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Flexing the rules for the 'flex' economy

The Democratic National Convention has come and gone. Regardless of your view of the proceedings, there is little doubt the delegates spent a lot of money in the region. But this large a meeting taxed the facilities and resources of the economy. Meeting t

The taxicab industry is heavily regulated, so that, while standards are enforced for service and security, a fixed supply of cabs cannot respond flexibly to demand fluctuations.
The taxicab industry is heavily regulated, so that, while standards are enforced for service and security, a fixed supply of cabs cannot respond flexibly to demand fluctuations.Read moreTOM GRALISH / Staff Photographer

The Democratic National Convention has come and gone. Regardless of your view of the proceedings, there is little doubt the delegates spent a lot of money in the region. But this large a meeting taxed the facilities and resources of the economy. Meeting those demands required calling on the potential supply of goods and services that exists in the new "flex economy." Unfortunately, resolving the business concerns of competition, regulation, safety, and taxation of these new types of firms has yet to be addressed.

Just as workers in the gig economy are essentially employees in waiting, businesses in the flex economy expand the supply of goods and services as the need arises. Consider the DNC and two critical issues: transportation and lodging. If it weren't for the flexibility of service providers in these two sectors, hosting the convention would have been more difficult and undoubtedly less successful.

When there is a surge in visitors, the transportation system always becomes stressed. Here is where the flex economy comes into play. On-call companies, such as Uber and Lyft, provide a source of transportation services that can be called into operation immediately. The workforce is either already available or readily expandable.

In contrast, the taxicab industry is largely fixed in its supply, as the number of cabs is limited by the regulatory system. That is not necessarily bad. Standards can be enforced to ensure acceptable levels of service and security. But it does mean that when demand swells, the supply may not necessarily be there. On-demand, less regulated companies provide what is called "latent" capacity that can be employed when the need arises. That elasticity is as critical for the efficient provision of services as the need to have minimum service levels.

On the hospitality front, hotels and other traditional lodging facilities also have relatively limited capacity to expand. When a surge occurs, people are forced further from the center of activity. That is where the flex economy comes in. Companies such as Airbnb have a large latent supply of rooms to rent that can meet the demand at prices people want to pay. That makes it possible to hold a convention in areas that may not have the required number of traditional hotel rooms, because the flex economy can supply the rest.

So, what could be wrong with firms that provide the needed flexibility to our economy? They challenge the current structure in ways that are both good and problematic.

Consider the taxi industry. The anger toward the flex-ride companies is understandable. Because the government limits the supply of taxis, the license to drive a cab is extremely expensive. In return, a minimum supply of the service is ensured for the public, and the government-set prices are supposed to provide acceptable earnings.

The limits on competition come with a price, though. Taxi owners are subject to insurance, inspection, and operational requirements. They pay local government taxes and fees. In contrast, many of the government regulations, taxes, and fees don't apply to the on-demand providers. Drivers and their vehicles don't undergo the same regulatory review as regulated taxi drivers face, though that clearly doesn't mean they are less safe or clean. And there is no high-priced license to buy - all you need is a vehicle.

Similarly, hotels are closely regulated and are taxed heavily. The on-demand providers do not face those formal restrictions or costs. Airbnb is constantly fighting local requirements to inspect its units, as it would probably be a business-model breaker.

But it is the tax issue that is most troublesome. Hotels pay significant taxes, especially local ones. Hotel tax rates are much higher than other industries' because outsiders pay the taxes. However, those taxes are generally not paid by the on-demand companies or room providers. Does that make sense? Shouldn't all lodging providers pay the same taxes? The more there is a deflection from traditional lodging companies to flex-providers, the less local tax revenue is collected.

Finally, the traditional companies are responsible for security. Who is responsible for insuring the security of the flex-taxi customer or driver, the room renter, the rental unit, or the neighbors of those who rent out their units as part of the flex-economy?

The speed at which we transition into a flex-economy will only accelerate. Unfortunately, just as the labor rules for workers in the gig economy are unclear, the rules, regulations, and tax structures governing businesses in the flex-economy are lagging. We need them to be clarified sooner, rather than later.

jnaroff@phillynews.com