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This post by Charles Hugh Smith predicts an "underground" economy for 2009 and in the years to come.
Trends for 2009: The Rise of Informal Work
December 30, 2008
The crushing costs of formal business (State and local government taxes and junk fees rising to pay for unaffordable pensions, etc.) and the implosion of the debt-bubble economy will drive millions into the informal economy of barter, trade and "underground" (cash) work.
As small businesses close their doors and corporations lay off thousands, the unemployed will of necessity shift their focus from finding a new formal job (essentially impossible for most) to fashioning a livelihood in the informal economy.
One example of the informal economy is online businesses--people who make a living selling used items on eBay and other venues. Such businesses can be operated at home and do not require storefronts, rent to commercial landlords, employees, etc., and because they don't require a formal presence then they also fly beneath all the government junk fees imposed on formal businesses.
I have mentioned such informal businesses recently, and the easiest way to grasp the range of possibilities is this: whatever someone did formally, they can do informally.
Chef had a high fixed-cost restaurant which bankrupted him/her? Now he/she prepares meals at home and delivers them to neighbors/old customers for cash. No restaurant, no sky high rent, no employees, no payroll taxes, no business licenses, inspection fees, no sales tax, etc. Every dime beyond the cost of food and utilities to prepare the meals stays in Chef's pocket rather than going to the commercial landlords and local government via taxes and fees.
All the customers who couldn't afford $30 meals at the restaurant can afford $10. Everybody wins except commercial landlords (soon to be bankrupt) and local government (soon to be insolvent). How can you bankrupt all the businesses and not go bankrupt yourself?
As long as Chef reports net income on Schedule C, he/she is good to go with Federal and State tax authorities.
Now run the same scenario for mechanics, accountants, therapists, even auto sales--just rent a house with a big yard or an apartment with a big parking lot and away you go; the savvy entrepreneur who moves his/her inventory can stock a few vehicles at a time. No need for a huge lot, high overhead, employees or junk fees. It's cash and carry.
Lumber yard? Come to my backyard lot. Whatever I don't have I can order from a jobber and have delivered to your site.
This is the result of raising the fixed costs of starting and running a small business to such a backbreaking level that few formal businesses can survive.
One example of hundreds/thousands: 20 years ago I paid about $200 for a building permit for a $40,000 starter home. (Not in California, in Hawaii.) Locally in California you pay $350 just to have a staffer "review" your plans--even for a modest bathroom renovation. If they reject your plan for some reason, you still pay the fee. If they approve your project, the permit is much, much more. Oh, and they charge you for the electrical and plumbing permits, too.
Yes, I understand the movement to charge end users of government services; those who use the services should pay. Fair enough. But then what's happening to the 8.5% sales tax we pay, the $10,000 property taxes we pay, and the hundreds or thousands in other fees and income taxes we pay? Why don't those taxes go down if end users are picking up the tabs for "government services"?
Why have state and local government budgets all climbed by 30%-50% in a mere decade?
In a way, it doesn't matter; very few can operate a formal business profitably, and so they close their doors and scrape up a living in the informal cash economy. Local government will see its revenues wither and eventually insolvency will force a radical re-thinking of government revenues, expenses and services.
Until then, watch for the informal economy to grow and the formal economy to wither.
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