1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/8241/americas-underground/

America’s Underground

June 30, 2008 by

These were sharp businessmen, the four guys who pointed out that there were three dead trees in my backyard that needed to be cut down lest they attract horrible bugs that would infest my entire property. They would cut them down and remove them for $475.

In cash.

We dickered back and forth and finally settled on $350. In cash.

They attacked the trees like ants on ice cream. In 45 minutes, the trees were gone without a trace.

I paid them. In cash.

I didn’t break any laws in paying them this way. They broke no laws in accepting cash only. The state is egregiously invasive in our financial affairs but it hasn’t actually banned the use of cash.

So it was last weekend when I was traveling and needed some copies made from a Pakistani-owned copy shop in the Midwest. They would provide them on high quality, colored paper for 15 cents each, but only if I paid in cash. And so I did.

I asked for a receipt. Whoops, the printer on the receipt machine was acting up so she had to write a receipt by hand. It was indecipherable, but I took it anyway. Again, I wasn’t breaking any laws in paying with cash and she wasn’t either.

And yet we all intuit that there is some reason why cash payments are more valuable in the American service sector than checks or credit cards, nudge nudge, know what I mean? With cash, you enjoy the highest likelihood of staying out of harm’s way. If you don’t want to formalize your business model and get embroiled in the entire public-sector apparatus of withholding tax, social security, mandated health care, minimum wages, and the rest of the mind-boggling apparatus of central planning, doing a cash-only business is the wisest choice.

Now, this is interesting.The social apparatus of taxing and regulating is said to be good for us all. Without it, our sense of well being would plummet. We need worker protection and all the glorious services of the state. We need protection in old age, and protection from exploitative capitalists. We comply with the whole command-and-control burden because we are better off as a people than if we acted merely on our own.

So let’s say that I apply this in the two cases mentioned above. I have a sneaking suspicion that my tree-cutting friends are cutting their tax burden as well, and I wonder about this Pakistani printer. Maybe they are not paying minimum wage to those employees nor taking out social security nor providing medical benefits. So, as a good citizen, I make an inquiry. I demand to see their immigration papers, and tax records. I look them up in the official directory of obedient businesses, if such a thing exists.

I conclude that these are unseemly operators. It’s true that I know I can get good service from them but I do not want to partake in a transaction that will hurt others in society. Regulations and taxes are good for everyone, and so I will have no part in this black-market activity. So I decline to hire these tree cutters. I decline to let this lady make copies for me. I wash my hands of the unsightly mess and move on.

What happens? Well, my dead trees still stand, and my copies are unmade. The suppliers are denied a chance to serve others and profit from it. A transaction that both sides desired does not take place. Under the theory that regulations and taxes are good for us, we should both feel better that we didn’t exchange. Somehow we don’t.

Or let’s say that the suppliers of these services suddenly experience a conversion, and, newly enlightened as to their civic obligations, they decide to formalize their operations. But of course that means that the tree cutting service is now one third more expensive, and the copies cost that much more too. I decide that it’s just not worth it, and the exchange doesn’t happen. Again, we should feel better but somehow we do not.

The question I keep asking is: how is society actually better off? My copies are unmade, my trees are uncut, and these businesses lose profits, which means that they have less for providing for their children and for making a good life for themselves. This is especially tough in recessionary times when the prices of everything are rising and unemployment threatens all marginal workers. Try as I might, I just don’t believe that anyone is really getting hurt in a cash exchange that enters into the grey area between the underground economy and the official economy.

In the developing world where government bureaucrats rule everything with outrageous arbitrariness, the sector of society that functions in this grey area is called the “informal sector.” It is a burgeoning area of study for many academics on the right and the left and for different reasons. It is mostly populated by the poor and the poor have the largest stake in the outcome.

Hans Sennholz wrote an excellent little study on the topic for the Mises Institute back in 1984. The upshot is that the larger and more intrusive the government, the more the informal sector flourishes. It is a safety valve of sorts, one that is ignored by GDP counters and nearly invisible to macroeconomic planners. One wonders just how large the US informal sector truly is. I’m not just talking about the drug trade or prostitution or off-the-books gambling. I’m referring to wholly legitimate and wholly legal trades of goods and services that take place outside the purview of the public sector.

