The Underground Economy: A Discussion with Androcles
Mike Shedlock recounts an online debate he had about the effects of the Underground Economy on the housing market and the US economy as a whole.
“Millions of undocumented aliens are driving taxis, selling newspapers, pumping gas, digging ditches, picking grapes, driving trucks, writing code for software startups, etc. Do you count these workers as members of the labor force? Not if they work off the books, as most do to avoid being deported.
“In other words, there is no way you can accurately count either the employed or unemployed in America. All I can say is…”look around you.” Haven’t you noticed the large numbers of Asians, Latinos, and Eastern Europeans doing the work Americans won’t do? Our country is overrun with immigrants from all corners of the planet. They all have a job. Why? Because they’d starve if they didn’t. I don’t see any starving people walking the streets of Boston.
“I still maintain that the labor force numbers in America are understated due to the millions who work off the books or in activities that are never reported to the government. The underground economy in this country is bigger than ever. Accordingly, the unemployment rate is overstated, because the government is using the wrong denominator in its calculations.”
The Underground Economy: Mish’s Reply
Following is my reply to Andy:
Andy, that was an excellent, thought-provoking post and well deserving of recs.
Yes, there are tens of thousands of undocumented workers, many of them illegal aliens, more or less adding to the economy in varying ways (or taking jobs from U.S. workers, if looked at in another way). But some stats do not lie, either, such as the number of weeks people average on unemployment. Nor do unemployment stats count the “underemployed,” such as those with degrees in engineering working at Wal-Mart.
Eventually, people have to take something. “Eventually” in this case is when benefits run out. In the meantime, debt keeps piling up, and up, and up. In a normal recovery, debt is paid off. In this recovery, savings have fallen to zero, private sector employment is negative (actually, I think it finally went positive a month or two ago), and even if you think it is understated, the fact remains that it is pathetic.
The key statistics are these:
2) How little of the excesses were wiped out by the last recession
3) How we keep losing manufacturing jobs but gaining jobs at retail places such as Wal-Mart
By now, it should be obvious to everyone that this economy is in “recovery” and will only stay in recovery as long as housing is strong. Close to 40% of the job creation in this recovery is directly related to housing. Yet in spite of mammoth increases in the numbers of houses and associated construction jobs, job creation has paled. Now, I realize you dispute that. But unemployment numbers have only dropped because the participation rate has dropped. That is yet another problem with this recovery. A falling participation rate in a recovery is nonsense.
Then again, it seems you might be suggesting that the falling participation rate is wrong. Let’s assume for a minute that you are correct. The question is, where to from here? Does this recovery continue until everyone owns three houses? Does it even make sense to include illegal aliens in the participation rate in the first place? What happens when everyone owns three houses? Is it meaningless to you that only 12-14% of the people can afford a house in California? Perhaps you think the answer is “0% down,” that that makes things affordable. If so, you sound like all the rest of the cheerleaders. But please, let’s look ahead. What is the next step when we have declining real wages and affordability based on 0% down? Is the next step in affordability negative 25% down? In other words, unless wages pick up, and pick up substantially, there will be no new marginal buyers except by dropping lending standards. Do you not think lending standards are dropping like a rock? Foreclosures in many areas are skyrocketing.
Let’s return to debt levels. People are getting by in spite of falling wages, in spite of decreasing benefits, in spite of rising gasoline prices, in spite of higher heating and cooling bills, and in spite of higher property taxes — for one reason only: People are just about eating their houses. There has been round after round after round of cash-out refis supporting consumption. The savings rate has fallen to zero, and debt is rocketing.
The Underground Economy: The World’s Biggest Ponzi Scheme
This entire house of cards rests on two things:
2) Very high real estate sales
If either of those falls, it is all over. In fact, this mess is the world’s biggest Ponzi scheme to date. Actually, I can shorten the above two points to one, if you like: As soon as the credit bubble stops expanding, kiss this economy goodbye.
For the life of me, I cannot see how you think this is all sustainable:
· Housing prices enormously above rental values
· 0% savings
· Falling real wages
· Speculation in Florida, California, Las Vegas, Chicago, Boston, and numerous other places
· Condos being bought sight unseen
· Outsourcing and layoffs
What I am calling for is a great deal of pain and soul-searching and correction of obvious malinvestments when anyone who can breathe qualifies for a 0% down, no-doc loan on properties that have risen 100% in three years while real wages have shrunk.
By the way, I am not sure if I have one job or three jobs or even five jobs, and those curious about my photography might wish to take a peek at Mish’s Photography. Now, photography might be one of my businesses, but “blog advertising” surely is not. Since my blog’s inception back in February, I have raked in a grand total of $66 (in credits) from site advertising. I have not even received a check yet. Thus, I would be hard pressed to call blogging a job.
On the other hand, I have a strong feeling there are relatively large numbers of people attempting to sell stuff on eBay who are struggling to make ends meet, yet for the point of the household survey consider themselves employed. Thus, while I am inclined to agree with you that all is not what it seems with the participation rate, I also propose that perhaps all is not what it seems with the participation rate! Think about that for a second. How many are attempting to sell stuff on eBay, attempting to make a living at multilevel marketing, starting businesses that are doomed to fail (etc., etc., etc.), and call themselves “employed”? Take me for example. You want to count me once. How many times have I been counted? I don’t know, do you?
Thus, your theory on the participation rate works both ways. Regardless of what it is, however, the very second housing breaks down, there is going to be a massive revelation on what is sustainable going forward.
For now, I am willing to accept much of what you have said simply because the “underground economy” — in conjunction with loose credit standards and the ability to treat one’s house as an ATM — is the only plausible explanation for the resilience of this economy. The key question is, what happens going forward? I think we are about to find out…and I think the results will not be pretty.
Mike Shedlock ~ “Mish”
August 17, 2005