Black Markets

Obama Finally Brings Growth — To the Shadow Economy

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Stack of cash
FBI

If as many Spaniards were out of work as official figures suggest, pointed out Victor Mallet and Guy Dinmore in a 2011 article in the Financial Times, "Spain would not be as peaceful as, barring a few demonstrations, it has so far been." Spain's unemployment rate has gone up since then, and while the country isn't exactly thriving, there's no rioting or mass starvation, either. Clearly, there's a huge gap between official data and what people are actually doing, and occupying that gap, they reported, are off-the-books jobs, untaxed businesses and lots of cash in an active shadow economy. As noted at Reason 24/7, Rick Newman of U.S. News & World Report has spotted a similar mismatch — this time in the United States. Income isn't rising. Neither, really, is credit-card debt. But consumer spending is marching along at a healthy clip. Once again, unofficial economic activity beyond the reach of tax collectors and regulators seems to be taking up the slack.

Writes Newman:

Household spending has held up surprisingly well in recent months, even though new taxes have reduced paychecks and other problems are holding back the economy. Incomes haven't risen by nearly enough to explain the entire boost in spending. Nor has the use of credit cards.

When your teenager starts wearing expensive clothes and flashing bling he couldn't possibly afford through his part-time job, you start to wonder where the money is coming from. Some economists are asking the same question about consumers who seem more flush than they ought to be. The answer may lie in the large "underground" economy that doesn't show up in official statistics.

He goes on to cite Bernard Baumohl of the Economic Outlook Group, who recently wrote (PDF):

[S]evere recessions have historically driven jobless Americans into the shadow economy, and we suspect the destructive nature of the last downturn and the prolonged weak recovery pushed a record number of people into that murky world of cash transactions. Doing so allows them to earn money without reporting their income, leaving more available to spend. …

Despite the sharp drop off in the labor force participation rate, consumer spending has nevertheless continued to surge. One explanation is that many of those who have left the labor force since the last recession have managed to earn income in the shadow economy and their spending still shows up in the official retail sales and personal consumption data.

Adds Newman:

That may help explain one troubling trend—a sharp decline in the labor-force participation rate, which measures the percentage of the adult population considered to be either employed or looking for work. The participation rate has dropped from a peak of 67.3 percent in 2001 to 63.5 percent today. The last time it was that low was 1979. Some economists think this reflects a worn-out workforce resigned to long-term decline. But it might show a migration of workers from the official economy to the underground one instead.

There's always a bit of a data lag, but income figures haven't looked good for several years. In September 2012, the Census Bureau reported that "[r]eal median household income in the United States in 2011 was $50,054, a 1.5 percent decline from the 2010 median and the second consecutive annual drop." Household income is actually down 5.7 percent since the "recovery" began, Sentier Research reported that same month.

And let's not forget that lovely New Year's gift we all got in the form of a payroll tax hike.

And yet … consumer spending has been rising. Retail sales were up 1.1 percent in February. Even if you leave out car purchases and the big jump in gasoline prices, reports the Los Angeles Times, "so-called core retail sales increased a solid 0.4% in February, and this measure was revised up to 0.3% for January from 0.1% previously estimated."

Or as the federal Bureau of Economic Analysis puts it:

Personal income decreased $505.5 billion, or 3.6 percent, and disposable personal income (DPI) decreased $491.4 billion, or 4.0 percent, in January, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $18.2 billion, or 0.2 percent. In December, personal income increased $353.4 billion, or 2.6 percent, DPI increased $325.7 billion, or 2.7 percent, and PCE increased $14.8 billion, or 0.1 percent, based on revised estimates.

Real disposable income decreased 4.0 percent in January, in contrast to an increase of 2.7 percent in December. Real PCE increased 0.1 percent, the same increase as in December.

But, this is America. So, we're all running up the credit cards, right? Except, we're not. While overall consumer debt is moving, revolving credit — the interest-laden purchases we put on plastic — is barely budging. According to the Board of Governors of the Federal Reserve Bank, revolving credit was up all of 0.1 percent in January, and down 4.4 percent in December. So Americans aren't running up unsecured debt in a crazed spending spree.

But, Americans are spending something.

Newman's theory about a growing shadow economy makes a lot of sense. That's a very interesting development, because the United States has traditionally had a very small shadow economy relative to other developed nations. The most recent estimate from Professor Friedrich Schneider of the University of Linz puts the U.S. shadow economy at 7.2 percent, compared to Switzerland at 8.2 percent, with percentages going up from there. Given the divergence between official figures and consumer activity, that 7.2 percent figure may not hold anymore.

And the thing is, once people slip into the shadows, it's hard to get them back. Writes Schneider (PDF):

But even major tax reforms with major tax rate deductions will not lead to a substantial decrease of the shadow economy. Such reforms will only be able to stabilize the size of the shadow economy and avoid a further increase. Social networks and personal relationships, the high profit from irregular activities and associated investments in real and human capital are strong ties which prevent people from transferring to the official economy.

Once people get used to operating in the shadows, not paying taxes, using cash, dodging paperwork, it becomes increasingly difficult — and unattractive — for them to come back above-ground.

After years of conservative accusations that the Obama administration is trying to turn the United States into Europe, that charge may actually be coming true. We just didn't know that the model for the transformation was Spain's crisis-fueled underground economy.

