The Underground Economy
The gross domestic product misses many transactions that take place in the underground economy.
Searching for the Hidden Economy
Here is the brief, unremarkable story of how I recently “line 10 participate in till’ underground economy on the iciest day this past winter. a man knocked at my fro in root Shovel your walk?” he asked. “Only $5,”Outside. it was a bone- chilling 15 degrees, “Sold,” I said. A hall-hour I handed over a five-dollar bill and thanked him for saving me the trouble. .’ Officially, this was an unofficial transaction=-off the hooks, with no taxes paid or safety regulations followed. (At least, I assume this hired hand didn’t bother to report that income or register with till: proper authorities.) As such. it was technically illegal. And •.of course. it’s the sort of thing that happens all the time.
The size of the official U.S. economy. as measured by Gross Domestic Product (GDP). was almost $12 trillion in 2004. Measurements of the unofficial economy-not including illegal activities like drug dealing and prostitution differ substantially. But it’s generally agreed to be significant, somewhere between 6 percent and 20 percent of GDP. At the midpoint. this would be about $1.5 trillion a year. Broadly defined. the underground. gray, informal. or shadow economy involves otherwise legal transactions that go unreported or unrecorded. That’s a wide net, capturing everything from babysitting fees. to bartering home repairs with a neighbor. to failing to report pay from mooulighting gigs. The round label tends to make it sound much sinister than it really is Criminal activities make up a large portion of what could be termed the total underground economy. Many studies have been done on the economics of drug dealing.prostitution, and gambling. But because money from crime is almost never recovered. many policymakers are more interested in portions of the underground economy that otherwise would be legal if not hidden from authorities. Things like shoveling walks.Despite it> intrigue, the informal economy’s importance and consequences remain in debate, The reason: “You’re trying to measure a phenomenon whose entire purpose is to hide itself from observation,” says’ Ed an economist at the University of Wisconsin This uncertainty poses problems for policymakers. Without knowing the precise size, scope, and causes of the underground economy, how can they decide what-if anything-to do about it? Was the man who shoveled my walk engaging in a socially positive or negative activity? Was I? Suffice it to say, some economists have dedicated their entire careers to answering questions about the underground economy-and still there is nothing close to a consensus about its size or description Economists generally agree that the shadow economy is worse in developing nations, whose webs of bureaucratic red tape and corruption are notorious. For instance, [economist Fried rich] Schneider in 2003 published “shadow economy” estimates (defined broadly as all market-based; legal production of goods and services deliberately concealed from the authorities) for countries including: Zimbabwe, estimated at a whopping 63.2 percent of GDP, Thailand’s at 54.1 percent, and Bolivia’s at 68.3 percent. Among former ‘Soviet bloc nations, Georgia led the ‘way with a 68. percent of GDP shadow economy, and together those nations had an average 40.1 percent of GOP
underground. This contrasts with an average of 16.7 percent among western nations ….
In his 2003 book, Reefer Madness: Sex, Drugs and Cheap Labor in the Geriatrician Black Market, investigative writer Eric Schlosser invokes Adam Smith’s “invisible hand” theory that men pursuing their own self-interest will generate benefits -for society as a whole. This invisible hand has produced a fairly sizable underground economy, and we cannot understand our entire economic system without understanding how the hidden underbelly functions. too. “The underground is a good measure of the progress and the health of nations,” Schlosser writes. “When much is wrong, much needs to be hidden.” Schlosser’s implication ,was that much is wrong in the United States. If he had taken a more global view, he might haw decided relatively little is hidden here .