Posted on 10/31/2013 1:09:48 PM PDT by RKBA Democrat
Sometimes being a publicly traded company may not seem like it’s worth the hassle. Quarterly earnings reports, disclosure of stock sales by insiders, a raft of government regulations, it’s all a lot of rules dictating how one does business. And, whether public or not, there’s any number of government regulations to follow at the local, state, and federal level. Not to mention local, state, and federal taxes.
It’s enough to make one seriously consider taking it all underground. What would it be like? To operate a company without any concerns other than profit and your employees? To keep all of your profits without any consideration of taxes? Must be nice. Or not. With that freedom comes a whole range of new issues, not the least of which being “people with guns may come take our stuff and we can’t call the police” or “I could go to prison.” Those two alone tend to keep most businesses operating in the daylight.
However, for a great many people, the high risks and tremendous freedom of a black market economy remain appealing. For as long as there have been governments and laws, there have been people trying to skirt them, buying and selling goods and services on their own terms. And that tradition continues with fervor even today. Estimates by some economists place the size of shadow economies at over 20 percent of global GDP. Those are, of course, just estimates as no cartel is releasing an earnings report (that would be a touch bold, even for the most powerful figures of organized crime). But they do speak to a simple fact: no matter what the legal economies do, there’s always a large market out there for goods that exist outside the law.
Different Types of Shadow Markets
Economies that function outside of the law can take on a variety of different forms, but they tend to divide into two distinct camps based on pricing: goods and services that are available at a discount because they are illegal, and goods and services that charge a premium because they are illegal. Unlicensed moonshine or cigarettes in the United States, for instance, are sold illegally because, by operating outside of legal authority, vendors can avoid paying taxes and fees and offer the same goods at a discount. On the flip side of that coin is the sale of illicit drugs. Cocaine, for instance, is illegal and can only be obtained outside of legal authority. This allows the people distributing it to charge a considerable premium over what one would normally expect to pay in a legal economy based on its production costs.
Risk Premiums Drive Massive Margins
Illegal goods and services tend to survive, and even thrive, based on these unusually high margins. A brick of cocaine that sells for $2,000 in Peru, where’s it’s grown and processed, is worth $10,000 by the time it gets to Mexico. It’s then another $30,000 wholesale, and $100,000 by the time it’s sold by the gram at the street level. At a base level, this is a basic example of a risk premium. Each time the product crosses a border, there’s a chance it gets stopped by customs or government officials. Any person involved in moving it is taking a legal risk, and the compensation they receive has to be enough to make it worthwhile for them. And at the street level, dealers take major risks to sell products, resulting in the price jumping even further. On the whole, the profit margin for a complete end-to-end lifespan is 5,000 percent, but this sort of mark-up is necessary to make it appeal enough for people to accept the risk of incarceration of violent death associated with the industry.
For legal products being sold outside the normal market, the margins clearly remain higher than they would be working inside the law. Otherwise, the risks associated with operating an illegal business wouldn’t be worth taking. However, the legal availability of the same goods drastically reduces these margins. There needs to be a significant enough price advantage that your potential consumers will accept their own risk premium when they select your product over the legal alternative. In the case of entirely illegal substances, no such price controls exist.
No Anti-Trust Laws
Another benefit (and liability) for moving illegal goods is the absence of any sort of anti-trust laws or government regulations. Is your product unsafe? That could injure customers, potentially hurt your business by damaging your reputation. But you won’t have to worry about facing fines or legal ramifications. What’s more, monopolies, which allowed some of the richest men in history to accumulate vast fortunes when they were still legal, are fair play. And anyone’s who watched an episode of The Wire can tell you that said monopolies can be violently enforced, at times, allowing one to completely control a market place. What if, in the late 1990s, Bill Gates and Microsoft (MSFT) didn't have to limit their business because of anti-trust laws? What if Bill Gates could have just gotten a gun and FORCED everyone to use windows? And what if those people couldn't call on the police to protect them? Kind of makes it a whole new ballgame.
On the whole, illegal goods enjoy a number of advantages purchased by their considerable risk premium, including elastic demand, an absence of traditional marketplace competition, and no regulatory body limiting the way one does business.
A Massive Economy by Any Measure
So what does this all mean? It means that the size of the underground economy is considerable. Estimates of just how much money is trading hands for prostitutes, illicit drugs, and/or stolen artwork are inherently shoddy. Given that these economies need to stay hidden from any official measure as a matter of survival, attempts to measure them defy traditional efforts to collect data.
However, the estimates of its size are considerable, to say the least. If Elgin and Oztunali’s estimates, where one fifth of the global economy takes place outside of legal regulation, are accurate, it means that shadow industries are easily among the most active in the world. And author Robert Neuwirth asserts that it’s even higher, estimating the size at $10 trillion a year, which would be over one fourth of global GDP. What’s more, Neuwirth says the black market, if legally recognized "would be an economic superpower, the second-largest economy in the world…" He also estimates that it involves 1.8 billion people, nearly half the world’s workforce. Add to this recent estimates from the public safety secretary in Mexico put the cartel’s annual revenue from sales to American buyers at almost $65 billion and a dark picture of the global economy starts to emerge.
