“The Underground Economy”
Coming from the economics department, I’m here to tell you today that you are all a part of a $2 trillion world-wide operation that the government cannot track. And this worldwide operation is called the underground economy.
This operation is significant to the flow of cash around the world. And by knowing how individual finance is directed, we can decide what to do with our money and make sure that it goes to ethical sources. But before we get into all of that, I want to clarify what the economy really is — the shadow economy as some may call it. By definition, for those of you that are in the economics or business department here, it is defined as the part of our country’s economic activity that is unrecorded and untaxed by the government. It’s also called a shortcoming of gross domestic product, which is basically the output of a country during a span of time. So that is the textbook definition.
But what is included in this underground economy? Well let me simplify. All you need to know is that above ground is anything that the government can regulate, anything that is recorded, anything that’s taxed. And everything else that is not taxed or is recorded by the federal bureau of economics is underground. As you can see from this chart, it consists of a $900 billion radius. It is 1/3 of our economy. And it’s predicted to be so because, again, the government cannot track it.
So how big is the shadow economy? Well, according to the IRS, the United States lost $500 billion in taxes in 2012 because of this unreported income. And the leading economist today, Edgar Feige, estimated that the worldwide underground economy is around $2 trillion, which you can imagine is a lot of money. That is why we should care about it.
So, why do we even have this underground economy? Well, it’s for the convenience. Mostly it’s tax evasion. It’s to avoid too much government regulation and bureaucracy. It’s also illicit employment from immigrant workers that are trying to gain some form of living. So this isn’t necessarily a bad thing. The underground economy is something that can drive cash flow in a
positive way, even though it does have negative impacts on the global transaction of money.
So we know that it is in illicit narcotics. People that smuggle various products will be participating in this underground economy. But it could also include something like you getting money from your parents after mowing the lawn or washing dishes or selling your shoes to a friend on eBay for $50. And that is not taxed. Hence, you are technically part of the underground
economy.
So now I’m going to look at why we as individuals should care about it so much, aside from the fact that it’s $2 trillion. Well, according to the IMF, the International Monetary Fund that
records a lot of the underground economy’s activities, or at least tries to, this sector of this economy is growing continuously. And this is because of taxes and Social Security contributions that adds to the cost of labor. And hence when a company decides to cut down on costs, they will result in taking part of the underground economy and getting employment, getting workers for construction, for production, and for various purposes. And again, this is not bad because there are positive side effects like cheaper costs, quicker, and more convenient employment, movement in the production chain that we all need in a hasty amount of time. However, this convenience does come with negative side effects. Since this economy is not recorded, most employers and manufacturers do not have to register their employees, which leads to child labor and illicit employment, again, with immigration and everything that’s going on right now. It’s linked to child labor. And the fact that the World Counts forum has accounted for 300 billion children and counting — hiring of not only children but their parents and people that are disabled to work in these hazardous, sometimes life-threatening conditions is not something that the government can regulate. And hence it’s a part of the underground economy. And since April 2014, this $300 billion number is so far just an estimate. We do not know how much or how far these environments have reached outside of human rights. And we don’t have to look far for more examples. Your candy brand, Hershey’s and Mars, get their cocoa and chocolate refined products from most of these sub-Saharan African continents. And they use child labor to harvest these cocoa beans to cut down on costs. Which again is not the fault of employers. It is the fault of the smugglers and the syndicates that are running the supply chain. So this all contributes to the $2 trillion that is being laundered into the economy.
Now what is money laundering? It basically means to clean illegal money. And so you washing dishes for your parents doesn’t necessarily have to be clean because it’s not dirty money, and hence you can spend it at your liberty. But for most of these syndicates, they will have to launder money through false accounts, through setting up of puppet banks, and through transitioning between countries to country to convert this currency into spendable money.
So, what can we as individuals do to exercise our power over these syndicates? Well, I’m here to tell you that your money you may not have come from the most ethical predecessors. But what do you do next with your money counts, because every dollar you spend is a vote in cash for the world you want. That is a quote from LN Smith. And to stop the piracy that is going on in China, to stop the cocoa and child lab or production that most Hershey’s harvesting fields, the way we can cut this down is if we know where these come from and use our dollar votes to boycott these products.
What are dollar votes? It basically means our purchasing power since US consumers have a say in businesses to stay afloat and what businesses tank. And your dollar vote can count towards tomorrow. So the next time you go to a store, just think about it. When you buy the product, make sure you know where the proceeds are going to and where this product is coming from, because you might be financing the future. Thank you.