Underground Economy

Worms and moles mostly run the underground economy, trading shovels and hardhats.

Oh, you mean the other kind? That underground economy involves the dealings that go unseen, unaccounted for, and unregulated by the government. The black market. The shadow economy. The unregulated, wild, wild west economy.

The underground economy includes all illegal economic transactions. Some economic transactions might break the law directly (like child trafficking), while others might break it more indirectly, like selling cigarettes under the table to avoid paying high cigarette taxes.

What else is in the underground economy? There are the more obvious ones, like the sale of illegal drugs, illegal prostitution, all-things-mafia, and smuggling things or people across borders. You know, the stuff you see on the news, or when you’re bingeing Breaking Bad. The less obvious illegal transactions? Did Billy (the neighbor boy who rakes everyone’s yards in the fall) violate child labor laws? Shame on you, Billy. Shame. Okay, even if Billy was old enough to not be violating child labor laws...did he report that income to the IRS? His parents? Probably not. Same goes for Bonnie the babysitter. “Don’t have a permit for that lemonade stand, little 7-year-old? Then we’re gonna shut you down...” And yeah, that has really happened. The underground economy’s got some obvious illegal activity...and some less obvious illegal activity...but it’s still all illegal.

So just how widespread is all of this illegal economic activity? The underground economy is notoriously hard to measure, but according to the International Monetary Fund, the average size of the underground economy of 158 countries between 1991 and 2015 is almost a third of GDP: 31.9%. In some countries, like Zimbabwe, Georgia, and Bolivia, the shadow economy is about two-thirds of GDP. The smallest shadow economies can be found in the U.S., Austria, and Switzerland, which have underground economies estimated to be in the 7-9% range.

Underground economies aren’t necessarily stable though. For instance, there’s some evidence that, after the 2008 financial crisis, the U.S. underground market doubled from one trillion to two trillion dollars. As the legal economy plummeted, the underground economy picked up some of the slack.

Which begs the question: why is the underground economy a thing, anyway? Well, where there is demand, supply will find a way, even if the thing being demanded is illegal. For sellers, if the benefits of selling on the black market outweigh the costs, then the market will exist. For instance, marijuana was made illegal around the time of the Great Depression. It’s theorized that high unemployment and fears of Mexican immigrants led to marijuana being made federally illegal. Fast forward to today, and well over half the states have legalized marijuana medically, and many recreationally.

What changed as marijuana transitioned from the underground economy into the legal economy? First, governments get to tax marijuana, increasing their revenues, providing more money for schools, roads, etc. Second, money that used to be funneled through the underground economy is now being funneled through the legal economy, which has different rules and enforcement protocols. In the legal economy, we’ve got police, courts, and laws we can use to enforce the rules. In the underground economy, everyone has to fend for him-or-herself...which is why enforcement in the black market often results in violence. As the black market for a good like marijuana is being displaced by marijuana in the legal market, it also means that legal enforcement is displacing illegal enforcement. Courts and cops replacing black market violence for enforcement is a societal benefit.

When we make economic laws and policy, it’s important to consider the economic effect of “bans” and high taxes on the entire economy, including the underground economy. We’d like to think high taxes will bring in a ton of revenue, and that bans will be respected, but that’s just not the case. If the tradeoffs are worth it and the demand is there, taxes and bans can simply push transactions into the underground economy. Just as marijuana is moving from the shadow economy to the legal economy, drastic tax increases on commodities and bans can move goods and services from the legal economy into the illegal economy.

As in all of economics, whether a transaction is in the legal market or the illegal market, it comes with its own set of tradeoffs. For instance, food stalls on the street that avoid paying taxes mean less money for the government...but it could also result in an economic stimulus. There’s a good chance many food stalls that aren’t paying taxes wouldn’t exist if they did have to pay taxes. Since they do thrive, it means more money for them, but also more money injected into the economy from all of the economic transactions they’re creating.

It’s the same idea behind job creation via relaxing taxes. Feeling like the government is being gipped? Well, some governments have their own underground economy, too. Government officials tapping government coffers for their own purposes (a.k.a. corruption and fraud) is nothing new. Ironically, while governments are the enforcers of the legal economy, many have their own share of behind-the-curtains illegal dealings.

So yeah. Don’t try violating child labor laws and hiding income from the IRS. Or, you know...just make sure there are no neighborhood sticklers against lemonade stands or freshly raked lawns.

