Notes from underground: money that people earn and spend outside the realm of official economic calculations is nonetheless real

American Demographics, Jan, 1998 by Elia Kacapyr

Money that people earn and spend outside the realm of official economic calculations is nonetheless real

The Department of Commerce estimates that the U.S. produced $7.6 trillion worth of goods and services in 1996. This is the official assessment of Gross Domestic Product (GDP). Yet, everyone involved with the collection and dissemination of this figure understands that it is a vast underestimate. The Department of Commerce traditionally ignores the wide array of goods and services produced in the underground economy.

For instance, illegal gambling and prostitution are not included in the official estimate of GDP. Because of the criminal nature of these activities, it is understandably hard to get a handle on their dollar volume. It's also hard to estimate the value of legal goods and services provided in an illegal fashion, i.e., "off the books" The house painter who insists on being paid in cash to avoid claiming income and paying taxes does not contribute these dollars to the official GDP. Products produced and exchanged through casual or formal barter systems also fly under the Department of Commerce's radar.

But by far the largest type of production not included in official accounts is both legal and ethical. It falls under the category of "housework." This includes any goods or services that households provide for themselves. Do-it-yourself auto repairs, cooking and cleaning, vegetable gardening, and much more fall into this classification--virtually everything we do that could be done by someone else if we paid them enough.

The "underground" economy includes all production not accounted for in the official GDP. Estimates of its scope range from 3 percent to 40 percent of the "above-ground" economy. The wide range of estimates is the result of different definitions. For instance, most studies of the underground do not include housework. That is, many researchers, like Edgar Feige, consider the underground to be only illegal and "off-the-books" production. Even so, his estimates suggest that the underground is about 20 percent of the above-board economy. One estimate of the economic value of unpaid housework sits at 31 percent of official 1981 GDP, according to Robert Eisner, in The Total Incomes System of Accounts. Piling other types of underground activity on top of this boosts the size of the underground economy to as much as half of the official total.

Underground money has implications for other economic statistics and economic policy. The official unemployment and poverty rates may be overestimated because of the employment and earnings people make but don't report. The federal government also loses out on at least $100 billion in lost tax revenues. On the other hand, the fact that the money's in consumers' hands means it's flowing somewhere.

If the proportional size of the underground economy remains relatively constant, then economic data expressed in rates, such as the growth rate in GDP, will be accurate despite the fact that they ignore the underground. But such a consistency is unlikely; evidence indicates that when tax rates rise, so does underground activity.

Some statistics that go into the American Demographics Index of Well-Being, such as the employment rate and after-tax income, exclude the underground economy. In their absence, the best we can do is note the inaccuracy. In August 1997, the Well-Being Index stood at 102.47, down about a tenth of a percent from July's revised reading of 102.56. These figures indicate that the typical American has enjoyed an increase in well-being of almost 2.5 percent since April 1990, the base month for the Index.

The decline in August is due to a drop in labor productivity that lowered the productivity and technology component, as well as an increase in the average work week that cut into leisure time. The social and physical environment also gave up ground as a result of increases in crime, divorce, and the number of endangered species. On the up side, income and consumer attitudes improved. The income figures don't account for our under-the-table dealings. But our attitudes might to some extent reflect them.

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RELATED ARTICLE: POPULATION UPDATE

FOR JANUARY

Despite the fact that January traditionally hosts the smallest number of weddings of any month of the year, the estimated number of U.S. marriages in January 1997 was 6 percent higher than in January 1996, totaling more than 106,000. The number of divorces granted in January 1997 decreased 2 percent, to 92,000.

In 1996, less than 2.4 million couples tied the knot, only a neglible increase from the number that wed in 1995. Between 1994 and 1995, the number of marriages declined slightly, largely because of the relatively small U.S. population of young adults in the prime years for first marriage. Divorces fell 2 percent over each one-year period, declining 1,148,000 in 1996.

The largest states in the nation are likely to have the most marriages in January. Yet there are a couple of surprises. California doesn't make the top-10 states for divorces granted in January 1997, but Ohio and Georgia rank third and fourth.