I’m going to venture a guess that every single reader of this article is capable of telling stories similar to mine above. The cash-only economy is pervasive in the United States. How big, no one knows for sure, obviously. The lesson here represents a wholesale overturning of the official rationale for the interventionist state: that it is good for us. You can turn these informal scenarios around in your head again and again and still fail to see how we as a society are better off when mutually beneficial exchanges that would take place absent intervention fail to take place because of the intervention.

What’s more, the existence of the informal sector provides a useful blueprint for reform. They can be completely abolished by lowering the costs associated with compliance. If the costs of compliance fall low enough, what is informal becomes formal and no one has any reason to continue to hide anything. The agenda for a free market might be summed up as nothing more than the complete legalization of the prevailing informal sector, which itself is created and sustained by a tax and regulatory burden that is too heavy to be sustained.

And yet the impetus for reform is precisely the opposite. The politicians believe that if they could stamp out the informal sector, crack down on cash-only business, shut down the fly-by-night tree cutters and photocopiers, we would all be better off. What will it take for the public sector to begin seeing the informal sector as a model to replicate rather than a symbol of anti-social economic activity? In a phrase, it will take an enlightened political class that is more interested in the well-being of society rather than the power and glory of the state.

{ 23 comments }

Mike Gogulski June 30, 2008 at 6:20 pm

Now shame on you…

In every transaction, we have three parties: buyer, seller and state.

In most transactions, buyer and seller both win. They each get more in trade than they would have had by not trading.

Sometimes, buyer cheats seller or seller cheats buyer. Caveat emptor, no? Still, we have means to deal with fraud and deception.

But the state? Ahhhh, the state always wins. And thereby, buyer and seller both always lose.

Unless….

greg June 30, 2008 at 7:25 pm

Nazi war criminal Mark W. Everson said you are supposed to tattle on your fellow citizens. Ya gonna do it?

Tom Ritchford June 30, 2008 at 9:09 pm

Taxes: “Without it, our sense of well being would plummet.”

Hah, hah. Drive on any roads recently? Ever use the emergency room? Your kids ever go to a public school – or did you hire someone whose kids did?

Sure, most of your taxes go on killing strangers and arresting people for smoking pot but that’s just because Americans are determined to destroy themselves and everyone else. In a civilized country, in a country where the government wasn’t going out of its way to prove that the government is only good for oppressing people and starting wars, you might actually see some good from your taxes, things like “health care” and “bridges that don’t fall down”

If you look at your commie pinko welfare state countries, it’s amazing how well – and how long – they live relative to Americans, how much better educated they are. What’s particularly amazing is how much less they worry than Americans – they actually have a life outside of work and they don’t have those nightmares of suddenly falling off the bottom rung.

Public roads? Taxes. Clean drinking water? Taxes. Remember all those plagues? Polio? Even measles? What happened to them? Well, the government immunized all the kids – with your taxes. Education? Remember when kids came out of school being able to read and write? That was when the government actually took their responsibilities seriously and spent a little of your money on educating kids, not pretending to educate them (ever seen a “No Child Left Behind Test”? if you do, you’ll know why America is on its last legs). Now all the money goes on killing random Arabs and enriching the ultra-rich.

So ha ha ha you people don’t pay taxes, you’re SOOOO much smarter than the rest of us! Glad to have you responsible, ethical, honest people on board with us! I’m sure we can rely on you when the shit really hits the fan.

BlackSheep June 30, 2008 at 10:53 pm

Hi Tom. A welfare system need not be dependent of compulsory taxation. Mutual Aid Societies were common before government got into that business. By the way, no need to feel jealous of any EU state; the waiting line is in the opposite direction. ;)

Mrhuh? July 1, 2008 at 12:06 am

“In a civilized country, in a country where the government wasn’t going out of its way to prove that the government is only good for oppressing people and starting wars, you might actually see some good from your taxes, things like ‘health care’ and ‘bridges that don’t fall down’

But if governments provided things like ‘health care’ and ‘bridges that don’t fall down’, then governments wouldn’t be able to justify looting tax-payers more to increase funding for their own wallets, perks, etc.

“Public roads? Taxes. Clean drinking water? Taxes. Remember all those plagues? Polio? Even measles? What happened to them? Well, the government immunized all the kids – with your taxes.”