Related or Semi-related Video

Econ: What is Underground Economy?2 Views

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And finance Allah shmoop What is thie Underground economy the

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black market the shadowy economy the underground The unregulated wild

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Wild West becomes well The underground economy includes all illegal

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economic transactions Well some economic transactions might break the law

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directly Like you know human trafficking It's a big no

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no While others might break it more directly like selling

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cigarettes under the table to avoid paying high cigarette taxes

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you know smoking up X free Well what else in

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the underground economy is there Well there are more obvious

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ones like the sale of illegal drugs and prostitution and

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all things mafia and you know smuggling things or people

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across borders You know the stuff you see on the

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news or well when you're binging on breaking bad Well

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the less obvious illegal transactions did Billy the neighbor boy

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who rakes everyone's yards in the fall violate child labor

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laws All shame on you Billy Shane How dare you

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break Okay Even if Billy was old enough to not

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be violating child labor laws did he report that income

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to the I R S did his parents Well probably

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not Same goes for Bonnie The baby sitter don't have

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a permit for that lemonade stand their little seven year

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old girl and we're going to shut you down And

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yeah that really has happened in some cities Well the

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underground economy has got some obvious illegal activity and some

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less obvious illegal activity But it's still all illegal Well

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so just how widespread is all this illegal economic activity

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Well the underground economy is notoriously hard to measure But

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according to the IMF the International Monetary Fund the average

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size of the underground economy of one hundred fifty eight

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countries between nineteen ninety one and two thousand fifteen is

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almost a third of GDP thirty one point nine percent

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It includes country like you know Zimbabwe in Soviet Georgia

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and Bolivia the shadow economy there's about two thirds of

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the GDP The smaller shadow economies can be found and

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highly regulated Highly technically audited places like the U S

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And Austria and Switzerland which have underground economy is estimated

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to be in the seven eight nine percent range Well

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underground economies aren't necessarily stable For instance there's some evidence

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that after the two thousand eight financial crisis the US

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underground market doubled from a trillion to two trillion dollars

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As the legal economy plummeted the underground economy picked up

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the slack Which begs the question Why is the underground

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economy even a thing anyway Well where there's demand supply

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will feel away usually even if the thing being demanded

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is illegal for sellers If the benefits of selling on

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the black market outweigh the costs and the risks well

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then the market will exist For instance marijuana was made

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illegal around the time of the Great Depression right The

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laws around it theorized that high unemployment and fears of

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Mexican immigrants led to marijuana being made federally illegal Well

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fast forward to today and well over half the states

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in America have generally legalized marijuana medicinally and many states

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recreational e well what changed as marijuana transition from the

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underground economy into the legal economy or overground economy While

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first governments get to tax marijuana increasing their revenues providing

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more money for for schools in theory and then roads

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and whatever government spend money on the second wealth money

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that used to be funneled through the underground economy is

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now being funneled through that legal economy which has different

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rules and enforcement protocols and competition in the legal economy

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We've got police courts and laws that we can use

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to enforce the rules in the underground economy Everyone has

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to fend for him or herself That's why enforcement in

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the black market often results in violence well as the

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black market for a good like marijuana is being displaced

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by marijuana in the legal market it also means that

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legal enforcement is displacing illegal enforcement courts and cops Replacing

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black market violence for enforcement is a societal benefit When

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we make economic laws and policies well it's important to

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consider the economic effect of bands and high taxes on

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the entire economy including the underground economy We'd like to

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think high taxes will bring in a ton of revenue

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and that bands will be respect But in reality that's

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just not the case If the trade offs are worth

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it and the demand is there well then taxes and

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bands can simply push transactions into the underground economy Well

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just as marijuana is moving from the shadow economy to

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the legal one drastic tax increases on commodities and bands

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can move goods and services from the legal economy into

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the illegal one as in all of economics whether transaction

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is in the legal market or the illegal market It

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comes with its own set of tradeoffs For instance food

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stalls on the street that avoid paying taxes mean less

04:38

money for the government But they could also result in

04:41

economic stimulus There's a good chance than many food stalls

04:44

that aren't paying taxes wouldn't exist if they did have

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to pay taxes Since these things do thrive well it

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means more money for them but also more money injected

04:53

into the economy from all the economic transactions that they're

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creating It's the same idea behind job creation versus relaxing

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taxes while feeling like the government is being well some

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governments have their own underground economy to government officials tapping

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government coffers for their own purposes A corruption and fraud

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is nothing new Ironically when governments are the enforcers of

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the legal economy many have their own share of behind

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the curtains Illegal dealings So yeah I don't try violating

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child labor laws and hiding income from the I R

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Rest or you know do just make sure there are

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no neighborhood sticklers against lemonade stands or freshly reclines Our

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prisons filled with seven a nine year old a waitin 00:05:35.363 --> [endTime] for mom and dad to come and bail amount

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