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The 'New' Economy?

As the economy tanks and unemployment jumps, the "underground economy" option is looking pretty good to many Americans.
 
 
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As the economy tanks and unemployment jumps to 6 percent nationwide--the highest since July 1994, the "underground economy" option is looking pretty good to many Americans.

Forget the get-rich-quick "Work at Home" ads promising "$300-$1,000 per week. There is an entire realm of underground economy activities alive and well keeping many individuals and families above water by dealing in cash payments or services under-the-table and off the books. Also called "shadow economy" and the "informal economy," it's a segment many are consigned to at a time when trolling for a decent paying job has become arduous.

According to a June 2002 International Labor Organization (ILO) Conference Report: Decent work and the Informal Economy, "There are, of course, criminal activities in the informal economy, such as drug trafficking, people smuggling and money laundering. But the majority in the informal economy, although they are not registered or regulated, produce goods and services that are legal."

One of the attendees of the June ILO conference was Karin Uhlich, of the Tucscon-based Southwest Center for Economic Integrity.

"One of the recommendations from the conference was that the ILO really ought to ensure that specific information is gathered, and by industry," says Uhlich. "So, I think there is an acknowledgement that currently there is no private or governmental entity that is doing a good job of tracking."

And that's the rub: While there are organizations tracking the underground economy internationally, there is nothing but estimates domestically.

This underground economy goes beyond the homeless collecting aluminum cans or clogging day labor halls. It includes the working poor getting cash for all forms of recycling: giving plasma, selling homemade tamales outside shopping plazas, holding yard sales, doing under-the-table work for friends and family, selling stuff at pawnshops, CD, book and used clothing stores, and even getting tips from restaurants and bars--to name a few.

The easiest money for healthy individuals who don't want the hassle of the day labor halls is giving blood.

"We have every range," says Margaret Kolar, front office supervisor at Aventis Bio-Sciences, Inc., an international plasma collection company. "We've got computer programmers, engineers, college students and moms and dads."

Honey Bee Recycling is a metal collection yard open seven days a week that caters to mostly individuals.

Honey Bee owner Diane Harris says that in her 17 years, she has seen every walk of life imaginable, from those living on the street to one customer who drives a Rolls Royce.

"They're coming in on Wednesday or Thursday," says Harris. "One of the most common comments you'll hear is 'This will get me gas money until pay day, or diapers for the baby, or milk.'"

The underground economy isn't all about cash. There is also a minor movement toward barter for services and trading in old stuff for newer old stuff.

"In stretching their dollar, they're much more inclined to make use of resale products: used cars, used homes, furniture and clothing," says Diane Kramm, CEO of the used clothing chain Twice as Nice.

"Yes, there has been a steady increase in that kind of activity," says Kramm. Tucson's five Twice as Nice stores see 50 people per day per store selling or trading while another 130 people per day come to buy.

All these examples result in quick, unreported cash or services to those on the ragged edge. The National Center for Policy Analysis points out: "Economists estimate that as many as 25 million Americans earn a large part of their income from underground activities."

While economists have long estimated that the U.S. underground economy equals about 10 percent of the gross domestic product (GDP), there are reasons to believe the number may be larger. According to a recent International Monetary Fund survey of 21 countries, the shadow economy has been growing for 30 years--the fastest in the 1990s--doubling from less than 10 percent of the GDP in 1970 to 20 percent or more by 2000.

"In the United States, for example, the shadow economy doubled from 4 percent of GDP in 1970 to 9 percent in 2000," according to IMF.

But the Internal Revenue Service is taking a dim view. The IRS recently estimated that the federal government is losing $195 billion per year in revenue due to underground activity-- both legal and illegal. In addition, it estimates the underground economy is anywhere from 3 to 40 percent of the above ground economy. And the IRS is continuing its battle with restaurant owners to collect taxes on the estimated $9 billion in tips restaurant employees receive annually but may not report.

Enter the Yard Sale Police. In a September 2000 audit report, the Treasury inspector general for tax administration recommended that the IRS take steps to improve the identification of taxpayers who did not report their outside income.

"Based on our statistical samples, we estimate that approximately $71 million in self-employment taxes remain unassessed each year for taxpayers earning self-employment income of $2,000 or more," said the report, referring to strictly legal activities.

"By working these cases in correspondence examination before refunds are issued to taxpayers, the IRS could immediately collect self-employment taxes of $21 million each year. Over 5 years, this totals $105 million."

In January 2001, the IRS responded and began identifying taxpayers with potential unreported income as the returns are processed. Interestingly, if one was to give blood twice a week for a year, he or she would take in over $2,400 in cash--over the IRS $2,000 limit.

"You donate your plasma and we're compensating you for your time spent here," says Kolar at Aventis Bio-Sciences. "We don't report it to the IRS and you don't have to fill out a W2 or anything."

And the feds are following the money. According to the Treasury Department, $100 bills have risen from less than 20 percent of currency in 1967 to more than 63 percent today. The assumption is that "law-abiding citizens" will not ordinarily increase their day-to-day need for cash so any significant increase "must be used in the underground economy."

Legal or not, what these activities have in common is their contribution to the multi-billion dollar underground economy prospering unofficially outside the realm of the struggling conventional economy.

"To some extent there could be an argument that if there is no access to formal, protected employment, that the underground economy does grow," says Uhlich, who believes the wealth gap is partly responsible for the increase in the underground economy.

The state of Arizona, for example, ranks 44th in the percentage of residents who live below the poverty level ($18,000 per year for a family of four). In Pima County the number rises to 14.7 percent and Tucson chimes in at 18.4 percent. Not surprising, Tucson Community Food Bank's distribution of food boxes is up 30 percent from a year ago and Primavera Works has seen an increase in those on the ragged edge seeking temp or part-time employment.

"We've gone from 25 to 30 to 35 to 40 people per day. Some are shelter people and some are walk-ins, and our walk-in numbers have increased," says David Powell, director of Primavera Works.

According to Powell, many are temp workers supplementing entitlement income from monthly social security or veterans checks but who are limited to the number of hours they can work as a requirement for receiving benefits. Still, they'll work $5.75 per hour manual labor for the extra income. "Unless they also have food stamps, they can't make it," says Powell.

Qualifying for federal assistance takes several months and while the state provides the barest of funds ($173 per month) through its General Assistance Program, the money is running out. For the current year, the Legislature cut the $5.5 million budget to $2.1 million while enrollment in the program grew to more than twice as many as was predicted.

"They just did not anticipate the growth in caseloads, so that's a looming situation," says Uhlich. "So, how do we approach that dilemma and how do we deal with the fact that there's so many people in the underground economy and what do we do to help and protect those folks?"

Uhlich hopes to answer these compelling questions when the Southwest Center for Economic Integrity hosts a conference on "Workers in the Informal Economy" with the United Nations Association and ILO in Tucson, Arizona on Feb. 22.

D.A. Barber is a regular contributor to the Tucson Weekly.