US Informal Economy estimated to have DOUBLED to $2 Trillion since 2009

All the financial repression via bailouts, rescues, inflationism, new taxes and regulations from the US mortgage-banking crisis of 2008 have driven many of the average Americans to the informal economy.

From the CNBC:

The growing underground economy may be helping to prevent the real economy from sinking further, according to analysts.

The shadow economy is a system composed of those who can't find a full-time or regular job. Workers turn to anything that pays them under the table, with no income reported and no taxes paid — especially with an uneven job picture.

"I think the underground economy is quite big in the U.S.," said Alexandre Padilla, associate professor of economics at Metropolitan State University of Denver. "Whether it's using undocumented workers or those here legally, it's pretty large."

"You normally see underground economies in places like Brazil or in southern Europe," said Laura Gonzalez, professor of personal finance at Fordham University. "But with the job situation and the uncertainty in the economy, it's not all that surprising to have it growing here in the United States."

Estimates are that underground activity last year totaled as much as $2 trillion, according to a study by Edgar Feige, an economist at the University of Wisconsin-Madison.

That's double the amount in 2009, according to a study by Friedrich Schneider, a professor at Johannes Kepler University in Linz, Austria. The study said the shadow economy amounts to nearly 8 percent of U.S. gross domestic product.

Whether in politics (Boston’s martial law) or in economics (informal economy) the US appears to be sliding down the path towards a banana republic.

Why?

The informal, underground or shadow economy have always been a product or outcome of the politicization of the marketplace.

Proof?

Regulations have been skyrocketing in the US. A big segment of growth comes from the post-crisis years. The number of pages of regulations from the Federal Register has ballooned almost sevenfold since 1940s. Chart from Political Calculations Blog.

Additional regulations means more taxes too.

Number of pages of Federal Tax Rules has swelled by about eight times since the 1940s, where the bulk of the recent expansion of tax rules also occurred during the years of post-US mortgage banking crisis . (Chart from Cato’s Chris Edwards)

Regulations signify as hidden taxes too. 

Estimated compliance costs is at $236 billion in 2012. This would account for 1.5% of the US GDP. By the way, $2 trillion informal economy is about 12.7% of the $15.7 trillion US GDP in 2012. 

Yet there are indirect regulatory costs too.

Overall, the total estimated regulatory costs have been at $1.752 trillion in 2011 according to Competitive Enterprise Institute.  That’s more than 10% of the US economy. Such costs must be a lot more today.

Statistics would not really capture the lost business opportunities from the burdens of additional taxes, regulations and other politics based programs because they are largely invisible or unseen by the public. For instance, I recently pointed out how state authorities shut down a child’s lemonade stand for the lack of license. So one has to be leery of any supposed analytical insights entirely focused on the shouting of statistics or on the dependence on empirical methodology.

We will have to add the burdens of tax and regulatory costs  from Obamacare and Dodd Frank.

That’s not all. There is also the enormous onus from entitlement spending. (chart from Heritage Foundation)…

…and the diminishing purchasing power of the US dollar from the printing presses of the US Federal Reserve since 1913 (chart from visual.ly), whose boom bust cycles have led to the justification of more interventions or “never let a crisis go to waste” dogma. 

So such vicious cycles of government expansion leads to a debt trap.

To cap it, increasing politicization of the marketplace means higher costs of doing business which entails more limitations or restrictions on economic opportunities and diminishing productivity and capital accumulation, which extrapolates to stagnation or a decline in living standards.

Thus when people’s survival is at stake, and where costs of doing formal business is high and increasingly a hindrance, they resort to the informal, underground or the shadow economy.

The digital age via the web has also substantially contributed to the expansion of the informal economy, where the former provides the platform to conduct businesses outside the prying eyes of the government. The emergence of the Bitcoin is a wonderful example.

The growth in the informal economy will also likely be manifested in the evolution of politics. This should translate to a growing divide or the deepening polarization between the productive class and political parasites (political class, cronies, welfare-warfare beneficiaries and the bureaucracy).

Although while informal economies represent as good sign of people’s attempt to generate productivity outside the political realm, they represent as an implied or passive revolt against politics. Alternatively, this also could mean social unrest ahead.

Updated to add: Informal economies will be smeared by the mainstream as illegal and immoral operations (such as drugs, money laundering and etc...). While there could be some, most of them aren't. This would represent as propaganda to cover up the failure of governments or to shift the burden of blame on the public rather than they owning up to their failures.

Graphic of the Day: Red Tape and Small Business

In the mainstream, hardly has there been any meaningful discussions about how red tape, costs of regulatory compliance and the costs of leviathan bureaucracy contributes to unemployment or how politicization of the economy via the bureaucracy and arbitrary rules (regime uncertainty) takes its toll on the economy, particularly on small business, which have been the major source of the employment in the US (and elsewhere).

The chart from the Joint Economic Committee Republicans exhibits the astounding maze of regulations.

So when the politicians deceivingly assert that the success of entrepreneurs has been due to the government, in truth this relationship has been in reverse: many business failures, stillborn and or unrealized businesses have been products of government interference in various forms.

Cato’s Dan Mitchell (where the chart above has been sourced) gives us some numbers on the onus of the bureaucracy to the US economy:

Americans spend 8.8 billion hours every year filling out government forms.

The economy-wide cost of regulation is now $1.75 trillion.

For every bureaucrat at a regulatory agency, one study estimated that100 jobs are destroyed in the economy’s productive sector.

