My first Uber ride was Aug. 8th, 2014. I was picked up by Hipolito in a brand-new Toyota Camry that still had the new car smell. He had bottles of water and candy for my enjoyment. Uber Technologies Inc. was still relatively new, so I quizzed him on what it was like to be a driver. He loved it. And the thing he loved most was that he was able to make his own schedule.
Hipolito was not an employee of Uber; he was a 1099, an independent contractor – his own boss. He didn’t have a schedule. He also, crucially, didn’t have company-provided health insurance or other such benefits, but for all I knew Hipolito had it through his spouse. We chatted a bit before he cheerfully retrieved my bags from the trunk after we reached my destination and sent me on my way.
I was reminded of this encounter by some recent developments concerning Assembly Bill 5, which the state of California passed last year. The bill forbids Uber drivers from working as independent contractors. Instead, they are required to be treated as employees, with benefits and workers compensation insurance. A state appeals court ruled a few weeks ago that Uber and rival Lyft Inc. can continue operating as normal while challenging the law. The decision came just hours before Uber and Lyft were planning to suspend services in California, their home state.
It’s a very 19th century Upton Sinclair way of thinking that drivers were somehow being exploited by Uber and Lyft. The reality is probably more like the job was such a good deal that drivers probably thought that they were the ones doing the exploiting. No driver is coerced into the Uber network. A driver joins of his or her own free will. The system was working fine until the state introduced coercion and forced everyone involved to do things they didn’t want to do. An informal survey of Uber drivers found that about 70% would rather be independent contractors. A mere 17% wanted to be treated as employees.
Studies over the years have shown that Uber drivers don’t make much money, after taking into account gas, vehicle maintenance and depreciation. But I seriously doubt drivers are not rational economic actors. If the economics didn’t work, they wouldn’t do it. California claims to know what’s in the best interest of drivers, which strikes to the heart of a libertarian concept known as the fatal conceit—the idea that a bureaucrat could possibly know what’s best for the masses. When government intervenes in a complex economic system, it typically unleashes a pile of unintended consequences.
California considers threats by Uber and Lyft to leave the state a bluff, but they most likely aren’t. Uber and Lyft are simply not viable businesses if they are forced to treat drivers as employees, especially in a state as large as California. Here’s what Uber Chief Executive Officer Dara Khosrowshahi recently told the New York Times:
“Uber would only have full-time jobs for a small fraction of our current drivers and only be able to operate in many fewer cities than today…rides would be more expensive, which would significantly reduce the number of rides people could take, and in turn, the number of drivers needed to provide those trips.”
New York, New Jersey and Illinois are considering similar bills as the one in California, and Uber and Lyft will probably leave those states if that happens. California’s intransigence risks putting thousands of drivers out of work, leaving millions of people without rides in the middle of a pandemic. The timing seems a bit strange for states to go to the mat on this issue.
California has become a bit of a poster child for liberal overreach in recent years. My guess is that AB5 is less about worker protections than it is about striking at the tech titans for their market power and extreme concentration of wealth, which is counterproductive given the importance of tech to California’s economy and tax revenue. But these actions are being taken under partisan, ideological grounds with the idea that billionaires somehow obtain their wealth via unseemly business practices.
Consider that Uber didn’t have the best corporate image in the Travis Kalanick years, dogged by allegations of sexual harassment and a “macho” culture. The architect of AB5, Democrat assemblywoman Lorena Gonzalez of San Diego, is also the author of a vulgar tweet directed at Tesla’s Elon Musk, sent around the time that Musk was making noise about leaving California.
The state has simply become inhospitable to business, with “over-regulation, mindless bureaucracy, high taxes, and endless lawsuits,” according to The Economist. And it will probably get worse. California legislators recently proposed both a top 16.8% income tax rate (which would be the highest in the U.S. by a wide margin) and a wealth tax - an idea that was rejected during the Democratic primary.
Of course, AB5 unleashed a hurricane of unintended consequences, including ensnaring freelancers writing for websites. Under the law, the submission of more than 35 articles to a media outlet over the course of a year would force a publisher to treat the freelancer as an employee and provide benefits. Vox Media promptly ditched a few hundred freelancers and replaced them with 12 full-time employees. It has also affected hundreds of other occupations where workers operated as independent contractors.
AB5 attacks economic freedom in a way that no other law does by effectively telling people who they can and can’t work for, and under what terms. Democratic presidential candidate Joe Biden likes the law and wants to roll it out nationwide, which could potentially cause more damage to the economy than any of his proposed tax increases.
This is the 21st century. People don’t have jobs; they have gigs. This is a vast improvement over the industrial revolution way of thinking, where you go to the factory and put part A into slot B for 8 hours a day. I left my last “job” 12 years ago, and I’ve been on my own ever since. It is incredibly liberating, which is something California doesn’t seem to understand.
Jared Dillian is the editor and publisher of The Daily Dirtnap, investment strategist at Mauldin Economics, and the author of 'Street Freak' and 'All the Evil of This World.' He may have a stake in the areas he writes about.
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