Underground Economy Helps Account for Discrepencies in Economic Data

Bloomberg News reports:

When Kevin Kalmes received a foreclosure notice on her home after being unemployed for more than two years, she said, she started selling the contents of her basement, figuring, "I can't fit all this stuff in a Walmart shopping cart."

"Then I just kept the basement sale open, forever, without getting permits, because I didn't sell it all," said Kalmes, 61, who lives in Chicago. She then sold items for family, neighbors and friends, dubbing her never-ending sale the "Little Shop of Hoarders."

Kalmes is among the 4.8 million unemployed Americans -- 40 percent of all those jobless -- who have been out of work for more than 27 weeks, even as the economy has been growing since June 2009 and the job market shows recent signs of healing. As her unemployment benefits have run out, she has entered the informal economy to make ends meet.

America's shadow economy includes activities that are actually illicit -- prostitution and drug dealing -- and more benign jobs like working construction for a day for cash, or even the $2 per child that Kalmes gets for walking neighborhood students to the bus. Added together, economists estimate $2 trillion could be involved.

Such informal arrangements, while providing a safety net of last resort for workers like Kalmes, also may provide answers to puzzling discrepancies in economic data. One example: explaining why retail sales have outpaced gains in reported income for almost four years, said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, N.J.

Retail sales grow even as taxes increase

Retail sales have grown at an annual rate of 3.5 percent or more since September 2010, even as taxes have increased and jobless benefit eligibility has shrunk to 73 weeks or less from 99 weeks in some states. Unemployment is 7.7 percent, up from 4.4 percent in 2007, and income rose just 2.2 percent in the 12 months through January.

"There could very well be a much-larger than expected underground economy at work here that is making a contribution," Baumohl said.