B.S. Private roads have existed before as has clean drinking water with capitalist created water purification techniques as well as private property rights in water. Plagues don’t exist anymore thanks to the Industrial Revolution (something that you statists despised) and its massive creation of new goods and services including better medicine and treatment. Those needed to be created by entrepreneurs long before governments could ever forcibly immunize people (and modern coerced immunizations have only helped to contribute to autism).

“Education? Remember when kids came out of school being able to read and write? That was when the government actually took their responsibilities seriously and spent a little of your money on educating kids, not pretending to educate them”

That never happened. The public school system in the U.S. was largely created in order to control people, not to educate them and foster critical thinking and dialogue. Before the public school system, people were educated either through homeschooling or various private school methods and more people were literate and well-read (as a percentage of population) then are literate and well-read now. It is not taxes that make the world go round and provide the infrastructure of society, but rather private individuals.

M Forss July 1, 2008 at 5:48 am

To Tom Ritchford:
the United States, Great Britain and Sweden were the most extensive welfare states in the 60′s. Other European countries started a little later, and the quality of government schooling, for example, has really come down. Most Western European economies are basket cases and the government universities push out pinko sociologists instead of engineers. It’s nice to afford to build roads but it would be nice to be able to build them also in the future. Taxation destroys wealth.

TokyoTom July 1, 2008 at 7:23 am

Thanks for your piece, Jeff.

The growing state frustrates and makes criminals out us all, and plays with our consciences (we have built-in cooperation circuits/sin reflexes that are triggered by our failure to comply with law) to boot!

Tom

Tom Ritchford July 1, 2008 at 7:56 am

“B.S. Private roads have existed before as has clean drinking water with capitalist created water purification techniques as well as private property rights in water.”

Perhaps you’re unaware of the history of your country, but in fact before the interstates were built with public money it was difficult or impossible to get from place to place in general. Great public goods like “trucking” (where we get all this fresh food) can only exist because of a standardized system of roads, and that could only have been built with public money.

If you don’t believe it, please name a country – any country you might want to live in – where most of the roads were built with private money.

“Most Western European economies are basket cases”.

Really? Which Western European economies are doing worse than the United States? The Europeans I have known always enjoy a more luxurious lifestyle than people with corresponding jobs in the United States – you can live quite well with a fairly menial job – I understand that the concept of “a living wage for regular work” is foreign to people here, that you want to have a few Randian superheroes and everyone else living as peasants, but for most people, “a living wage for regular work” is the sign of a healthy economy – and it’s not like you can’t become staggeringly wealthy in the EU.

“Taxation destroys wealth.” Quoting political slogans isn’t a substitute for thought or reasoning. In well-run countries, taxation creates public assets, things like roads, water, public health, law enforcement, bridges, things that cannot be done effectively on a for-profit basis.

“It’s nice to afford to build roads.” No, it’s *essential* to have roads, unless you consider things like “food distribution” to be nice but not essential.

“It is not taxes that make the world go round and provide the infrastructure of society, but rather private individuals.”

No, it’s both, clearly. Some things are obviously better done on a “for profit” basis. Other things, like roads, are better done by a government.

Government is a necessary evil. Am I trying to claim that governments don’t rip the people off? Of course not. Look at all the money that’s been pissed away on the so-called military industrial complex. (Why isn’t this all done on a competitive bidding basis? Why the constant conflicts of interest?)

But a lot of good things come from government as well – just spend some time in Africa to see what happens in a country where government provides no services. I would say that there’s literally no place in the world you’d want to live without a strong government providing billions of dollars worth of services every year.

You should realize that government is essential and be working on making it efficient, responsible, and keeping it out of your private life. We’ve just seen what happens after eight years of a government that doesn’t believe in the effectiveness of government – the rich loot the government.

When you’re a teenager, you have polarized emotions: “soldiers are evil”, “government is bad”, “save the planet”. When you grow up, you realize that the world is a more complex place and cannot be summed up in a few slogans; that government can sometimes be good and sometimes bad but is inevitable and essential and that you should try to make it work in the most efficient manner rather than pretending it doesn’t exist.

jomama July 1, 2008 at 8:50 am

…that government can sometimes be good and sometimes bad but is inevitable and essential and that you should try to make it work in the most efficient manner rather than pretending it doesn’t exist.

