America's Underground
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, 45 minutes.
The trees were gone, without a trace.
I paid them, in cash.
I didn't break any laws by 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
and the use of cash.
So it was last weekend when I was travelling and needed some copies made from a Pakistani-owned
copy shop in the Midwest.
They would provide them on high-quality coloured 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 healthcare, 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.
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 tree still stands, 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
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 Senholtz wrote an excellent little study on the topic 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 businesses, 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 antisocial economic activity?
In a phrase, it will take an enlightened political class that is more interested in the well-being
of Society and the Power and Glory of the State.