Brown paper bag money, or how big is the underground economy...

I've been thinking a lot about the underground economy lately, inspired by my own experiences, some books I've read, and of course, rap music.

The rap music first. I downloaded a random mix tape a couple months ago, and one of the songs was entitled Brown Paper Bag (warning: lyrics may offend those who are not down with the hip-hop culture, yo!). The song talks primarily about drug dealing, and moving large sums of brown paper bag money ("that IRS can't tax money), although Juelz Santana also gives a shout-out to all "those strippers making black plastic bag money".

On the literature side, early this year I read Off the books, by Sudhir Alladi Venkatesh. If you've read Freakonimics, Sudhir is the social scientist who did the research that led to the chapter about the profit structure of drug dealers. The book looked at a Chicago neighborhood and all the undeground commerce that took place in it, some of it clearly illegal (drug dealing, prostitution, selling stolen goods) and some of it in grey areas (car repair in alleys, people cooking or cutting people's hair out of their houses). Being a social scientist, Sudhir focused more on the social aspects - how everyone got along, where communities drew the line, how competing sellers interacted - but it was still interesting to see how big the underground economy is.

The second book I just finished a few days ago - Hernando DeSoto's the other path, which looks at the underground Peruvian economy in the 1980's. DeSoto saw legalization of the underground economy in Peru as the way to combat the Shining Path terrorist movement, and he was right. However, in the new intro, he briefly mentions how Islamic terrorism, like the shining path, will eventually go away, but doesn't mention how. In Peru, the government was behind stopping terrorism, and it was clearly driven by economics. In today's reign of sacred terror, where terrorism is often ideologically or theologically motivated and sometimes government-sponsored, the Peru example doesn't seem terribly relevant.

But what was most interesting about the DeSoto book is how big the underground economy was in Peru - most transportation, retailing, and housing was part of it.

But it makes me wonder how big a role the underground economy plays in the United States. I feel like it's something most people don't think about, even though most people participate in it to some degree, and that it's probably way bigger than people realize it.

I participate in it pretty regularly. I sell stuff on eBay and at Hamfests. I buy stuff at yard sales. I paid some dude who came to my door to clean my gutters (which was probably a bad move, as it looks like he screwed up some of the siding on the eves of the house in the process).

As readers of this blog know, I go to hamfests pretty regularly. Some of the people there are just people who've taken crap out of their basement and shoved it into the back of their car. Some people are clearly professional dealers who run legitimate businesses during the week, and have signs and late-model white vans and clearly marked bins. But there are also clearly people in between, people with pickups and old vans (and me) who obviously go to auctions and other places to buy inventory, and drag it out to hamfests. They clearly aren't surviving on this income, but it probably helps, and they probably aren't paying income or sales taxes or doing anything else that a legit business has to do.

And there are probably similar meets for all kinds of other hobbies, that are the same. And then there are ordinary, non-hobby flea markets, which have a similar set of vendors, and are all over the country.

And then there is eBay, where a ton of people who have the ability to comb yard sales and stores and auctions and other places buy stuff and resell it for some extra money. The IRS has been trying to find a way to tax eBay sales for years, but they haven't yet (thank God). And it's incredibly easy to set up a non-eBay storefront as well online, and much of that is probably also semi-underground.

And that only looks at the goods side. There is probably an even bigger collection on the service side. Working in IT, I know tons of people who fix computers for cash on the side, and I'm sure it's the same way for any profession, from carpet layer to car mechanic to dog-walker. Off the books services are probably an even bigger, and harder to trace, segment of the underground economy.

The underground economy is, by nature, impossible to measure. But I would suspect that even though people don't think about it much, it probably makes up a considerable part of the economy. That means that there is a bunch of money that is being made that the IRS isn't getting a piece of. It also means, however, that many of us are probably doing better than government statistics make it look, because we have all that brown paper bag money coming in from our own sales in the underground economy, plus we are paying less for whatever services and goods we purchase from the underground economy - surplus value that we gain that we wouldn't if we had to buy those goods and services from the aboveground, legit economy.