The Nazis had quite an “efficient” government.

But those days are gone.

I’m so happy that your government will eventually go the way of the Holy Roman Church.

Kevin July 1, 2008 at 9:03 am

The reason that there are no fully private road sysytems that can be used as an example is because the various governments have exerted their ‘authority’ over such goods and drowned out any chance for a truly private solution to develop. People want roads. Therefore private actors will find a way to give them to us if not prohibited or discouraged from doing so. That the government used mass theft to fund something that perhaps wasn’t yet feasible privately does not mean we’d still be stuck without interstates.

And the reason Africa is so underdeveloped is because their governments don’t allow the people to do anything without getting the local bureaucrat/chieftan to sign off on it. Lack of freedom and liberty combined with somewhat scant natural resources equals squalor.

Eric Parks July 1, 2008 at 9:10 am

“just spend some time in Africa to see what happens in a country where government provides no services.”

They do not provide the essential service of protecting property rights, either. It would be interesting to see the results if they did.

“You should … be working on making it efficient, responsible, and keeping it out of your private life.”

By this, you mean reducing government? I’m all for it. By making this statement, you identify the concerns relevant to allowing government to offer any services to begin with. How long before the people lose control of “their” government? It seems that it is just a matter of time.

M Forss July 1, 2008 at 11:16 am

Tom Ritchford wrote:
“Which Western European economies are doing worse than the United States? The Europeans I have known always enjoy a more luxurious lifestyle than people with corresponding jobs in the United States – you can live quite well with a fairly menial job – I understand that the concept of “a living wage for regular work” is foreign to people here, that you want to have a few Randian superheroes and everyone else living as peasants, but for most people, “a living wage for regular work” is the sign of a healthy economy – and it’s not like you can’t become staggeringly wealthy in the EU.”

Don’t substitute anecdotes and make-believe for facts. The strongest of the “big” European economies, Germany, hasn’t had substantial economic growth in almost 20 years (partly because of wealth transfer to Eastern Germany). Social mobility has stagnated and the middle class, according to some statistics, has shrunk by 5 million people. France, Italy are even worse. In these countries, there are no pension funds (savings) for post-war baby boomers. This means that pension are paid by taxation.

A rising level of taxation combined with the bursting of the latest inflationary boom (which was really bad in Spain, UK, Ireland, Denmark, etc) means that the living standard of young Europeans will be worse than their parents’. To blame is the government: the central banksters, public works corruption, unemployment induced by welfare benefits and the government schooling scam, which keeps many students in universities till their 30′s.

Of course Bill Clinton was better than George W. Bush, but that doesn’t make him good and isn’t really an argument for “responsible government”. Tony Blair stayed in power after Clinton, was best buddies with Bush too, and now Britain faces just the same problems as the U.S.

Sooper Dave July 1, 2008 at 11:20 am

Regarding the underground economy, I’d recommend the book “Off the Books” by Venkatesh.

It chronicles the economic activity of a Chicago south side neighborhood, detailing the types of black and grey market transactions that occur and how the entire community functions outside the mainstream economy.

Scott D July 1, 2008 at 11:29 am

“If you look at your commie pinko welfare state countries, it’s amazing how well – and how long – they live relative to Americans, how much better educated they are.”

Nonsense. Sweden, Japan, Iceland and Monaco all have greater life expentancy than Americans by a few years. I would hardly call Monaco a welfare state, and with a few exceptions, I would put Japan about on par with America in terms of socialism. As for education, literacy rates are extremely high in most of the developed world, with a less than 1% difference separating most of them. The United States has nearly all of the top 20 universities in the world, no matter who is doing the ranking. Now, if you want to go by something ridiculous like “enrollment”, you might find that the compulsory education systems of socialist countries are more efficient at putting butts into seats. I contend that this is meaningless, especially given the multiple studies that show better performance from private schools and homeschooling.

“Public roads? Taxes.”

I notice that you keep returning to this one, so I have a little challenge for you. Try putting forth a good argument for who roads can NOT be privately financed. Please indicate why railroads, mostly financed by private investors in the first half of the nineteenth century, managed to grow and prosper where private roads must inevitably require tax funding. Also, please argue out of existence the 10,000 miles of turnpikes built and maintained with private money in the first decades of the nineteenth century. Finally, explain why more efficient modes of transportation such as trains or buses are not at all affected by this indirect subsidy of auto travel, and must surely just be stupid ways of getting from place to place.

