me appreciate the fact that others may be as sick of hearing about Bitcoin as I am about twerking. Nevertheless, it’s a pretty important week for Bitcoin, an I wanted to highlight some of the work I’ve been doing.

Yesterday the Senate Homeland Security and Governmental Affairs Committee held a hearing on the promises and challenges that virtual currencies hold for consumers and law enforcement respectively. I testified at that hearing and video of my testimony is below. You can also check out the written testimony, which is an updated version of the Bitcoin primer for policymakers I wrote with Andrea Castillo earlier this year. And ahead of the hearing I published an op-ed in The Guardian arguing that if the U.S. doesn’t foster a sane regulatory environment for Bitcoin, entrepreneurs will go to other jurisdictions that do.

All in all the hearing was hearteningly positive. The federal regulators and law enforcement representatives all agreed that Bitcoin is a lawful and legitimate payments system and that it holds great promise. They also agreed that plain old cash and centralized virtual currencies (contra Bitcoin’s decentralized design) are much greater magnets for money laundering, and that they needed no new laws or authority to deal with illegal uses of Bitcoin. I discuss the hearing and its implications on today’s Cato Daily Podcast with Caleb Brown.

Finally, I think there are lots of folks, especially in the wonkosphere, who think they know what Bitcoin is, but really don’t, and so the opinions they offer about its viability or significance are based on misunderstanding. For example, Neil Irwin at Wonkblog today wrote a 700-word post to suggest that what Bitcoin needs is a central bank. Now, if he’s trolling, kudos to him. But I really think he’s innocently ignorant of the fact that Bitcoin’s seminal design feature is that it is a decentralized payments system, and that the moment you add a central banker (which would in any case be impossible) you would no longer have Bitcoin, but Facebook Credits or Microsoft Points or airline miles.

So, if you think you have an inkling about what Bitcoin is, but you’re not too sure, or you don’t know why it’s so significant, please check out my cover story in the December issue of Reason, which was just made available online. Apart from explaining the basics, I go into detail about the little understood fact that Bitcoin is much more than just money. Value transmission is just the most obvious use case for Bitcoin, and thus the one that’s being built out first, but the Bitcoin platform is essentially a decentralized ledger, so it is also able to support property registrations, decentralized futures markets, and much more.

And truly finally, if you want to keep up with all the happenings in Bitcoin, including the Senate Banking Committee hearing later today, check out MostlyBitcoin.com, a site a built for myself but that I hope is useful to others that tracks Bitcoin stories in the mainstream media.