America’s Growing Underground Economy

17 12 2009

A highway billboard in Missouri

Here’s another sign of the breakdown of the social contract between government and the people in the United States.




by Richard W. Rahn – Dec 9, 2009 =

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

The underground or “black” economy is rapidly rising, and the fault is mainly due to government policies.

Here is the evidence. The Federal Deposit Insurance Corp. (FDIC) released a report last week concluding that 7.7 percent of U.S. households, containing at least 17 million adults, are unbanked (i.e. those who do not have bank accounts), and an “estimated 17.9 percent of U.S. households, roughly 21 million, are underbanked” (i.e., those who rely heavily on nonbank institutions, such as check cashing and money transmitting services). As an economy becomes richer and incomes rise, the normal expectation is that the proportion of the unbanked population falls and does not rise as is now happening in the United States.

Tax revenues are falling far more rapidly at the federal, state and local level than would be expected by the small drop in real gross domestic product (GDP) and changes in tax law that have occurred since the recession began. The currency in circulation outside the U.S. Treasury, Federal Reserve banks and the vaults of depository institutions – that is, the currency held by individuals and businesses – has grown by 13.3 percent in the last two years, while real nominal (not inflation-adjusted) GDP has not grown at all, and real (inflation-adjusted) GDP incomes have fallen by more than 3 percent. With the growth of electronic means of payment and financial service providers, it would be expected that the currency component of GDP would fall, not rise.

The underground economy refers to both legal activities, such as often found in construction and services industries where taxes are not withheld and paid, and illegal activities, such as drug dealing and prostitution.

Countries such as the United States, Switzerland and Japan historically have had relatively small, nonreporting and/or illegal sectors, a typical estimate being 13 percent of GDP.

Most European countries have had somewhat larger underground sectors (typically 20 percent or so) in part because of the desire to escape higher tax rates. Italy and some of the other Southern European countries are believed to have underground sectors that account for 30 percent or more of all economic activity.

I recall an Italian finance minister telling a few of us at a meeting a couple of decades ago that, for policy purposes, he assumed that “the economy was 40 percent larger than what was reported.” In some developing countries and/or highly corrupt countries, underground or “off the books” activities are estimated to be as high as 70 percent of all economic activity.

The FDIC report about the size of the unbanked or underbanked sector in the U.S. should be of concern because those who do not use the banking system often have to pay higher fees to cash checks, pay bills (e.g., money orders, etc.), or transmit funds.

People who keep their savings in cash at home rather than in banks make themselves easier prey for criminals and are more likely to lose their money to fire, flood, or just neglect. Not surprisingly, a majority (71 percent) of the unbanked have household incomes of less than $30,000 per year.

There are many reasons people do not have bank accounts. Banks, because of the “know your customer” and other anti-money laundering regulations, make it difficult for nonestablished people, such as the young and transient, as well as legal and illegal immigrants, to open bank accounts.

Also, many of these same regulations are responsible for the rise in bank fees, which are a particular burden for low-income people. You can be sure that every time Congress passes some new law or the IRS implements some new regulation to “get tax cheats,” much of the real burden of these compliance costs will fall on those least able to afford it, while those intent on finding their way around it will do so.

People also avoid having bank accounts because they are vulnerable to asset seizure, judgments, levies, etc. Increasingly, bankers and others who provide financial services are forced by governments to spy and snitch on their own customers, and this is a real turnoff for many people, which causes them to find other ways of maintaining financial privacy.

Many studies have shown that when people believe the taxes they are required to pay are reasonable and the political leaders tend to spend their tax dollars wisely, tax compliance rises, and vice versa. In the United States, there is increased evidence that many tax dollars are not being spent wisely and are often used to pay off political cronies.

Over the past year in particular, the public has become aware that many in Washington who advocate higher taxes and argue that everyone has a responsibility to pay taxes are themselves not complying with the tax laws and regulations.

When you have a secretary of the Treasury and the chairman of the House Ways and Means Committee (the tax writing committee) accused of cheating on their taxes, it greatly undermines the moral authority of the tax collectors, making the common citizens feel like chumps and, hence, much more willing to try to legally avoid or illegally evade taxes themselves.

The evidence is unambiguous: governments cannot increase tax compliance and decrease the size of the underground economy by ever increasing and more onerous regulations.

