The Growing Informal Economy
Many people don’t know that the true unemployment rate is over 20%, double the official 10.2% government unemployment rate. This is because over 10% of potential workers are not reporting an effort to seek a job, and part of the reason is a growing informal economy.
John Williams’ Shadow Government Statistics goes beyond the official government reports to include the informal economy. A growing informal economy or black market is a sign that people are unable to find a legal way to provide for themselves. As a result they resort to off-the-books cash transactions, bartering, selling banned substances, and other activities that, even if not legal, will allow them to find a way to live.
Visiting the Soviet Union many times in the 1980s and 1990s, I was well aware of an active informal economy there before the official economy collapsed in 1991. Many of those same economic forces are at work in the United States as the Federal Government inserts itself into the economy. The result is a growing informal economy or black market in the United States.
In absolute terms, an informal economy is always the true economy because it reflects the natural market forces of people working for each other and trading with one another in order to live as best they can. Hernando de Soto’s book The Other Path is a masterful discussion of the relationship between the informal and formal economies in Peru in the 1980s. In Peru the 500 years of law layered over the original Spanish law became so thick and complex the legal establishment was brought to a virtual gridlock. The heart of the real economy was in areas that squatters had settled, built their own houses and businesses, and eventually paved their own roads. The “legal” government could not close this informal sector down because too many people depended on its economic fruits when the government could not provide them.
The founding fathers considered 38% the maximum amount of combined taxes on a citizen to be the breaking point. Beyond that rate, people would be pushed out or drop out of the legal system. Today in the United States we have surpassed that rate. In Minnesota we have a 9% state income tax. Add that to 28% federal income tax 12% medicare and social security and you are already at a 49% tax burden. Then when you consider property taxes, sales taxes, and other government fees and mandated insurance payments an average middle class worker is paying over 60%–making the true Tax Liberation Day sometime in August. It comes close to slavery.
The new Federal Health Care bill, if passed, will likely be the tipping point. It will force small businesses to pay health insurance they cannot afford, so every employee will become a part-time or freelance worker. It will try to force those part-time and free-lance workers (already over 30% of the workforce) to carry mandatory health insurance they cannot pay. It will be much easier for such people–many of them now in there 20s and 30s–to stop filing taxes and drop off the official books or go on unemployment or welfare. Many may officially be on government welfare and unofficially be working in the informal economy. This is how it worked in the Soviet Union.
Pelosi et. al., despite the promises they are making, cannot continue to grow the bureaucracy and government jobs at the expense of the formal economy. They will soon find themselves with only a few people left in the system to tax and more people asking for benefits.
The system the Democrats promise is very much like the system the Lutherans set up to “feed the starving people of India” when I was young. Out of compassion and a sense of justice, we sent boatloads of wheat and clothing to Calcutta and other ports. Within a few years the populations in these areas grew as people migrated and had children. An entire economy developed dependent on these boatloads of food and supplies coming from overseas. This led to a condition where, if the boats ceased arriving, millions more would starve than before the system was established. I’m afraid our politicians in Washington are creating a dependent class like Lutheran Social Service did in Calcutta.
A sustainable system requires ordered liberty in which each person has the ability to pursue life liberty and happiness in a family or extended family that will care for those too young, too old, or too sick, to care for themselves. What the Federal Health Care bill does is akin to throwing out a carcass (the remnants of the U.S. economy) for maggots to feed upon. When the carcass is consumed, the maggots die.
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