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California's Grey Market Economy

How Government Failures Strangle the Economy

The Grey Market is a shadow economy, or the underground economy and includes any paid work or transaction that is not reported to the government and therefore is not taxed. Countries with high levels of taxation, government corruption, and regulatory barriers tend to have the largest underground economies. Conversely, countries with relatively low tax rates, fewer laws and regulations, and a well-established rule of law tend to have smaller shadow economies. (International Monetary Fund. "Hiding in the Shadows." Accessed June 28, 2020). Estimates vary widely, but some put the underground economy at 11% to 12% of U.S. gross domestic product (GDP). In 2018, GDP was $20.8 trillion, so that puts the underground economy at about $2.25 trillion to $2.46 trillion (Dickinson College. "Understanding the Shadow Economy." Accessed June 28, 2020) While it is difficult to measure the size of the underground economy the impact on taxation is significant. Tax dollars avoided in this area force higher taxes in traditional areas. Estimates of the size of the Grey Market Economy in California vary from 12% of the state GDP to 30% depending on the source. It is significant. That means that you and I are forced to pay more taxes to offset the taxes NOT paid by those operating in the shadow economy. Those shadow economy workers still drawdown the budgets and resources supported and paid for by our tax dollars. Those same social programs and infrastructure projects and the running of all government services that tax dollars pay for are “free’ to the shadowland denizens of the grey market. You and I pay extra taxes to pay for their benefit. That is wrong. It has got to be stopped.

What drives the “grey market economy? Major drivers are tax avoidance; circumventing government regulations, government corruption, absent application of the “rule of law”, crime, cryptocurrencies, and illegal immigration. During economic downturns, the underground economy grows as more workers unable to get legitimate jobs turn to working off the books. Countries with high levels of taxation, government corruption, and regulatory barriers tend to have the largest underground economies. All illegal transactions make this “grey market” worse. Illegal immigration forces undocumented workers to accept “off-the-books” work. Or they buy forged working papers like social security numbers and Resident Alien Identifications. Emerging acceptance of “crypto-currencies” aids both the “grey market” and the criminal “black” market. Biggest drivers by far are taxes and all government regulations. Government corruption which scoffs at the “rule of law” further erodes the genuine economy and fuels the grey market. Government inaction and government corrupt action must be fixed to impact the damages done by the “grey market”.

HOW TO FIX IT? To fix the issue means to fix major structural issues in the federal government and in state governments. The Convention of States (through Article V of the Constitution) makes the best sense and the best fix. Term limits will reduce opportunities for corruption in the elected representative populations. Overhaul of government spending and the taxation base can only happen when forced upon those now charged with running the country. Stop illegal immigration. Regulate cryptocurrencies. Eliminate government overreach through unnecessary regulations. Punish criminal political corruption. We know that the current crop of elected official will NOT fix these problems. Only the Convention of States has the will and public support to go get the job done.

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