That is interesting. I bet there are people who work full time selling stuff at flea markets and online and probably don’t pay taxes, or admit just enough income to get EITC
That’s one thing that wannafeelgoodaboutmyself liberals will vehemently avoid - the force factor.
They don’t want to admit that all of their policies are imposed at gunpoint.
You would be astonished. In my little town there is a least 20 "off the books" businesses being run.
And that is not counting the Flea Market and the Swap Meet guys.
I know of several people that run skilled trade business out of their garage or basement. They operate on a mostly cash bases. It would be a very high risk endeavor to attempt to rob anyone of them.
How much yard work, home repairs, hair cut/style, coloring is done off the books? I’ve had contractors offer to charge much less for cash, so long as I don’t need a receipt (I don’t play that game, but I recognize it when I see it). How much furniture is refinished and sold at sway meets or garage sales without any records? It’s big business, and many middle class people play along because they like the discount.
I had a friend in college who made big bucks on the KY-OH run. Basically, he paid his tuition with it over the summer. THEN, he found out that it was a ticket to federal prison, not just “they’ll just take the van, we have more of those” as the owner of the “business” told him.
Yep. Like the guy who offered $10k plus $5k cash for my used car so he could reduce the sales tax bill by 1/3.
More power to him!
The article could not resist putting all the emphasis on the part of the black market that is inherently illegal, which makes sense because that is the most profitable part of it.
However, there is a substantial black market where goods and services are not inherently illegal, that exists to a great extent solely because there is no government involvement with them.
Importantly, there are also many people, citizens, not just illegals, who do their darndest to not involve themselves with government in any way. Many have little or no ID, don’t want it, don’t want government largesse, earn too little to pay taxes other than sales tax, and exist off the radar.
In the 1980s, a TV show, Max Headroom, called such people “blanks”, because they have no government issued public face.
So how do such people live? Everything they do is bought and sold for cash. They are helped by people in the system who rent them shelter, get them things that can only be purchased with ID, drive them places unless they drive without a license, etc., etc.
And there are quite literally millions of them. Legal citizens who reject government, and live, better or worse, without it. They are non-persons. Blanks. Free.
Paypal reports how much you take in and at flea markets records are kept of who rents a booth and how often.
You have to be careful or they will calculate how much profit you "should have" made and say that you owe that much in taxes.
A good book to read on the underground economy is “System D”. How the black market or grey market exists in many developing nations simply because they have horrific bureaucracies that many cannot cope with, from weeks to import anything to bribes.
The book had good observations such as:
* Being illegal meant an organization couldn’t become larger than a mid-sized business.
* Off the books businesses like in home stores and street vendors were often simply a means to survive, not an effort to circumvent the law.
* Where there were restrictive regulations, System D popped up to get around it. Shopping in the cheap country and bringing items back under personal exemptions to sell at below the market value + VAT tax were common.
* Infrastructure could arise under System D. The common example was the cell phone network powered not by monthly contracts but cell phone cards sold and traded like currency. That is how Africa pays for its wireless network.
* The U.S. underground economy is fueled and powered by illegal immigration. Illegals work with fake papers in some cases, without any legal cover in others.
My observation:
There may be a partial answer to how our economy isn’t collapsing with falling participation rates and the end of the 99 week unemployment with the growth of the underground economy. As someone commented, the shift is when the day labor centers have fights between blacks and hispanics or Hispanics and Asians, because citizens are joining the illegals at the day labor centers.
And selling services from childcare to lawn service to technical work via craigslist, business cards and Fiverr without paying taxes generates income but rarely income taxes.
System D is a good book on the general topic.
There are books on Amazon.com on this topic, though I’d recommend reading it at a library instead of buying it online.
http://www.starvingthemonkeys.com/MonkeyDefined.html
Otherwise, I’d look to animal studies about parasites and hosts. How does a host throw off a parasite? Especially if the parasite is toxic?
http://phys.org/news/2013-10-mice-survive-infection-virulent-toxoplasma.html
That’s why I’m hoping to come across a mid-50s Stratocaster or Les Paul in great condition, buy it for peanuts because the person doesn’t know what they have, then sell it for what it’s really worth (approaching 6 figures).
With the Internet the value of something is easy to look up.
What you generally find is that such people over price things. I deal in books. People don't realize that they may have a first edition first printing but if they don't have to dust jacket, the price drops. If it is written in, the price drops. If the cover is sun faded, the price drops.
You get the idea.
The hard part is convincing these people that their "treasure" is worth $10.00 not the $400.00 it would be in mint condition with a Mylar covered dust jacket.
I have the 6th printing of Unintended Consequences with the dust jacket. I’ve looked online and it’s usually only the first printing worth any money.
If the largest growing segment of your economy is the black market, you’re government might be a banana republic. (- with apologies to Jeff Foxworthy)
It became apparent to me after Yeltsin stood up to the tanks and toppled the Soviet rulers, that black market is what broke the communists. Note how quickly the new elite dismantled state enterprises and began operating as capitalists. They had hone their skills in the last decades of the Soviet Empire. There is a lesson here for Americans.
Sure.
But I’m sure they keep records of every transaction made.
And I’m pretty certain the IRS monitors it as well.
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