“Clean drinking water? Taxes.”

I only drink bottled water cause my drinking water tastes like crap. Is that funded with taxes?

“Remember all those plagues? Polio? Even measles? What happened to them? Well, the government immunized all the kids – with your taxes.”

Polio, eh? Ever heard of the March of Dimes? Because you seem to be rewriting history here.

“Education? Remember when kids came out of school being able to read and write? That was when the government actually took their responsibilities seriously and spent a little of your money on educating kids…”

How is this an argument for government administering education? You’re basically saying, “yeah, they’re doing a poor job now, but it used to be okay, so let’s let them keep going at it and maybe some day tir will change.” Besides, Germany, Spain, the UK, Italy and Australia all spend less on education per capita than the US. I think the government is already spending “a little” of our money on education. The problem is that the money is squandered.

“Glad to have you responsible, ethical, honest people on board with us! I’m sure we can rely on you when the shit really hits the fan.”

Let’s take a little walk back into recent history. August 29, 2005: Hurricane Katrina. The shit hit the fan. Evaluate the effectiveness of the government response. Now evaluate the efforts of individuals and private organizations (Wal-Mart, Red Cross, UnitedHealth Group, Pfizer, to name a few). Now, stay with me here. Which of these two groups is funded with taxes?

fundamentalist July 1, 2008 at 12:20 pm

Tom Ritchford: “…before the interstates were built with public money it was difficult or impossible to get from place to place in general.”

That’s not quite accurate. Railroads were privately owned and could take people just about anywhere they wanted with local roads finishing the job. It’s true that the state interfered in the market by giving railroads huge amounts of land in the 19th century, but the results of that were far more harmful than beneficial (see “How Capitalism Saved America). The interstate highway system we have today came from President Eisenhower, who wanted to be able to transport Army troops and materials across the continent without railroads. Thanks to his intervention in the transportation market interstate highways, and state support for the airline industry, destroyed passenger travel by rail. Railroads own their track and pay for its maintenance. Trucking and bus companies pay very little of the cost of building and maintaining highways while airlines pay a small portion of the costs of airports and air traffic control. If the state would end subsidies for travel by highway and air, the railroads would have a fighting chance at capturing some of the market. Railroads are far more efficient users of energy than either of the alternatives.

Tom Ritchford: “The Europeans I have known always enjoy a more luxurious lifestyle than people with corresponding jobs in the United States…”

What about the Europeans you don’t know, such as the guys who regularly torch cars in France? Surely a few of the 12% of unemployed are unhappy. The only objective measure of how well people live is the per capita GDP, and the US surpasses all European countries except Switzerland, last I looked, by quite a bit.

Tom Ritchford: “Taxation destroys wealth.” Quoting political slogans isn’t a substitute for thought or reasoning. In well-run countries, taxation creates public assets, things like roads, water, public health, law enforcement, bridges, things that cannot be done effectively on a for-profit basis.”

That’s not a slogan; it’s established economic fact. Taxation cannot create wealth or assets; it only transfers wealth from one group of citizens to another. Only the private sector can create wealth. I’m not an anarchist, so I leave some room for state activities such as providing courts, police and military. I don’t know that private roads and bridges would be significantly more efficient that public ones. But in building such things, the state hasn’t created anything. It has taken wealth from some citizens in order to enrich others. And the history of road building (as well as the history of state intervention in the railroad industry) demonstrates enormous amounts of waste because the state builds roads to please politicians who are trying to please campaign contributors. So many roads get built where they are not needed and the ones needed never get built.

Tom Ritchford: “…government can sometimes be good and sometimes bad but is inevitable and essential and that you should try to make it work in the most efficient manner rather than pretending it doesn’t exist.”

How can you tell whether the state is being good or not? Most people think they can simply look at what the government is doing and make the determination for themselves. But most people also look only at the most visible, immediate and short term effects. The job of the economist is to force people to see the long term, invisible (at the moment) effects of policy, to paraphrase Mises. The state should protect property of citizens through honest police and courts, and defend the nation with a military. But sound economics demonstrates that when the state oversteps its bounds, and especially when it interferes in the market, it does far more harm than good.

