The Underground Economy of the U.S.

CNBC ran an article (linked via Drudge) referring to the $2 trillion underground economy.  The article actually starts off saying, "The growing underground economy may be helping to prevent the real economy form sinking further, according to analysts."

Americans typically don't give a lot of thought to the underground economy.  Perhaps they may think of drugs or prostitution.  Perhaps they may think of other countries.  It is easy to imagine a marketplace in India where people are bartering for items or little shops on the side of the road.  But with mega-corporations like Apple and Walmart, Americans don't think of their own country as having a huge underground economy.

Yet the underground economy is all around us.  Whenever someone babysits their neighbor's kids, do you think most people would report that as income to the IRS?  What about mowing lawns or shoveling snow?  And this is just the tip of the iceberg.

The underground economy is undoubtedly much bigger today with the internet.  Just think of a website like Craigslist.  There are millions of people transacting, most of whom are not reporting sales or income to the various governments at all levels.

While many in the anti-Obama camp like to point out that unemployment statistics are false because they don't include many people who have given up looking for work (and they are certainly correct in pointing this out), you could also argue the other way and say that there are some people who are working who are not reporting it.

I know some people who are collecting unemployment or disability and will not find a "regular" job because they don't want their so-called benefits cut off.  It is actually a rational choice they are making (regardless of whether you think it is moral).  It isn't even a matter of finding a job that pays more than your government checks.  You could be getting government checks that total $25,000 per year, yet be able to find a job for $30,000 per year.  But would it be worth it to work 40 hours per week just to make an extra $5,000 per year?

The person in this example can simply find some underground work on Craigslist.  He could help people move their furniture, mow lawns, babysit, shovel snow, paint houses, etc.  If he can earn $1,000 per month doing this, while still collecting $25,000 per year from his government checks, he will be making far more than if he worked a regular job.  He also gets to work far less and also avoid paying taxes on the money he does earn.

I suppose some people may look down on the underground economy with the above example.  But the problem in that example is not the underground economy.  The problem is our massive welfare state that encourages disability and unemployment.

I think in most cases, the underground economy is a positive thing.  The bad thing about it is the simple fact that it is so big because the government is so big.  Imagine if there were no income tax.  Imagine if small businesses did not have onerous regulations to follow.  Imagine if all acts between consenting adults were legal.  If we didn't have big government, we wouldn't have a big underground economy.