The Underground Economy - Finance

The Underground EconomyByWilliam CateThe estimates of the scale of the present American underground economy range between $800 billion to $2.8 trillion per year. The American Revolution was essentially a conflict between a Colonial Underground Economy and the British Empire. Among the early problems for the newly formed United States was the Whiskey Rebellion of 1794. A conflict over taxes and government services between Washington and Western Pennsylvania.The history of civilization is a history of economic duality between a traditional economy and an underground economy. They are the yin and yang of economic balance. Economic stability and prosperity favors the traditional economy. Economic uncertainty, excessive regulation, taxes and growing unemployment favor the underground economy.As any Government's economy tanks, the citizens' standard of living falls and unemployment jumps, the underground economy grows. As business people find it increasingly difficult to make a living in the traditional economy, the underground economy grows.The underground economy is all the revenues generated in a country that isn't reported to the government for tax, regulation or other reasons. The best guess is these revenues represent between 20% and 30% of GNP in Western Europe and North America.Rapid growth of the underground economy has been the trend in the United States and Western Europe for the past decade. In the last thirty years, economists estimate that the underground economy has doubled. Currently, the underground economy is growing faster than the traditional U.S. Economy.In the United States, the IRS estimates that the underground economy may represent as much as 40% of the GNP. In some countries, like North Korea, the estimate is that 80% of the North Korean GNP goes unreported as part of their underground economy. The Kyrgyz Republic's economy is primarily an underground economy. Economic instability means a strong underground economy.Histori cally, the underground economy has been a cash economy. The European Union's currency is the Euro. It's now competing for the underground economy's business by having 500 Euro bills. It's worth more than five times the U.S. Dollar. We haven't printed a larger bill than the $100 bill in over than 50 years. One million dollars in $100 bills fits into a briefcase. But, one million U.S. Dollars worth of 500 Euro bills would fit into a purse. The smaller bill stack is a major advantage in the underground world. The underground economy results from many factors, including criminal activity. But the bulk of it arises from ordinary businessmen and workers who are evading taxes, government regulations or can't find meaningful employment in the traditional economy.The Underground Economy can be divided into at least six sub-economies. Scholars should name these sub-economies, since the members of one sub-economy often have little in common with their counterparts in another sub-econom y. The sub-economies appear in almost every country.1. Criminals: From fraud to kidnapping, criminals don't tell their governments the amount of their annual incomes.2. Politicians and Bureaucrats: Bribery is alive and well in the world. The only country that may have keep dishonest people from government service is Singapore. When Mobutu Sese Seko left office, he had accumulated a $10 billion dollar fortune. He could have written a check and paid off Zaire's $7 Billion foreign debt. I suspect the same could be said of most dictators who have been in office for years.3. Immigrants: If they can't legally work in their adopted country, they are automatically assigned to the underground economy. This is as true of Indonesians fleeing to Malaysia as it is of Hondurans fleeing to Guatemala. The best guess is that there are probably between 18-20 million undocumented workers in the United States. All are members of the underground economy.4. American Citizens: In the USA, you are only unemployed as long as you are drawing unemployment benefits. Thereafter, you no longer exist at the U.S. Dept of Labor. In the past few years, six million workers have disappeared from the U.S. Dept of Labor unemployment statistics. I suspect that many have joined the underground economy.The U.S. Government estimates there are 25 million underground economy entrepreneurs. Some are homeless collecting aluminum cans and crowding day labor halls. Some are merchants at Ebay, which has 40 million merchants, who do Internet sales that aren't reported. The smarter ones take a clue from the Owlhooters of the 1950s and 1960s and go to a local Junior Colleges and learn marketable skills.5. Employed Americans: Trade-persons, professionals and almost anyone with a useful skill often do side work for which they are paid in cash. Business owners often don't report all their income. Most traditional workers directly or indirectly earn unreported income. These people have one foot in t he traditional economy, the other in the underground economy.6. Sophisticated Investors: These people, from almost every country, realize that putting all of their eggs in any one economic basket is a bad bet against the future. They go offshore to their country of residence to increase investment income and reduce taxes. Governments, including the United States, are anxious to recruit these investors to build their national economies. This group controls trillions of dollars of investment capital.Whether caused by taxes, excessive regulations, ineffective lawenforcement, corrupt government or bad laws, it is clear that government is the prime cause of the growth of the underground economy. I see that growth as a piece of evidence for the steady increase in the probability that our children will meet the Mother of All Depressions. A study of the underground economy during the Dark Ages might prove to be a useful manual for generations to come to come.

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