Kevin Kalmes received a foreclosure notice on her home after being
unemployed for more than two years, she says she started selling the
contents of her basement. “Then I just kept the basement sale open,
forever, without getting permits,” says Kalmes, 61, who lives in
Chicago. She started selling items on behalf of family, friends, and
neighbors in what she dubbed the “Little Shop of Hoarders.”
is among the 4.8 million Americans—40 percent of all those
unemployed—who have been out of work for more than 27 weeks. With her
jobless benefits exhausted, Kalmes has entered the informal economy. It
includes activities that are illicit—prostitution and drug dealing—and
more routine jobs such as working construction for a day for cash, or
even walking kids to the bus, as Kalmes does for $2 per child. Added
together, economists estimate that the income generated by the
underground economy in the U.S. could be $2 trillion.
arrangements, while providing a safety net of last resort, also may
provide answers to puzzling discrepancies in economic data. Retail sales
have outpaced gains in reported income for almost four years, says
Bernard Baumohl, chief global economist at the Economic Outlook Group.
“There could very well be a much larger than expected underground
economy at work here that is making a contribution,” he says.
entry into the shadow economy came after losing her job of 13 years as a
production manager for Paris Presents, a distributor of bath and beauty
products in Gurnee, Ill. Kalmes says she oversaw the assembly of “all
those gels and lotions and refreshers and gift baskets.” She even flew
to China to train workers in a factory. On March 17, 2010, her job was
outsourced to the people she’d trained, she says. The company confirms
Kalmes worked there.
Mitchell Hirsch, an advocate for unemployed
workers with the New York-based National Employment Law Project, has
heard stories of the unemployed entering the shadow economy with
increasing frequency. Such informal work “is definitely more significant
than before the recession,” he says. “They’re finding in some cases
very creative ways to get some kind of income legally.”
In a paper
last year, two economists estimated that 18 percent to 19 percent of
income nationwide is not reported to the Internal Revenue Service. “The
estimated $2 trillion of unreported income gives rise to an annual tax
gap of $450 billion to $500 billion,” wrote Richard Cebula, a professor
of finance at Jacksonville University in Florida, and Edgar Feige, a
professor of economics at the University of Wisconsin at Madison.
underground economy runs on cash, which can’t be traced. The total
number of physical bills has surged since the onset of the recession,
reaching a record $1.18 trillion on March 13, up from $803 billion in
2007, according to the Federal Reserve. More than half of that cash may
be held in other countries. Still, even if part of this cash hoard
remains in the U.S., it illustrates the informal economy’s growth.
robust economy that operates on the books is the best way to shrink the
economy that doesn’t. “As consumers continue to increase spending,
companies will see their sales increase, earnings will rise, hopefully
it will generate more hiring that will bring in some of the people stuck
in the shadow economy,” Baumohl says.
For her part, Kalmes won’t
be able to save her house: She’s trying to avoid foreclosure by
unloading it in a short sale. She just wants to bring her basement shop
out of the shadows. “I’m hoping to incorporate the business,” she says,
perhaps covering the incorporation costs with the money she’ll start to
receive when she becomes eligible for Social Security in August. “I’m
looking for a tiny storefront, maybe 900 small feet. It could be
something little and wonderful for the neighborhood.”
The bottom line: The $2 trillion in unreported income from the underground economy results in unpaid taxes of as much as $500 billion.
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