California Officials in the Dark About Black Markets

State needs regulatory reform, not armies of new inspectors

One of the most notorious features of the Soviet Union as it limped toward collapse were black markets. Rather than deal with that nation's myriad regulations and restrictions in the official economy, Russians relied heavily on these markets to survive.

A close look at the United States economy also points to a large and growing underground economy — not just for illegal goods and services such as drugs and prostitution, but for legal ones such as cigarettes and construction. Indeed, the more heavily taxed and regulated the activity, the more likely black markets will arise.

It's no surprise this is common in heavily regulated California. This month the state's independent oversight agency, the Little Hoover Commission, released a report ("Level the Playing Field: Put California's Underground Economy Out of Business") detailing the costs of what it calls an "insidious multibillion-dollar" marketplace.

Little Hoover focuses on a lack of enforcement: "The commission found the underground economy is growing and thriving in part because of insufficient resources for enforcement." It calls for more government officials, and for increasingly punitive measures such as "bolstering asset seizure laws" that let the government, say, seize the trucks owned by unlicensed contractors.

The report sidesteps other possibilities. Many say California's tax and regulatory structure pushes people into the underground economy and that an enforcement-heavy approach will lead to more obtrusive inspections at private job sites, reduced economic activity, a bigger bureaucracy and more poverty given that many of those who work without licenses don't have the financial wherewithal to get them.

A guy who builds a deck without a license isn't the same thing as a pimp or a drug pusher. Yet prostitution is the world's oldest profession and shows no signs of going away. Likewise, the nation's drug wars haven't put the drug cartels out of business and never will. What's the likelihood that a new "war on handymen" or unlicensed hair braiders will put the underground economy out of business?

"People go underground because the paperwork, taxes and licensing are onerous," said William Anderson, a professor of economics at Frostburg State University in Maryland. "A lot of times (the scofflaws) are smaller guys who don't have the resources to comply. (These regulations) destroy jobs and turn what would normally be law-abiding activity into criminal activity."

As a small example, I recently gave a speech at an event in Southern California, but was not allowed to personally sell my books unless I applied for and purchased a city business license. Is the problem a lack of enforcement agents to fine and possibly jail authors? Or is the problem an unreasonable regulation that does nothing to advance the safety of book buyers and sellers?

Because such rules often are so unreasonable and meant mainly to bolster local budgets or protect a powerful interest group (e.g., shop owners who don't like the competition), most people tend not to worry morally about breaking them. We find more regulations everywhere, with increasingly bizarre outcomes – such as cities shutting down children's lemonade stands, or sending SWAT teams to arrest people who sell raw milk.

"If we want to follow the letter of the law, we better not have the local kid (cut your lawn); you better get a licensed contractor with permits," Anderson added. This raises costs and it inserts government and lawyers into every private transaction. "Less gets done at a higher price … and there are fewer opportunities for younger people to learn how to work," he added.

Contractors and unions often lobby for more regulations because it gives them a competitive advantage over lower-cost businesses and workers. Then they complain "it isn't fair" that others ignore many of the edicts. "Taking more aggressive action against the underground economy is essentially about fairness," agrees the commission.

But if commissioners were truly concerned about fairness, they would once again evaluate ways to make California's laws more reasonable, so there's far less benefit to ignore them. Unless, of course, they believe the Soviet Union's economy would have worked better had there only been better enforcement.