I wrote at length about tax collection and the shadow economy here.

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  1. Just to be clear, we’re talking about kulaks and wreckers, right?

    1. And hoarders. Still undetermined if splittists are involved.

  2. “That’s a very interesting development, because the United States has traditionally had a very small shadow economy relative to other developed nations.”

    Well, many believe that Obama’s real goal is to bring America down a notch – if that is indeed his goal it sounds like he is succeeding. We are becoming less and less like a developed nation. The best way to ensure we are nocked down a peg or two is two spend spend spend. Spend on welfare programs here at home that ensure dependency and spend on warfare abroad that will create lots of disabled veterans who need more FedGov help.

    Is Iran next on the agenda?

    https://reason.com/blog/2013/03…..ch#comment

    Thanks Obamabots!

    1. Well, many believe that Obama’s real goal is to bring America down a notch

      I hate to sound conspiratorial, but it is impossible to see any other alternative. What remote substitute there is is Obama’s being stupid. Stupid or evil. Helluva choice in a POTUS.

      1. Why can’t it be both?

        /Captain Obvious

      2. Wingnuts and CT go together like PB and J.

        1. You have no actual argument? Only insults?

          1. SOP for Shrike.

    2. I don’t think that’s fair — too conspiratorial. All progressives are the enemies of civilization, and he’s just serving his constituents.

  3. pushed a record number of people into that murky world of cash transactions. Doing so allows them to earn money without reporting their income, leaving more available to spend.

    Damn. One can hardly call such an existence “human”.

  4. “Once people get used to operating in the shadows, not paying taxes, using cash, dodging paperwork, it becomes increasingly difficult ? and unattractive ? for them to come back above-ground.”

    This may provide a great oportunity for the libertarian movement.

    One word : Agorism.

    http://en.wikipedia.org/wiki/Agorism

  5. Easy fix. Do away with cash and make internet access only available at approved government kiosks.

    1. There is indeed a War on Cash for this reason.

      http://mises.org/daily/6370/Th…..ar-on-Cash

      1. They are getting to the young ones. The girls at the campus Starbucks will stare blankly at a $20 bill for a few seconds. And a couple seem to have an embarrassing amount of trouble counting out change.

        1. I bought 90 edge wall tiles the other day; they were in three boxes, where they were arranged 15×2. The checkout lady at Lowes counted out one row of 15…and then counted out the one next to it, when it was clear that the row of 15 took up all of the available space.

          Then she entered 30 three times in the register rather than 90.

          1. At least she knew to multiple by 3.

      2. I was given the opportunity to pay cash in this one case if I brought the exact amount.

        Nice. 8-(

        I hope this guy keeps on going with his “shenanigans”.

  6. I’ve started turning tricks in the evenings – well, evening where there isn’t anything interesting on tv… and not really for the money, I just like selling my ass.

    1. The five-o’clock shadow economy, as it were.

  7. …Spain would not be as peaceful as, barring a few demonstrations, it has so far been.

    Seems kind of racist to automatically assume that the Spaniards would be at each other’s throat just because of tough economic times. It’s doubly racist to automatically assume those taco-eaters would be engaging in illegal commerce to make up the difference.

    I have every confidence, here at home, we will find a way to hunt down and drone these unpatriotic black marketeers and tax dollar hoarders out of existence so we can get back to economic recovery.

    1. Spanish isn’t a race, is it? And don’t eat tacos (interestingly “taco” means poop in Spain).

      1. The proper race designation for Spaniards is Iberian-Americans. Just ask Jesse Jackson if you don’t believe me. He’s a fucking king and shit. Or fucking the corpse of King. I forget which.

  8. The Blackmarket: You didn’t build that.

  9. I saw this somewhere. Can’t remember where.

    I was driving back from a woodcutting trip, the pickup was filled with split logs. I stopped for gas, and a gorgeous blonde walked over and said “I’m really active in the underground economy, and I was wondering if you’d like to trade sex for firewood.” I looked back at her and asked “How much firewood do you have?”

  10. cough**cough* Ebay **cough**cough

    1. ding.

      I’ve also built audio gear and *gasp* sold it to my friends.

  11. It’s the realistic way to go Galt.

  12. that murky world of cash transactions.

    Good grief.

  13. Personally, I don’t have any skills of value to offer the cash/underground economy. I’m really hoping it doesn’t come to that for me, personally.

  14. Even before the crisis, there were loads of people working under the table in Europe, largely because of the high taxes and weird employment regulations.

  15. After all the shadow stimulus, aka regulations, they’ve passed, what else would they expect when times are rough?

    1. aka regulations and TAXES

    2. “what else would they expect when times are rough?”

      We are all supposed to line up in front of daddy FedGov and ask for handouts like good little sheep.

  16. Here in Los Angeles, the underground economy has exploded since the financial crisis. My neighbor across the street runs a thrift store out of her garage every weekend. The sheer number of cash-only, pop-up food stands and “yard sales” on the weekends is stunning. Hell, I’ve got family that are now working under the table at $20/hr.

  17. jobless Americans into the shadow economy, and we suspect the destructive nature of the last downturn and the prolonged weak recovery pushed a record number of people into that murky world of cash transactions. Doing so allows them to earn money without reporting their income, leaving more available to spend. …

    “If only there were some way of finding them and making them pay!”

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