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America's Underground

July 2, 2008

Tags Free MarketsEntrepreneurship

These were sharp businessmen, the four guys who pointed out that there were three dead trees in my backyard that needed to be cut down lest they attract horrible bugs that would infest my entire property. They would cut them down and remove them for $475.

In cash.

We dickered back and forth and finally settled on $350. In cash.

They attacked the trees like ants on ice cream. In 45 minutes, the trees were gone without a trace.

I paid them. In cash.

I didn't break any laws in paying them this way. They broke no laws in accepting cash only. The state is egregiously invasive in our financial affairs but it hasn't actually banned the use of cash.

So it was last weekend when I was traveling and needed some copies made from a Pakistani-owned copy shop in the Midwest. They would provide them on high quality, colored paper for 15 cents each, but only if I paid in cash. And so I did.

I asked for a receipt. Whoops, the printer on the receipt machine was acting up so she had to write a receipt by hand. It was indecipherable, but I took it anyway. Again, I wasn't breaking any laws in paying with cash and she wasn't either.

And yet we all intuit that there is some reason why cash payments are more valuable in the American service sector than checks or credit cards, nudge nudge, know what I mean? With cash, you enjoy the highest likelihood of staying out of harm's way. If you don't want to formalize your business model and get embroiled in the entire public-sector apparatus of withholding tax, social security, mandated health care, minimum wages, and the rest of the mind-boggling apparatus of central planning, doing a cash-only business is the wisest choice.

Now, this is interesting. The social apparatus of taxing and regulating is said to be good for us all. Without it, our sense of well being would plummet. We need worker protection and all the glorious services of the state. We need protection in old age, and protection from exploitative capitalists. We comply with the whole command-and-control burden because we are better off as a people than if we acted merely on our own.

So let's say that I apply this in the two cases mentioned above. I have a sneaking suspicion that my tree-cutting friends are cutting their tax burden as well, and I wonder about this Pakistani printer. Maybe they are not paying minimum wage to those employees nor taking out social security nor providing medical benefits. So, as a good citizen, I make an inquiry. I demand to see their immigration papers and tax records. I look them up in the official directory of obedient businesses, if such a thing exists.

I conclude that these are unseemly operators. It's true that I know I can get good service from them but I do not want to partake in a transaction that will hurt others in society. Regulations and taxes are good for everyone, and so I will have no part in this black-market activity. So I decline to hire these tree cutters. I decline to let this lady make copies for me. I wash my hands of the unsightly mess and move on.

What happens? Well, my dead trees still stand, and my copies are unmade. The suppliers are denied a chance to serve others and profit from it. A transaction that both sides desired does not take place. Under the theory that regulations and taxes are good for us, we should both feel better that we didn't exchange. Somehow we don't.

Or let's say that the suppliers of these services suddenly experience a conversion, and, newly enlightened as to their civic obligations, they decide to formalize their operations. But of course that means that the tree cutting service is now one third more expensive, and the copies cost that much more too. I decide that it's just not worth it, and the exchange doesn't happen. Again, we should feel better but somehow we do not.

The question I keep asking is: how is society actually better off? My copies are unmade, my trees are uncut, and these businesses lose profits, which means that they have less for providing for their children and for making a good life for themselves. This is especially tough in recessionary times when the prices of everything are rising and unemployment threatens all marginal workers. Try as I might, I just don't believe that anyone is really getting hurt in a cash exchange that enters into the grey area between the underground economy and the official economy.

In the developing world where government bureaucrats rule everything with outrageous arbitrariness, the sector of society that functions in this grey area is called the "informal sector." It is a burgeoning area of study for many academics on the right and the left and for different reasons. It is mostly populated by the poor and the poor have the largest stake in the outcome.

Hans Sennholz wrote an excellent little study on the topicDownload PDF for the Mises Institute back in 1984. The upshot is that the larger and more intrusive the government, the more the informal sector flourishes. It is a safety valve of sorts, one that is ignored by GDP counters and nearly invisible to macroeconomic planners. One wonders just how large the US informal sector truly is. I'm not just talking about the drug trade or prostitution or off-the-books gambling. I'm referring to wholly legitimate and wholly legal trades of goods and services that take place outside the purview of the public sector.

I'm going to venture a guess that every single reader of this article is capable of telling stories similar to mine above. The cash-only economy is pervasive in the United States. How big, no one knows for sure, obviously. The lesson here represents a wholesale overturning of the official rationale for the interventionist state: that it is good for us. You can turn these informal scenarios around in your head again and again and still fail to see how we as a society are better off when mutually beneficial exchanges that would take place absent intervention fail to take place because of the intervention.

What's more, the existence of the informal sector provides a useful blueprint for reform. They can be completely abolished by lowering the costs associated with compliance. If the costs of compliance fall low enough, what is informal becomes formal and no one has any reason to continue to hide anything. The agenda for a free market might be summed up as nothing more than the complete legalization of the prevailing informal sector, which itself is created and sustained by a tax and regulatory burden that is too heavy to be sustained.

And yet the impetus for reform is precisely the opposite. The politicians believe that if they could stamp out the informal sector, crack down on cash-only business, shut down the fly-by-night tree cutters and photocopiers, we would all be better off. What will it take for the public sector to begin seeing the informal sector as a model to replicate rather than a symbol of anti-social economic activity? In a phrase, it will take an enlightened political class that is more interested in the well-being of society than the power and glory of the state.

 


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