What is the Underground Economy?


We all know how the economy works in the U.S. – we go to work, we pay our taxes and then those taxes are used to cover social programs, lend money to other countries, ensure cities, counties and states are able to do business – the list is endless. But how much does the underground economy account for?


It’s how government agencies figure the numbers associated with things like the gross national product and as long as citizens are paying taxes and the companies, non profits and of course, individual tax payers are doing as they should – both reporting and paying taxes, then things move along as they should, or at least, according to the government. But what happens if everyone begins working for cash and are paid “under the table”? We all have heard of a cousin or distant friend or relative who doesn’t or can’t find a legitimate position that includes using his social security number for proper government tracking for whatever reasons.

Recently, though, there’s been an increase in the number of people who simply don’t want to be a part of any kind of government documentation. In fact, so many have become distrustful of the government that this underground economy, or shadow economy, accounts for a massive $2 trillion every year. This is incredible, especially considering the other facts that go along with this latest report. This week, we explore the underground economy.

Underground Economy Historically

The underground economy isn’t new. And the federal government has been able to at least track it to some degree. It knows that goods and services are traded back and forth – provided the visible economy is good and folks aren’t wary of the government as a whole. Once consumers become distrustful or frustrated with the economy, its almost as though the “shadow” of the underground economy overcomes everything. Gamblers, prostitutes, roofers and others who are working on a cash basis become harder to track. Not that the government could really do anything with those in the underground economy – not without extensive work and preparation, anyway – but it’s as though those who are content working for cash want to keep it that way. And you’d be surprised to learn who’s underground these days.

Those who earn a living using online auctions, those who prefer bartering as a form of currency and even graphic artists and other creative souls who earn their living via the internet can easily stay underground. The problems they run into though is the inability to secure credit cards, bank loans or other financial products. If there’s no income being reported on their social security numbers, then there’s no way to know whether they could repay their loans. And many of these people aren’t necessarily breaking the law – many aren’t required to report earnings unless they meet certain thresholds from the IRS.

While it’s believed the underground economy accounts for about $2 trillion every year, it can be difficult to accurately ascertain the real numbers. The US government can use things like changes in the legitimate economy, and certainly those associated with the flow of cash money. If consumers spending habits remain consistent, that can be used as measuring device, for the most part. But when you consider the fact that 80% of all one hundred dollar bills that are printed every year end up overseas, it can be troublesome – and confusing. For instance, an example often used to describe the difficulties include a gambling operation that suddenly ships 10,000 US $100 dollar bills overseas could be felt in both economies.

The Conflicting Numbers

Ah, and then there’s the conflicting news that’s reported every day from the media. The stock market is doing well, even as not much else is. Unemployment is still high and despite the numbers being reported, most of us can look around our communities and still see frames of houses that were suddenly stopped because the money dried up. Many of us can still name several foreclosed properties in our cities and most of us can also tell stories of how much we’re spending at the grocery stores and how it falls woefully short of what we need to stock our pantries.

Insurance rates are on the rise, paychecks are less because of new taxes and our credit cards are carrying balances – those of us who still have credit cards. Many are using prepaid debit products instead of traditional credit cards and while it can be chalked up to being unbankable or underbanked, others are turning to these financial products because they’re “underground”. The percentage of Americans who are “unbanked” or “underbanked” rose from 25.8 percent in 2009 to 28.3 percent in 2011. Meanwhile, unemployment doesn’t seem to be budging. In fact, in some counties in the south, the unemployment rates are in the double digits.

Economists are wondering how Americans are covering the bases and it could be as simple as them going underground – either partially or completely. The fact is, there will always be an underground economy. Whether it’s to avoid paying taxes or following certain laws, or it could be as simple as consumers who couldn’t find jobs on payrolls, so they turned to methods of earning a salary off of a payroll, known as being paid “under the table’.

And there’s historical data to support this,

Severe recessions have historically driven jobless Americans into the shadow economy,

writes Bernard Baumohl of the Economic Outlook Group.

We suspect the destructive nature of the last downturn and the prolonged weak recovery pushed a record number of people into that murky world of cash transactions.

Unemployment and Retail Numbers

The statistics tell the tale, too and reinforce what Baumohl suspects. Over the past five years, retail sales have increased in numbers similar to an unemployment rate of less than 6%. Of course, the unemployment rate has been considerably higher – closer to 8% in that timeframe – so the money’s coming from somewhere. It’s clear the underground or shadow economy has allowed many to earn an income to the point they contribute to official retail numbers.

With this being one of the most unusual and longer recessions in our generation, the question is – will the underground economy dry up when the economy actually does begin to improve? Is this a new reality for many Americans and are they happier without so much government involvement? Time will tell, but with such distrust, it could be a gamble the federal government wasn’t counting on.


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