Tuesday, May 7, 2013

The Underground Economy

The impact of recent regulation and re-regulation in NZ is likely to be leading to the same effects in our economy – see this post on the Future of Capitalism blog:

The New Yorker has an interesting article by James Surowiecki about "the underground recovery":

Off-the-books activity also helps explain a mystery about the current economy: even though the percentage of Americans officially working has dropped dramatically, and even though household income is still well below what it was in 2007, personal consumption is higher than it was before the recession, and retail sales have been growing briskly (despite a dip in March). Bernard Baumohl, an economist at the Economic Outlook Group, estimates that, based on historical patterns, current retail sales are actually what you'd expect if the unemployment rate were around five or six per cent, rather than the 7.6 per cent we're stuck with. The difference, he argues, probably reflects workers migrating into the shadow economy. "It's typical that during recessions people work on the side while collecting unemployment," Baumohl told me. "But the severity of the recession and the profound weakness of this recovery may mean that a lot more people have entered the underground economy, and have had to stay there longer."... Tutors, nannies, yoga teachers, housecleaners, and the like are often paid in cash, which is hard for the I.R.S. to track. In a 2006 study, the economist Catherine Haskins found that between eighty and ninety-seven per cent of nannies were paid under the table.

Left mostly unexplored in the article, aside from the glancing though significant mention of unemployment benefits, is the way that regulation and taxes encourage this cash, off-the-books work. The more regulations the government heaps on employers and employees — health insurance mandates, payroll tax, minimum wage, and other reporting requirements — the more tempting it is for both parties to cut the government out of the deal and just reach a contract on their own.

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