As the great Ludwig von Mises pointed out,

The trend toward bureaucratic rigidity is not inherent in the evolution of business. It is an outcome of government meddling with business. It is a result of the policies designed to eliminate the profit motive from its role in the framework of society’s economic organization.

Elimination of the profit motive means a declining trend in a society’s standard of living.

The Economist has an article about “The parable of the four-engined planes” which nicely demonstrates of the failure of bureaucratic rigidity.

Updated to add:

Another worthwhile example is this article about a 13 year old aspiring entrepreneur whose business got shut down by local regulators. (pointer to Professor Gary North)

Currency Controls: My Nightmare at the Airport

Not only has government paranoia almost cost me and my family a vacation, worst, I had to endure a traumatic episode from bureaucratic harassment from local officials.

My basic mistake was to leave my wallet and instead brought my peso cash allotted for our travel expenditures packed into a white business envelope.

At the immigration pat-down, I was asked what the lump in my left front pocket of my pants was which I promptly disclosed.

The inspector told me to step aside from the line and wait for the immigration official, stating that I had exceeded the maximum amount cash (P10,000) allowable for each local citizen to bring abroad, who would decide on my case.

The immigration official arrived and lectured me on my supposed offense. And the officer further said that in breach of the regulation, I was subject to penalty in accordance to the regulations of the Bureau of Customs.

I replied that I DID NOT know about any disclosure procedures, or of any currency exports regulations by individuals.

And prior to the pat-down all I did was to fill up a form where I affixed my signature which DID NOT contain any information about required disclosures.

The immigration departure document looked like this.

Looking back I found the said regulation from IATA’s website

Residents and Non-residents: local currency (Philippine Peso-PHP): up to PHP 10,000.-. Exceeding amounts require authorisation from the Central Bank of the Philippines. foreign currencies : up to USD 10,000.-, or its equivalent. Amounts exceeding USD 10,000.-, or its equivalent must be declared.

Information must be furnished on the source and purpose of the transport of such amount. Violation will be subject to sanctions under Philippine customs law and regulations.

This means I have to apply with the central bank for any amount exceeding 10k pesos to bring abroad! Gadzooks, what onerous red tape!

Back to the airport, the officer suggested that to circumvent the regulation, I could go out of the area and have my (slightly) excess pesos changed into US dollars or other foreign currencies.

However, because of time constraints, doing so risks that we could miss our flight, which would translate to financial losses on our flight tickets compounded by the psychic losses from our frustrated plans.

I pleaded to the officer that the marginally excess pesos (less than 5,000 per head) had been meant for my mom, who is an overseas resident, as a Christmas present. After a few minutes, the officer relented and allowed us through.

Of course, I am thankful to the officer for his ‘generous’ gesture in spite of the hassle.

But such event only reinforced my understanding of how unilateral or arbitrary laws corrupt a system.

-I became an alleged offender for bringing my personal property without knowledge of any breach of the law, and importantly without aggressing upon anybody else (except in the eyes of the enablers and implementers of the regulation, again whose regulations I didn’t know).

-For not enforcing the law, the officer can be construed as being remiss of his duties and equally culpable transgressor.

Yet he did so perhaps in the understanding of the law’s unreasonableness, in my opinion.

The officer knew such law has been repressive, selective in enforcement and would hurt citizens in good faith, thereby perhaps conscience dictated the tolerant decision.

Or it is possible too that the officer has seen enough of our mental and emotional anguish.

-The officer offered an alternative to go around the system (change excess pesos into US dollars), again for the same reasons.

-I was lucky to have that particular officer attend to me. For the outcome would have been different if someone else with malice adjudicated my case. Such regulations could have been used to mulct and extort on us.

And come to think of it, just how can one enjoy a vacation with only 10,000 pesos (USD 227 @44 pesos per USD) in the pocket, especially when visiting a country whose cost of living has vastly been higher than ours?

And considering the millions of local travellers abroad annually, I am quite certain that such regulation have hardly been implemented except for a few instances.

The implication is that such currency control regulation has not been only repressive, selective and arbitrary in implementation but also impractical.

Yet to whose benefit these regulations accrue?

One the political class.

By imposing capital controls, the political class does not want people to vote with their money, or for the markets to expose on their abuses to their constituencies.

The attempt to restrict money outflows, in the guise of preventing money laundering (applied mostly to political opponents rather than to the incumbents and their clients) and blame-the-speculators (not the policies of local politicians and bureaucrats) signify as symptoms of government repression, who coldheartedly would penalize the innocent for their upkeep.

Two, the banking class.

Obviously putting restrictions on cash movements has been designed to bring transactions to the politically privileged banking and finance industry, which have been under the ken or supervision of the political class.

Yet the unintended consequence has been to foster more underground activities, using loopholes (e.g. change to US dollars) or etc., while simultaneously breeding corruption of the bureaucracy.

Let me add that I brought spare cash as insurance from the untoward experience I had 5 years ago, where the failure to access my bank’s overseas ATM network almost left me helpless.

And I have to admit while I have some credit cards, I am an averse or an infrequent user where my credit cards have been meant for emergencies.

Yet another possible unintended consequence would be if there would be an emergency while in another country (say natural disaster), without enough CASH or access to credit cards or ATM, one will be left to suffer an undeserved fate because of such feckless regulations.

I have been reluctant to travel mostly because of my aerophobia, but now I have developed a new phobia: fear of bureaucracy-bureauphobia.