Inside the Trillion-Dollar Underground Economy

Keeping Many Americans (Barely) Afloat in Desperate Times

By Sarah Jaffe
AlterNet
September 20, 2011

The United States continues to suffer from mass unemployment.

People have had to adjust their lifestyles to the new reality—fewer jobs, lower wages, mortgages to pay that are now more than their homes are worth.

Millions have dropped out of the job hunt and are trying to find
other ways to sustain their families.

That's where the underground economy comes in. Also called the shadow or informal economy, it's not just illegal activity like selling drugs or doing sex work.

It's all sorts of work that doesn't get regulated by the government
or reported to the IRS, and it's a far bigger part of the economy
than most of us are aware—in 2009, economics professor Friedrich
Schneider estimated that it was nearly 8 percent of the US GDP,
somewhere around $1 trillion. (That makes the shadow GDP bigger
than the entire GDP of Turkey or Austria.)

Schneider doesn’t include illegal activities in his count-- he studies
legal production of goods and services that are outside of tax and
labor laws. And that shadow economy is growing as regular jobs
continue to be hard to come by—Schneider estimated 5 percent in
'09 alone.

The Young Women's Empowerment Project [PDF] describes the “street economy” as “... any way that girls make cash money without paying taxes or having to show identification. Sometimes this means the sex trade. But other times it means braiding hair, babysitting, selling CDs/DVDs, drugs or other skills like sewing and laundry.”

D.A. Barber explained:

“This underground economy goes beyond the homeless collecting
aluminum cans or clogging day labor halls. It includes the working
poor getting cash for all forms of recycling: giving plasma, selling
homemade tamales outside shopping plazas, holding yard sales,
doing under-the-table work for friends and family, selling stuff at
pawnshops, CD, book and used clothing stores, and even getting
tips from restaurants and bars--to name a few.”

That means nearly all of us have participated in some way in the underground economy.

Yet little is known or discussed about this area of our lives, even though it touches many of us as we try to make ends meet.

Economist Edgar Feige estimated in 2009 that unreported economic activity was costing the US government $600 billion in tax revenues, and the growth in that number—from the Internal Revenue Service's 2001 estimate of $345 billion—indicates the growth of the informal economy.

Reporting on Feige's work, Dennis Chaptman noted, “As the
recession deepens and regular employment opportunities decline,
unreported activities tend to grow, thereby swelling the tax gap
and worsening the government's budget deficit.”

Workers in the underground economy can also be vulnerable to
exploitation; the Monthly Review pointed out that workers,
especially undocumented immigrants, are pushed into off-the-
books work out of desperation and have no authority to appeal
to when their conditions are horrific or their pay substandard;
wages are pushed downward and expectations lowered.

Labor economist Mark Price agreed. He told me, “People enter such arrangements because of their difficulty finding formal employment. Think of undocumented immigrants that work as housecleaners or in the construction industry.”

He continued, “Employers or consumers who use workers in this way are doing so to boost profits or lower prices. Of course documented workers also can end up choosing to work in the underground economy but that choice, like the choice for the undocumented, has the same basic driver--the inability to find formal paid employment that meets a worker's needs.”

Alfonso Morales, a professor at the University of Wisconsin at
Madison, told the Christian Science Monitor that off-the-books
work “is probably neutral to good.”

He pointed out that it is impossible to separate the informal
economy from the formal. “People who make their money in
unregulated businesses probably spend it in regulated ones.”

Price compared the growth of the underground economy to payday lending; “a typically undesirable practice that develops and thrives because it fills a need created by the failure of public policy to address societal needs.”

The informal economy, though, does not only consist of low-wage workers.

Saskia Sassen, Robert S. Lynd Professor of Sociology at Columbia University, pointed out in her book Cities in a World Economy that there is also an informal economy of creative professionals.

In an article titled “Cities Today: A New Frontier for Major Development” she wrote:

“In brief, the new informal economy in global cities is part of
advanced capitalism. One way of putting it is that the new types
of informalization of work are the low-cost equivalent of formal
deregulation in finance, telecommunications, and most other
economic sectors in the name of flexibility and innovation. The
difference is that while formal deregulation was costly, and tax
revenue as well as private capital went into paying for it,
informalization is low-cost and largely on the backs of the workers
and firms themselves.”

She points out that by keeping creative professional work informal, these workers avoid the corporatization of creative work, and maintain the freedom to be innovative and self-sufficient.

While these creative workers prize independence, Lisa Dodson stressed the way communities come together to help one another through tough times, often through off-the-books economic activity, in her book The Moral Underground: How Ordinary Americans Subvert an Unfair Economy.

In one passage, she tells the story of arriving in a small-town farmer's market in Maine, only to overhear a discussion between locals on “neighbors and the market erosion of common fairness.” She wrote:

“Just then a middle-aged woman, who had been talking to friends,
suddenly turned around to face other shoppers and asked, 'What’s
happening to us? Why doesn’t the government do something?' A
local farmer, sorting vegetables nearby, responded immediately,
'The government is the same as the oil companies. There’s no
difference. We can’t wait for them to do anything.' A young mom
holding a baby as she stood in line said, 'So what do we do?' There
was no single response, but they were looking at each other to find it.”

Without solutions coming from Washington or local governments, it continues to be up to working people to find a way to negotiate the rough economy.

Price argued, “People shouldn't have to give up fundamental human rights like access to income in retirement or safety on the job because they need work.

But in a society like ours, which tolerates high levels of
unemployment, the underground economy is often the
next best alternative to starving.”

While some have been able to flourish working underground, it's
important to remember that most workers are not off the books
to dodge paying taxes or because they prefer it that way.

As we see more and more people dropping out of the formal labor
market in despair, the informal economy will remain a destination
of last resort—and will keep growing.


Sarah Jaffe is an associate editor at AlterNet, a rabblerouser and frequent Twitterer. You can follow her at @seasonothebitch.

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