Do We Need to Crack Down on Restauranteurs?

I think that Dave Alpert’s suggested changes to DC’s regulatory efforts to ensure the existence of non-restaurant retail opportunities would be an improvement over the status quo. Still, I would reject the whole premise that regulation is needed in this sphere. Here’s the rationale:

Adams Morgan. Photo by randomduck.
Fostering a diverse range of retail in a neighborhood commercial area is a difficult balancing act. DC has tried several techniques for managing this balance, including limiting the frontage devoted to restaurants, limiting liquor licenses, and offering bonuses to new development that contains certain uses.

Restaurants, especially those allowed to serve alcohol, can afford higher rents than neighborhood-serving businesses, like grocery stores, hardware stores, pharmacies and dry cleaners. As bars and restaurants become successful, an area draws more foot traffic, attracting more of those businesses. Landlords can charge higher rent, which pushes out the local businesses. This is basically an economic game theory problem: the most natural equilibrium states are a mostly-vacant corridor on the one hand, and nothing but bars on the other.

What’s going unasked here is the question of why the restaurants, especially those with liquor licenses, can afford to pay higher rents? The reason, of course, is that they register higher operating profits. But why do they register higher operating profits? Well, I would submit that they’re so profitable precisely because of the regulations aimed at limiting their quantity.

If you made it easier to open a restaurant, and easier to get a liquor license, then many people would look at the high operating profits currently being earned and open more bars and restaurants. The increased competition, citywide, would reduce bar and restaurant profits and eventually bring the system into equilibrium. But right now the preferred marginal use of a currently vacant structure is as a bar or restaurant precisely because there are so many regulatory barriers to opening new ones. Given not only the hard limits, but also the uncertainty involved in securing regulatory approval, people hesitate to attempt to start up new bars and restaurants even though if you can get a new one off the ground in the right neighborhoods in DC you’re certain to earn profits. That leads to structural undersupply of restaurants, oversupply of vacant buildings, and a persistent culture of mediocrity.

The problem, when people envision a neighborhood becoming “a new Adams-Morgan,” is that they’re envisioning a very limited deregulation. The high levels of regulation prevailing throughout the city means that if you make a single three-block stretch of some street somewhere friendly to new bars and restaurants then you really will get a ton of new bars and restaurants crowding everything out. But it’s a fairly large city. If there were less regulation across the board then the new bars and restaurants would be spread throughout the city and no particular neighborhood would see a drastic increase.