The only way to increase wealth in a country is to increase the stock of capital goods in private industry. Every dollar the state takes in taxes to pay for police, courts and military is a dollar that cannot be used to increase the stock of capital goods, but it is necessary. Everything the state does outside of that basic role decreases wealth dollar-for-dollar. Some economists have estimated that the optimum (based on statistical analysis, not theory) tax level is 25% of GDP, which includes local, state and federal taxes. Ours is currently around 50%.

WCH July 1, 2008 at 1:06 pm

How about “Government of the people by the people for the people?”

Mr. Tucker’s article is completely correct.

However, we do need government. What we do not need, and what seems to happen in essentially all great nations, is the gradual usurping of the systems of government by the power elite for their own enrichment. Voltaire, Tiberius Cesar, The Medicis, and many others, including Franklin, Jefferson and Madison warned us about remaining vigilant against tyranny. We have failed at this for all the reasons mentioned in earlier comments.

When (and history indicates this is not likely) we get back to representatives who actually work on behalf of their constituents instead of the power elite, we will have achieved something that is often dreamed of but rarely achieved. What seems to be so shocking in this country today is the degree to which the power elite has got the citizenry under its thumb. European states, for now, seem to have learned much better how to keep the power elite more in check. The benefits in quality of life are obvious to anyone who spends any time there. Unless the USA does this, it will not thrive.

Call your senator. Call your congressman/woman. Vote them out when they fail to do your bidding. Remember they are all part of the “Republicrat” party of the power elite. Do not be lulled by the ongoing circus between the democrat and republican sides of this one party caricature.

Meanwhile, when I can get it cheaper for cash, I will do so.

Good luck.

Scott D July 1, 2008 at 1:36 pm

“Call your senator. Call your congressman/woman. Vote them out when they fail to do your bidding.”

I have e-mailed senators and congresscritters on occasion, usually to point out the clause in the Constitution that they are choosing to blatantly defy, and asking that they justify their activities. (I recently e-mailed a Tenesee senator who is pushing for a statewide ban on commercial advertising for DUI attorneys). Oddly, they never get back to me.

fundamentalist July 1, 2008 at 1:42 pm

Scott D: “I have e-mailed senators and congresscritters on occasion…”

I used to do the same, until my daughter interned for a senator one summer. That’s when I learned that all letters, phone calls, and emails are taken by interns who tally the pros/cons for particular issues that the senator is interested in. If he’s not interested, it just goes in the trash.

BlackSheep July 1, 2008 at 1:55 pm

Tom, Africa does have big (at least relatively to their economy) states that try to provide communications, transport, health care, education, among others, and they get lots of help from foreign governments to do so. What they fail to provide is freedom of trade, a sound currency, and courts of law.

Tim Harford has some work on this. Checkout his visit to Cameroon:
http://www.reason.com/news/show/33258.html

Scott D July 1, 2008 at 2:13 pm

“I used to do the same, until my daughter interned for a senator one summer. That’s when I learned that all letters, phone calls, and emails are taken by interns who tally the pros/cons for particular issues that the senator is interested in. If he’s not interested, it just goes in the trash.”

I realize that it is essentially an exercise in futility, but it’s a nice outlet for the anger at least. I had to scream at someone for the DUI attorney thing. Might as well scream at the person responsible.

Entreprenuer July 1, 2008 at 8:59 pm

I’m interested to see how, in the event of some suspension of specie or other calamity in the United States, the underground economy will deal. We speak of black and gray markets, only because there is no truly “white” market anymore, at least, our government doesn’t allow us one.

WHC: “How about ‘Government of the people by the people for the people?’”

I’m not quite sure where government has ever been either of the people, by the people, or for the people. And when it comes from a statist Lincoln’s mouth, it can only be seen in it’s true form, propaganda. Because government is not for people, as history can certainly attest.

Entreprenuer July 1, 2008 at 11:50 pm

Of course, I guess what I really mean is a bank run (is it legal to talk about that?) because specie doesn’t really make sense if there is no gold backing money.

fundamentalist July 2, 2008 at 6:51 am

Blacksheep, That story on Cameroon was depressing!

Comments on this entry are closed.

Previous post:

Next post: