Tag Archives: underground economy

04.27.2013 | The Underground Economy: How Much Did the GDP Really Grow?

Having reported yesterday that the GDP grew 2.5%, the Bureau of Economic Analysis (BEA) reminded us that their data “are incomplete or subject to further revision.” They meant that businesses and individuals still have more information to gather and submit about US goods and services production for the first quarter of 2013.

But what about the nannies, tutors, housecleaners and cupcake bakers who never reported their income? For nannies alone, in 1994, there were 500,000 tax filings; by 2008, the number dropped to 219,000. Fewer nannies? Probably not.

Some data, the BEA will never find out.

Researchers estimate that the size of the underground economy–the goods and services we produce that do not get counted–totals $2 trillion, close to 8% of US production. You can translate $2 trillion into $500 billion in unpaid taxes. In advanced economies, maybe 14-16% of all production is underground while in the developing world, 30%-40%. Predictably, for the euro zone’s strugglers like Greece, the underground economy might occupy one quarter or more of all production.

If we eliminate illegal goods and services like drugs, we can define the underground economy as all legal goods and services that are intentionally concealed from government to avoid taxes and/or other regulations. As a result, participants receive lower wages, they work longer hours. Businesses do not comply with quality standards; they are more susceptible to corruption. Correspondingly, the taxes to support government programs never materialize and the nannies who never paid their social security will never receive it.

But still, if the reason is a complex tax system with lots of forms–a system that has a high transaction cost, for some noncompliance is productive. Also, with the underground economy having increased during the great recession, it could have been a lifesaver for the unemployed.

Perhaps, an increasing underground economy means that first quarter GDP growth is more than 2.5%?

Your opinion?

Sources and Resources: Having read the BEA first quarter GDP news release, I recalled James Surowiecki’s New Yorker article on the underground economy. Surowiecki and a subsequent CNBC article lead me to a wealth of research. One solid discussion, here, presents the academic perspective and research and this briefer note focuses on nannies.

Posted by: adminEcon
Tags: GDP, nanny tax, social security, underground economy
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03.02.2012 | Who Is Unemployed?

Does an unemployment rate of 8.3% mean we have 8.3% unemployment? Not necessarily.

Using what Abbott and Costello might have said, a Huffington Post journalist explains why.

Costello: I want to talk about the unemployment rate in America.
Abbott: Good subject. Terrible Times. It’s 9%. (Note: This was published last November.)
Costello: That many people are out of work?
Abbott: No, that’s 16%.
Costello: You just said 9%.
Abbott: 9% Unemployed.
Costello: Right 9% out of work.
Abbott: No, that’s 16%.
Costello: Okay, so it’s 16% unemployed.
Abbott: No, that’s 9%…
Costello: WAIT A MINUTE. Is it 9% or 16%?
Abbott: 9% are unemployed. 16% are out of work.
Costello: IF you are out of work you are unemployed?
Abbott: No, you can’t count the “Out of Work” as the unemployed. You have to look for work to be unemployed.
Costello: BUT THEY ARE OUT OF WORK!!!
Abbott: No, you miss my point.
Costello: What point?
Abbott: Someone who doesn’t look for work can’t be counted with those who look for work. It wouldn’t be fair.
Costello: To who?
Abbott: The unemployed.
Costello: But they are ALL out of work.
Abbott: No, the unemployed are actively looking for work…Those who are out of work stopped looking. They gave up. And, if you give up, you are no longer in the ranks of the unemployed.
Costello: So, if you’re off the unemployment roles, that would count as less unemployment?
Abbott: Unemployment would go down. Absolutely!
Costello: The unemployment just goes down because you don’t look for work?
Abbott: Absolutely it goes down. That’s how you get to 9%. Otherwise it would be 16%. You don’t want to read about 16% unemployment do ya?
Costello: That would be frightening.
Abbott: Absolutely.
Costello: Wait, I got a question for you. That means there are two ways to bring down the unemployment number?
Abbott: Two ways is correct.
Costello: Unemployment can go down if someone gets a job?
Abbott: Correct.
Costello: And unemployment can also go down if you stop looking for a job?
Abbott: Bingo.
Costello: So there are two way to bring unemployment down, and the easier of the two is to just stop looking for work.
Abbott: Now you’re thinking like an economist.
Costello: I don’t even know what the …. I said.

According to the Bureau of Labor Statistics (BLS), the U-6 unemployment rate was 15.1% for January 2012. U-6 is defined here.

The Economic Lesson

At 22%, then is Greek unemployment even higher than the official rate? Some economists say no. Because of a massive underground economy, many more people are working than the publicized numbers indicate.

An Economic Question: Who would you include in the unemployment rate?

Posted by: adminEcon
Tags: Abbott and Costello Economics, economic growth, euro zone, Greece, recession, underground economy, unemployment
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11.29.2011 | Greek Taxes

Having added property taxes to electric bills, the Greek government is shutting off the power to people who do not pay what they owe.

The response?

In a northern suburb of Athens, a mayor has assembled a group of electricians to reconnect people who lose their power. He has also made municipal attorneys available to defend tax “scofflaws.”
The annual tax obligations of one 86 year old man more than tripled. But he might not get any more bills because unions are occupying the power company’s billing center.
While government ministries still owe the power company more than $135 million euros, there are no plans to cut off their electricity. So, union workers shut down the Health Ministry’s power for 4 hours.
Sales of generators have risen.
Out of the 16,974 pools that satellite photos revealed in one affluent Greek suburb, only 324 homeowners declared them on a tax form.

The bottom line? Yes, these are random stories that might or might not be entirely accurate. However, with the Greek GDP cascading, the euro zone faces a gargantuan and perhaps unsolvable fiscal challenge.

Here is Merle Hazard’s “Greek Debt Song.”

The Economic Lesson

Off the books transactions that sidestep taxation compose a shadow or underground economy. For Italy, the shadow economy is estimated to total close to 20% of all economy activity while for Greece, maybe even 30%. In the US, 8% is the number that has been cited.

An Economic Question: Some say higher taxes solve a fiscal crisis by increasing government revenue while others believe that by discouraging business activity, they diminish revenue. Your opinion?

Posted by: adminEcon
Tags: euro zone, Greece, Italy, shadow economy, tax evasion, underground economy
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