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.

NEXT: Obama's 'Signature Achievement' Will Be Bypassing the Constitution

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  1. Freedom means asking permission and obeying orders. How can you know you’re free unless Authority says so?

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  2. I pay for local services in cash and decline receipts whenever possible just to make sure they have the opportunity to not report that income. Any work that involves parts, I try to buy the parts myself so they don’t have to account for them.

  3. 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…

    You say that like it’s a bad thing. More obtrusive inspections are a great thing from the perspective of someone who loves the idea of a top-down, ordered society. Reduced economic activity is good because you wouldn’t want people forming their own businesses, which might compete with established interests that give to your campaign. Bigger bureaucracy?!? BUREAUCRACY IS A SOCIAL GOOD. And more poverty is good because it ensures a larger voting base of helpless people who will vote for whoever promises to keep greasing the axles of the Free Shit Express.

  4. Dear Reason: I don’t know who decided to put autoplay ads on every article, but please fire them or at the very least, place them in a burlap sack and beat them with reeds.

    If you need the money that badly, why not send Elizabeth Nolan Brown to go flirt with the Koch brothers? She has experience as a sugar baby. Send Emily Ekins too and you’d be swimming in cash for life.

    OK, perhaps I was too harsh with ENB. I apologize for that low blow.

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    2. I’d pay to watch ENB and EE give you a few low blows.

      1. How about a PPV jello wrestling match between the two? I bet that would raise more than the annual webathon.


          1. Your negativity is damning. Next you’ll be walking around with black toenails, tarran.

    3. She has experience as a sugar baby.

      ENB has a stalker and his name all the guys who post on Reason. 😉 That was a fun read by the way.

      And, autoplay ads are likely no fault of Reason, they should be dipped into the most acidic liquid on the planets never to arise, and because of autoplay I will be forced to use adblock. I’ll support Reason in other ways. I have a couple of hotties I can let the office there enjoy for an evening of pleasure.

    4. “OK, perhaps I was too harsh with ENB. I apologize for that low blow.”

      You realize that if you think you’re being too harsh in a post but haven’t hit ‘submit’ yet, there’s still time to edit, right?

      Like, you didn’t have to apologize. You could have just deleted the stuff you thought was too harsh.

      This would be like if I said ‘I apologize for being about to punch you’ and then hit you anyway.

      1. This would be like if I said ‘I apologize for being about to punch you’ and then hit you anyway.

        If we do a Chicago meetup, I can make that happen. I’m apologetic and violent.


      Seriously, she gave us a great article about teledildonics. I don’t care how many daddies she sugared.

  5. Can O’Malley Pull a Carter ’76 in 2016?

    Don’t hold the gubernatorial campaign defeat of his lieutenant governor, Anthony Brown, against him ? his name was not on the ballot.

    Sheesh, neither was Obama’s and the Dems lost the Senate.

    It’ll be entertaining to watch the dynamics among Hillary’s evasiveness, Biden’s gaffes, and O’Malley’s preachy vacuousnesses

  6. “Level the Playing Field: Put California’s Underground Economy Out of Business”

    Do these people think the black market came about because of a lack of enforcement? Those trees sure block the view of the forest, don’t they?

  7. I’m going to start hoarding blue jeans to sell into Soviet California when the time comes.

    1. You can buy Levi’s seconds and overruns in Lesotho.

  8. I believe Carrie Fisher had some words of wisdom on this subject.

  9. “The commission found the underground economy is growing and thriving in part because of insufficient resources for enforcement of costly, burdensome, and onerous regulations we support.”

    Clarified for greater honesty.

  10. The state is a parasite that lives off the lifeblood of the economy.
    It inevitably tries to kill the host, but in the end, it only kills that part of the economy on which it depends, then both the state and economy adapt, and you get cartels, cronyism and police states.

  11. I have a consulting business in Colorado that services contracts in Colorado. I hired a Software Engineer who works from home in California. His work was directed from and delivered to Colorado. An auditor from the Cali Franchise Board contacted me that I qualified as “doing business in Cali”. It was not enough that we withheld Cali income tax. They are trying to make me file a business income tax return in California and make me pay the required $800 annual franchise fee to the state for the privelage of having a business connection with their state. The conversations with these people are surreal.

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  13. Big Government, the cure for it is, more Big Government.
    Wait, what?

  14. California can’t do anything. They are backed into a corner. The state has bent over backwards to accommodate illegal immigrants and I don’t see the state aggressively going after unlicensed food, flower, construction, painters etc.

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