It is no accident that those governments that allow their citizens a high degree of personal and financial liberty, including financial privacy, and spend taxpayer dollars wisely, honestly and competently, have much smaller underground sectors than corrupt and oppressive governments. Washington, take note.




10 responses

17 12 2009

Does “Let them eat cake” ring a bell? If I was a tax cheat I would either pay some serious penalties, or depending on how bad you went out of your way to cheat……’d end up in the “Grey Bar” Hotel. So Geither and Rangel just get to say “Oops I forgot I own them 7 other apt’s in Harlem….”

So back to my let them “eat cake.” The Utter disdain they have for the people is “Twilight Zone.” How as your post pointed out before can 545 people control the lives of 300 Million amazes me. When this happens there is bound to be one ugly outcome if it is not resolved at the ballot box in 2010. I think that has happened because most people just don’t pay attention as long as it does not involve them. And these Genius New breed socialist/ communists in power now who seem to have it all figured out………even though every attempt before them at socialism/ communism has led to HUNDREDS OF MILLIONS OF DEATHS, Not to mention the utter destruction of every economy and standard of living…Think CUBA So maybe, just maybe we may have gotten a few people to turn away from the sport pages and start paying attention. Because this is going to infect them. Unless I’m wrong…..Amoeba-brain-in-Chief will probably get his crap passed, but none goes into effect for a while. So I also predict we will take both houses back in 2010. My question is can we reverse the damage that pin head has caused………Anyone knows???????
PS…… there is no misunderstanding..I’ve said it before and am going to say it again………my line in the sand is if the great vominator signs some kind of treaty at Copenhagen that puts us under any sort of U.N. control. At that point I hope all patriots will join me because that we have just lost our sovereignty…………Steve

17 12 2009



I honestly think there are times when Eowyn and I are sharing some brain cells, she just has a billions more of them than I do. The two of us do not plan with each other as to what we will post or write about. We write independently of each other and only occasionally end up writing about the same thing on the same day. I started this way because I went to bed last night thinking about this very same subject. Honest!

If we could convince 100 million Americans to switch to cash instead of using check or debit/credit cards and any sort of digital banking, it would start a snowball rolling down a hill that could not be stopped. The biggest hurdle to get over with this plan would be to convince employers to pay in cash and do away with payroll checks.

Yeah, I know it would never happen, but it would be harder for the government to know who, what, and where, concerning how much money we have. This would be the only moment in time that we could as individual citizens decide that the government is no longer spending our money wisely, and actually get away with paying no taxes. I came up with this crazy idea because I think a tax revolt would not work in this day and age.

Ok, one last dream… Every person that pays income taxes just stop paying them (tax revolt) until our Representatives in D.C. change their ways.


17 12 2009


Perhaps we were separated at birth? LOL 😀

17 12 2009

That would explain a mysterious scar I have.


17 12 2009
Doc's Wife

when this economy started tanking, I started hiding cash. I was afraid the banks might go under, and we would lose everything. I have talked to many friends and relatives, and they are doing the same. As for an underground economy, it has always existed. Anyone who can get away w/ it should go for it.

17 12 2009


It’s a good thing that we don’t know your name or where you live. DON’T EVER ADVERTIZE THAT YOU’RE SQUIRRELING AWAY CASH! You don’t want to become a magnet for burglars.

Take care!

17 12 2009
Doc's Wife

Eowyn–Don’t worry. Things are in a safe place far away from my home.

17 12 2009

Phew! All’s cool 😉

17 12 2009


You are doing the smart thing on both accounts.

1. Socking away as much cash as possible is a good idea, as is doing the same with gold, silver, and even food.

2. And using some creative thinking on where to hide the stuff is a must do.

Plus, I understand you live in the Asheville area as I do. If you are out in the country and not near downtown Asheville, you should be ok in an emergency situation. Most know that they stand a good chance of getting shot and nailed-up on the side of a barn if they come out to our neck of the woods and start stealing. I expect most of the chaos to be in and around more metropolitan areas, but I am still very prepared and it sounds like you are too.


17 12 2009
Doc's Wife

We are so isolated that my mom in Mississippi swears she could never find our house on her own as much as she has visited. My sister came, and said she needed to drop stones to find her way back down. We LOVE it!

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