Including Illegal Activity in the U.S. National Economic Accounts [pdf] | Hacker News Reader

Including Illegal Activity in the U.S. National Economic Accounts [pdf]

bea.gov

96 pointsbenbreen49 comments

I've often wondered how this should be dealt with in countries (specifically thinking of Eastern Europe) where large potions of the economy are off the books. I've assumed it would significantly skew GDP / GDP per capita figures if such values were included, and wondered how it would affect general quality of life indicators in places where even engineers often work in the unreported economy.

Or even countries where the USD or Euros are commonly used unofficially.

Adding grey zone activity to GDP numbers a great trick to increase the available govt debt ceiling without compromising the debt/GDP % numbers. I'm wondering if the US will do the same, given how large the deficit already is.

Neither party in the US actually care about the debt or deficit.

If we add illicit activity into the GDP it will be so that whoever is President can claim more GDP growth.

I’ve heard it speculated that if we accurately accounted for hidden wealth obtained illegally that Vladimir Putin is actually the richest man in the world.

https://www.todayifoundout.com/index.php/2019/12/is-vladimir...

The chart of illegal drug expenditures as a percentage of average person consumption is wild. People did a lot of drugs in the 1970s and 1980. “In total, this paper calculates that illegal drugs accounted for 5 percent of total PCE in 1980. This high expenditure share is consistent with contemporaneous reports. For example, a Washington Post article estimated that Americans bought $35 billion of cocaine (O’Toole 1981).” That figure has fallen to under 1% today. Maybe the war on drugs worked.

Maybe, maybe not; cuz drugs have gotten cheaper, and there are how “legitimate sources” of drugs like opiates

That's an excellent point. It would be interesting to see a chart of the growth of legal pharmaceutical opiates vs the growth of illegal opiates in the past few decades. It won't necessarily show causation ( and maybe not even correlation ) but it would be nice to see how these two opiate markets ( legal and illegal ) grew during the war on drugs.

Going from "we don't use as much coke as in the 80's" to "the war on drugs worked" is a bit like going from "we have less teen pregnancy now than in the 90s" to "abstinence worked". It's not only ignoring a very large number of alternate factors, but it's assuming the latter is a successful strategy, when all of the evidence points to the contrary.

Interesting you bring up abstinence because kids are having way less sex nowadays than in the past.

Most definitely not because of abstinence education

https://www.google.com/amp/s/www.washingtonpost.com/national...

Because proving causation is always difficult if not impossible? Or because in both cases we have a personal bias that makes us not want those programs to have worked, despite not being able to disprove causation either?

Because in neither case has anyone actually even made a coherent argument for a causal effect that doesn't ignore all the other factors? Besides, when "all the evidence points to the contrary" is usually a bad sign...

There are a lot of things you aren't able to disprove that are (probably) not true.

I have a rock that keeps tigers away. Ever since I got it there have been no tigers in my house.

I want to buy your rock.

or its as simple as drug market got more competitive and diverse while wages also rose

This is correct.

The numbers are % of PCE. So that number could go down for a number of reasons:

1. People buying less drugs

2. People spending less money on the same amount of drugs (lower prices)

3. People’s PCE is growing faster than the amount they spend on drugs

There are others I’m sure.

An explanation for 2 could also be drugs getting stronger. Given how much more potent modern cannabis is than it was in the 20th century, people might be spending the same amount relative to THC content--but there's much more THC in a gram of cannabis than there once was, so they have to buy much smaller amounts of cannabis for the same amount of THC.

Hah - the overdose rate in the US and the casualty of people killed abroad say... war on drugs is a horrible failure

Naw everyone just moved on to different drugs

That's a strange statistic to use to define success. Cocaine is expensive because it's illegal and is associated with harsh prison sentences. Cracking down on the drug might have increased the percent of income spent on it.

> Maybe the war on drugs worked.

Meh. If you look at the next chart you can see that drug prices started to plummet in the mid 70s, probably aided by the opening up of smuggling routes from Colombia (my theory).

So expenditure on drugs isn't a reliable indicator here - if they had figures for quantities (ie, weight) bought/sold you may reach a different conclusion.

Weight isn't ideal either. You would need to adjust for dose and interval.

Adjacent to this, has anyone ever seen statistics/estimates on income percentiles of illegal/underreported income? I've always wondered about this as a huge portion of jobs is based off tips or cash transactions (servers, contractors, maids, landscapers) and I can't imagine all these people report 100% of their income.

What percent of of the US population would you estimate doesn't report at least 10 thousand dollars a year?

The standard deduction removes this as a concern for most Americans.

I don’t understand, can you elaborate? Hiding some of your income reduces your tax paid regardless of whether you take the standard deduction.

Well, unless you actually earn an amount that is less than the standard deduction, in which case you gain nothing by hiding those earnings, or if you actually earn only slightly more than the standard deduction, then you only gain slightly. That said, I think the person you're replying to is mostly wrong since most American do more than the standard deduction several times over.

The standard deduction doesn't help for social security and Medicare tax.

I'm a really naive when it comes to tax law and a lot of economics statistics - but I'm having trouble seeing this.

If I am a waiter who made 35,000 in reported income and 10,000 in unreported income I made 45,000. I can take the standard deduction on 35,000 and in all statistics used by think tanks/reporters/politicians I will weight in the category of those who made ~35,000. Am I missing something?

No, your parent poster is completely wrong. You'll pay more in taxes reporting 45k with the standard deduction than if you report 35k with the standard deduction. The only scenario in which the standard deduction "fixes" this issue is if it reduces your taxable income to the point where you do not owe income tax regardless of if you report that extra income or not.

In other countries the underground economy is estimated from 15% to 25%.

There is no doubt that many people who are paid in cash under report their income. At least in the case of servers, however, the IRS has a pretty good idea how much you are getting in tips. If you don't report enough, you will be audited and you will get a bill. I'm acquainted with someone who tried this and he was still paying off his tax bill a couple of decades later.

When Italy started including this stuff in their economic report, the joke was that the change happened to make their economic numbers look better...

How could it not? Supposing illegal activity exists, including it will increase GDP. GDP per capita could decrease if you suddenly count people you'd missed, I suppose, but I doubt that that'd be significant.

Here’s similar information from the Australian Bureau of Statistics

The Non-Observed Economy and Australia's GDP, 2012 - Measuring Illegal Production

https://www.abs.gov.au/ausstats/abs@.nsf/Products/5204.0.55....

It would be interesting to see the proportion of legal to illegal economic activity over time.

For the types of illegal activity measures here, the paper provides that in the figure measuring revision to nominal GDP. Basically, it peaks in the 70s around 4% of GDP and declines to around 1.67% today.

Thanks!

The BEA is an interesting little bureau. They have to resist a lot of pressure both from politicians and law enforcement.

The most amusing part is stagflation disappears when coke is included.

I almost always tip in cash, and I frequent the same places so the service employees learn who I am. And they love my cash tips! You will get better service if you leave a $5 bill in cash rather than credit. Every bit helps.

So you think people who receive part of their pay in cash should be taxed less than people who don't?

Presumably they think that everyone should be taxed less, but that this approximation is the best they can do.

I don't follow, are you implying the cash tip is going unreported?

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