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The pros and cons of an underground economy
A shopper pays cash for sales merchandise December 26, 2000 at the Lakeline Mall in Austin, Texas. Stores were hoping that after Christmas shopping could salvage what seems to be a disappointing holiday season.
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Bob Moon: When we talk about unemployment here in the U.S., there are things we know -- some of us, all too well. The unemployment rate holds steady at 9.1 percent. And there, we netted no additional jobs in the month of August.
And then, there are the unknowns. What about the folks who work off the books? People making cash in what's known as the underground economy. Sudhir Venkatesh is a professor of sociology at Columbia University who studies the underground economy. Thanks for joining us.
Sudhir Venkatesh: Great to be here, thank you.
Moon: First off, a definition of what we're talking about by the "underground economy." That conjures up the black market, in a way. It's not illegal behavior, though, is it?
Venkatesh: No. We can split the underground economy into two different sectors, and as you're saying, one is the criminal side. But there's a lot of stuff that's out there that is not criminal by any means, it's just that the income is not reported to the government, so people who are cutting hair inside their house, some people are may prepare your taxes. So that's probably even a greater percentage of the activities and the income that's in the underground economy.
Moon: Given that it's not reported, I'd assume it's not easy to come up with concrete numbers about the size of the underground economy, but what do we know about how it's grown in the past few years?
Venkatesh: You put 10 economists in a room and you ask them to define the underground economy or the size of it, and you'll get 11 different estimations.
Moon: I've heard that before.
Venkatesh: And I'll just give you a couple. If you just do it relative to GDP, the economist Friedrich Schneider estimates that it's about 8 percent of GDP. There's studies by the G.E.O. that suggest that one out of every six purchases is made in the underground economy. We do know though that there are things, however, that make it grow. In a tightened regulatory climate, businesses will often switch to underground economic relationships, meaning that they might have paid you on the books one day, and over time, if they start fearing that they're going to have to pay more taxes, they'll change to an informal relationship with you.
Moon: Have you seen changes as a result of the recession, both in terms of the underground economic activities and the types of people who might be engaging in them?
Venkatesh: I think there is certainly a driver in the recession and that it will lead to overall increases in the underground economy. But you just don't know how it's going to affect particular kinds of groups. So that in a service sector environment where so much of their costs are based on manpower, you'll see a greater reliance on casual hiring. In a manufacturing sector, you may not have that same kind of relationship.
Moon: You've interviewed lots of people who are doing this type of work. Any stories particularly striking?
Venkatesh: I remember going to Chicago and seeing an elaborate network whereby that small businesses in the South Side of the city took out cash altogether as a means of interacting with each other. There was an auto repair shop in which Leroy, the owner of the auto repair shop, he just no longer had a cash register. His customers would come in, they might pay him with a cell phone or they might pay him with the promise of painting his house. He would take that note and he would exchange it for someone else. They just simply did not have the cash to make payments. And you would have never seen that if you just walked in and made a purchase. And I think that shows the ways in which the underground economy is quite invisible, but it teaches us a lot.
Moon: The black market always exists, whether the economy is doing poorly or not. Should we be concerned by these types of activities or is it just an alternative way to make a buck in tough times?
Venkatesh: Because the underground economy is invisible, it is something that you don't report to the government, you may feel over time that you're doing something wrong. Then you start to feel like you don't have value as a worker, as a laborer. That means that that same person, when times get better, might have difficulty going into an employer who says, 'well, so what have you been doing for the past year?' It becomes difficult to say, 'well, I've been painting houses in the underground economy.' And so you might have to make up a story or you may just avoid the question altogether -- or worse you might avoid the interview, and that's the worse thing. Those are the reasons that we don't want the underground economy to be thriving.
Moon: Sudhir Venkatesh is a professor of sociology at Columbia University. Thanks for being with us.
Venkatesh: Thank you for having me.
The interview might incorrectly lead listenrs to conclude that just because there is no cash changing hands, and perhaps no "income" for tax purposes, there is no reportable income fopr any purpose. Many programs, such as Medicaid define "income" to include in kind goods and services. Not reporting in kind income in those circumastces would be illegal, and raises the costs (and tax burden) on the rest of us.
I think the comments criticizing those involved in the underground economy are missing the point: the participants don't have any money. Chances are that many make less than the poverty line, and would owe no tax anyway. The auto repair shop on the South side of Chicago has customers that don't make much money. If they actually had the money, they would all be dealing in cash. For those that engage in this kind of activity when they have the money, well, that's just criminal. But, for everyone else, it is just plain necessity.
I am a law professor teaching tax at Washington University Law School, with concerns that listeners may have a serious misunderstanding from this story. Prof. Venkatesh mentioned two underground economy sectors: one criminal, and “one not criminal by any means.†He mentioned concern for insufficiently valued workers who may have trouble with later job interviews. To this, I am sympathetic. Yet, we should be clear: not reporting income results not only in civil penalties, but criminal prosecution. The untaxed underground economy puts an extra burden on other taxpayers. Imagine the federal revenue from taxing an additional 8% of GDP. I appreciate that many underground workers are poor, and I understand the temptation to a certain amount of “self help†through the underground economy. On the other hand, many well-to-do participate as well. Everyone should pay tax on their income, and we should improve the “safety net†for the poor.â€
Your poo pooing the barter economy. Communities like Chicagos south side are disempowered, barter allows them to empower each other despite the lack of cash. I live in rural midwest, our friends and community barter frequently with each other for goods and labor. Its not criminal, its human.
Income tax evasion is criminal. Your next story should cover what can happen to people who cheat on their taxes. I certainly wouldn't hire people who confessed to crimes during job interviews. They are already cheating me by making my tax rates higher, and they would probably cheat my corporation, too.
