Car-Sharing Bill Typifies California's 'Crony Capitalist' Approach to Innovation

Rental-car companies are facing the same challenges as other established businesses in the internet age. One state lawmaker wants to protect them from change.

Real capitalism is a tough sport where entrepreneurs risk their capital in hopes of winning customers.

The "crony" version of it involves politicians rigging the rules to assure that the "right" people are winners. We see this ugly process on high-profile national issues, such as when Donald Trump promotes tariffs to boost steel makers at the expense of companies that use steel products. But most of this nonsense proceeds quietly in legislative committees, without garnering any headlines or vocal opposition.

One awful but illustrative example popped up recently in the California state Capitol. Assembly Bill 2246, by Assemblywoman Laura Friedman, D-Glendale, apparently is part of a national effort by rental-car companies to snuff out a burgeoning industry that just happens to be threatening its business model. The bill would redefine "personal vehicle sharing" companies as "car rental companies"—and then slam them with reams of new regulations. Similar measures have been proposed in Idaho, New Hampshire, Maryland and Maine.

Rental-car companies are facing the same challenges as other established business models in this internet and app-based age. Capitalism—the real sort—is defined by "creative destruction," as economist Joseph Schumpeter called it. New companies are free to offer better products and services that appeal to customers. This is creative as new ideas flourish and consumers get a broader choice and lower prices thanks to competition. But it's also destructive. Complacent old companies suddenly are forced to improve their offerings or shut their doors. The consumer is king.

For example, I recently grabbed a taxicab rather than my usual Uber and noticed the oddest thing. The cabbie had a modern app-based system for taking my credit-card payment. Until recently, paying by credit card was a hassle because cab services didn't really want to take your card. I've also noticed a fleet of nice new cabs around my city. And the cab I took even sent an email with a receipt and a rating system. Sound familiar?

The cab companies have been forced to step up their game. But let's not give them too much credit. They have lobbied at the state and local level to impose new regulations that would hobble the ride-sharing companies that have forced them to operate more efficiently and to better cater to drivers and consumers. The taxicab cartel, which was a creation of crony capitalistic rent seeking in the first place, limits competition. The cab companies whined that it was unfair that these upstarts could skirt all the cab regulations—but the clever app-based workaround is the entire reason consumers are no longer stuck riding in decrepit cabs.

Likewise, room-sharing applications such as Airbnb continue to deal with limits and bans by cities, some of which are backed by the hotel industry. No one believes that these hoteliers simply are concerned about possible noise and parking issues in neighborhoods. They are worried about losing some of their vacation market share, so they have turned to lawmakers rather than the marketplace. It's another example of the crony capitalist approach.

Now, companies such as Getaround offer a similar deal. I know someone who rents her car through one of these services, which provides an app, insurance and everything needed for people to easily borrow her Mini Cooper for an hour or a day. I'm too particular about my car to let strangers drive it, but for some people it's a great way to make extra cash. It provides tourists with a nifty way to rent cars at various locations rather than going to the rental-car center and paying steep prices.

"By including personal vehicle sharing programs within those terms, the bill would make personal vehicle ride sharing programs subject to the rules and regulations applicable to rental car businesses, including provisions of the Consumer Automotive Recall Safety Act," according to the Friedman legislation. In other words, by defining these non-rental-car companies as rental-car companies, the bill would strangle this entrepreneurial model in the back seat, so to speak. It's appalling. It's so typical of how business is done in the Legislature that it doesn't even make many waves.

The vehicle-sharing companies are backing Assembly Bill 2873. It's an understandable, defensive measure that exempts them from being considered rental-car companies, but expresses the legislative intent to boost regulations. That's par for the course. Entrepreneurs have to propose new regulations on themselves to avoid getting hammered with unreasonable, industry killing regulations by their competitors.

AB2873's author is Evan Low, a Democrat from Silicon Valley and co-chairman of the California Legislative Technology and Innovation Caucus. Most of the exciting new business models are coming from the tech sector, and virtually all of them are facing pushback from old-line companies that find it easier to hire lobbyists than focus on improving their products or services. Here's hoping this committee can become a bulwark of capitalism in a world of cronyism.

This column first appeared in the Orange County Register. Steven Greenhut is Western region director for the R Street Institute. Write to him at [e-mail].