Book Reviews

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN The Subterranean Economy NOT so many years ago my 35-year old horse Toy died in the middle of a frozen January. Digging a grave for him in the snow-blanketed ground with ordinary tools was a manifest impossibility. A man with a back hoe, hearing of my plight, offered to do the job for me. I was about to ask his name in order to make out a check for an agreed-upon $100 when he said, "If you have ninety dollars in cash I'll take that." I don't know whether that $90 ever figured in the Gross National Prod uct, but I have wondered about it. Similarly I wonder about the in comes of all those street hawkers who sell everything from women's hand bags to polished red apples in and around Grand Central Terminal in New York City. In businesses where there is little overhead and no doc510 umented inventory how much of any given transaction produces a statis tic that is recorded?

At the other end of the scale we have computers spewing out thou sands of documents that go into files far too voluminous for any correla tion. In a suggestive book called The Subterranean Economy (New York: McGraw-Hill, 187 pp., $19.95), Dan Bawly, an executive partner of an Israeli certified public accountant firm, says that Americans produce 72 billion documents annually. There are, so Bawly tells us, approxi mately 18,000 papers for every white collar worker in the United States, and the total number of records, vouchers and other documents on file must exceed three billion. As an international accountant with business in Europe, America THE SUBTERRANEAN ECONOMY 511 and the Middle East, Mr. Bawly has good reason to believe that no Gross National product statistics are reli able. Between unrecorded transac tions, mislaid files and untotalled slips of paper, the job of making a science of macroeconomics becomes a joke. In computer language, it's "garbage out."

Just GettingEven There can be no science without measurement, said Lord Kelvin, and Mr. Bawly would be the first to ad mit that The Subterranean Economy is not a scientific book. But he is sat isfied in his own mind that, with the proliferation of tax-consuming and inflation-creating welfare state bur eaucracies, thousands of individuals have come to regard their political representatives as crooks. Tax eva sion is no longer regarded as im moral; it's just getting even. To describe the new attitude, Ar thur Seldon of the Institute of Eco nomic Affairs in London has coined a new word. It is "avoision," com pounded of "avoidance" and "eva sion." Tax avoidance has always been legitimate. But now Mr. Seldon sees a moral blurring of avoidance and evasion. The higher the tax rate, the more popular the "avoision" schemes. The Gross National Product sta tistics either underreport or totally exclude many activities that should be relevant to any meaningful sci ence ofhuman action. Mr. Bawly lists a few of these activities. There is, first of all, moonlighting. In both Europe and the Upited States there is the illegal employment of aliens.

Barter is a big i_em. There is tax evasion through! manipulated ex pense accounts. ~nd there are the myriad "laundering" activities re lated to the dope traffic and the cul tivation, in California and Hawaii, of big unrecorded cash crops of mar ~juana. Money from heroin, cocaine and marijuana p~sses from hand to hand and into bank accounts for subsequent "laun<Iered" investment in legitimate business. And where is the farmer who i~ meticulous about recording roadsi~e stand sales? In parts of Canada, i for example, the unrecorded exch~nge of farming, fishing and forestIt commodities only rarely leaves an audit trail the Ot tawa government: can pick up. The "guesstim~tes" of the extent of the American underground econ omy naturally va;ry. Fortune maga zine has figured that $50 billion a year in taxes are ~ost to government. In 1976 the Intetnal Revenue Ser vice said the covett economy was ap proximately one-tenth of the surface economy. In 1981ithe Department of Labor estimated ~hat nearly one in twenty workers Held more than one job during a parjticular survey pe riod. Presumaoly, much of the "moonlight" income went unre ported. The Gen~iral Accounting Of fice has estimated that some $30 bil512 THE FREEMAN lion in taxable income remains "off the books," which means a substan tial loss in annual Federal income taxes.

The probability is that govern ment estimates of the underground economy err on the conservative side. If "authorities" were to admit their inadequacy to the job of tracking down every unrecorded dollar, it might encourage more people to be more brazen about practicing "avoi sion." Police state measures would then be necessary, and the Ameri can people wouldn't stand for that. Tax Avoidance Is Common In Other Countries In other countries there is less reticence in speaking about "avoi sion." Despite the recent jailing of Sophia Loren on a tax evasion charge, the Italians boast that their . underground economy has saved the nation from collapse. In spite of the fact that the Italian government in 1978 was close to bankruptcy, the country imported more Rolls-Royce cars and caviar than any other Com mon Market nation. It was second only to Britain in its consumption of French champagne. There is much less labor unrest in Italy's clandes tine businesses than in the open economy, where the Communist unions are strong. The presence of moonlighting in Italy gives the en trepreneur access to a flexible labor force that is' willing to work overtime. There is no registered glove factory in Naples, yet this city ex ports five million pairs of gloves an nually. The unmeasured Naples shoe industry is supposed to be just as large as the glove industry.

Macroeconomic data in Italy are meaningless. Things are not much different in France, where a quarter of the 25 million labor force is thought to be in moonlighting. Un recorded labor in France has, says Mr. Bawly, contributed materially to the construction of highrise build ings in cities from Paris to Nice. Pay in the unrecorded economy goes up, with the employer and the employee sharing the amount of tax avoided between them. In supposedly moral Britain the "unmeasured" economy is estimated as 7.5 per cent of the surface econ omy. Scotland reports an unemploy ment rate of ten per cent, but the London Economist suspects the fig ures. The "largest industry north of the border," says the Economist, "lies in the penumbra of services relating to providing Bed and Breakfast, and most of them avoid the taxman's eye." And the illicit whisky still in Scotland has always been a healthy sector of highland output. As for fish, "far more are landed than are offt cially sold."

The underground economy, says Bawly, will continue to grow until the Welfare State is cut back. It is as simple as that. , the Freeman VOL. 32, NO.9. SEPTEMBER1982 The Brigands and the Bargainers The case for trading rather than plundering. Ernest G. Ross 515 Small Business and Entrepreneurship E. C. Pasour, Jr. 520 How the competitive market process best serves consuimers. The Elements of a Fair System of Taxation Ridgway K.. Foley, Jr. 528 In search of a better way to finance limited government. The Relics of Intervention: 6. Conclusion: The Relic of an Idea Clarence.B. Carson 542 The idea persists that government should actively int~rvene in our lives. The Lessons of History John Jefferson Davis 554 Comparing the records of capitalism and socialism from a Christian perspective. The End of Schooling John K. Williams 565 A survey of the origins, the growth, and the results of state-school systems.