What is the Shadow Economy?

Is there a divide occurring in the U.S? One that keeps Americans away from the government; where taxes aren’t a priority for hundreds of thousands, nor is a stable job and a roof over their heads? A recent in-depth investigation suggests the divide indeed exists – and it’s growing. New America Media has begun a long investigation on the shadow economy with the goal of better understanding not only this secret society, but also to learn more about who they are and why they made such drastic decisions – will they discover it was as much about being frustrated with the way things are as they are desperate for a better life?

Mini World

So what exactly is the shadow economy? It’s sometimes referred to as the underground economy and it’s its own mini-world of Americans where little thought is given to the trappings of a modern society. No taxes are paid, no health care is available, there are no checking accounts or 401(k) accounts or credit cards. And as it happens, for many, it’s a choice they’ve made.

Fed up with the frustrations that come when a job is nowhere to be found but the bills are still due, these people work day jobs when they’re available. And when there are no jobs to be found on any given day, no problem – it’s not like they have utility bills to pay or clothes to buy. It could be a family needs a handyman for a day or a small construction crew might need an extra set of hands to meet a deadline – either way, these people are for hire and the things they are willing to do for money – provided it’s cash, of course – will surely give you a moment’s pause as some is perhaps more legal than other choices.

But it’s also creating problems for the government. In fact, while the politicians go on about the economy, Obamacare and financial reform, no one is really focusing on the dynamics associated with those who are redefining their “new normal”. At least one economist has something to say, though. We have to wake up to the world that we live in,” says Martha Chen, a public policy lecturer (Harvard’s Kennedy School of Government) who has studied the shadow economy.

New Normal

Many say this new society, which, if you think about it really isn’t that new at all, has faced job losses, foreclosures and hunger. There have always been homeless people, many who, after years of letdowns, decide they’re more comfortable under the radar. But this subset of society is growing – fast, too. This new underground society, though, doesn’t come without its problems. Safety being one of the biggest ones. Also, some say these one-time tax paying, law abiding citizens are a burden to the government now. Since they’re not employed – at least to the extent that they’re receiving a paycheck, complete with tax deductions, they’re still showing up at emergency rooms when they’re sick, they’re still visiting food banks and they’re not contributing to the economy – and this, says many, is not acceptable.

Perhaps what many are more fearful of is the threat this new society could be for a traditional “civilized” world. Some are concerned the more people who fall off the radar, the stronger the numbers could be should they grow disenchanted and fed up. Maybe, though, what bothers so many is they’re just not sure how fast the shadow economy is growing – and maybe that just frustrates those who feel it’s their responsibility to ensure everyone “falls into place”. As one analyst lamented last year,

That construction worker willing to cut you a discount if you pay cash for your new porch is in part responding to pressures exerted by China and the global triumph of capital over labor. That shantytown bike mechanic hasn’t been liberated from the state; he’s been cut off from true participation in an economy that will allow him to prosper.


If this new society isn’t on the payrolls, isn’t paying taxes and isn’t contributing in some way to his community, that’s a problem for many. Nevermind the fact that many felt as though they were abandoned by that government and those communities. So they bailed. They bailed on their mortgages. They bailed on their credit card payments, their car payments, their insurance premiums and life in general. This is what frustrates the financial sector. They’re using a strict cash system, which means banks and card networks are earning that revenue-important interest. Of course, it’s not going to bring down any bank, but many bankers and CEOs are taking notice.

Yet those who are a part of this new society are managing. They’re learning to make do with less, which isn’t necessarily a bizarre sentiment. Many Americans have learned to do more with less. Everyone has compromised to some degree; for these people, though, they’re not being forced to play by government’s rules.

The best anyone can figure regarding the current size of this shadow economy, at least here in the states, hovers around 9% of the current GDP. Two years ago, the last time efforts were made to gauge the numbers, that equated to around $1.4 trillion. Interestingly enough, it’s believed the shadow economy accounted for about 4% of the GDP in 1970. The Vietnam War played a role in that, as well; the point being this isn’t necessarily a new lifestyle. One researcher, Friedrich Schneider explained those countries with lower tax rates, less restrictive laws and fewer regulations will will have smaller shadow economies.

So who are these people and where are they? They’re the day laborers waiting for a construction manager to come by with a day’s work. They’re the hairdressers who are working out of their mom’s houses during the day and disappearing into the night after the sun goes down. They’re the farmers who might not be completely under the radar, but who might be providing food for those who are. And they’re the prostitutes – some of whom are children. Therein lies the true tragedy.

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