Some methods for estimating the informal sector, and characterizing the cyclical behavior thereof, from Ceyhun Elgin, Ayhan Kose, Franziska Ohnsorge, and Shu Yu (2019).
Source: Elgin, et al. (2019).
In advanced economies, the size of the informal sector has declined to about about 18% of official GDP, using the MIMIC method. If this estimate is applied to the US, then the total GDP of the US in 2020 would be about $24.75 trillion (vs. $21 trillion official).
More on informal sector estimates cross-country, see Medina and Schneider (2018).
Note that this measure does not include home production. Nor does it include depletion of natural resources, and other aspects of sustainability. (See Nordhaus and Tobin).
Menzie,
Oh my. Guess this is triggered by comments by me on another thread. There is much I can say, aside from being annoyed at not being cited, although I have not done anything new on this topic for over a decade. I shall just note a couple of things.
One is the plethora of terms used for this sector, which can be seen in the titles in the References. I think it is unfortunate that they use this term “informal” for this non-home production, legal, but non-reported activity sector with no mention of the alternative titles. Some of those from the References include “shadow” (favored by Schneider, a leader in all this), “underground,” “unofficial,” and “unobserved” (used by your former colleague, Ed Feige). That “informal” has long been preferred for looking at EMDEs where much of it is more like home production and in general has a different character than in the advanced economies, can be seen in the References where that term is more likely to appear in titles of papers dealing with EMDEs, but these fine points are not made by these authors, who just charge into their discussion of approaches with little discussion of meanings aside from saying they are not considering either home production or illegal activities.
I have long had problems with the MIMIC and DGE approaches, not so much in principle but more in how they have been used, which has often involved arbitrary choices of variables to go into them that are not clearly what should be the ones used in them (Elgin has long been a fan of MIMIC in particular). This can be seen by my own bugaboo, income inequality. There it is in both the text, just barely, and also in the tables, notably A.2 D, that indeed there is a pretty clear correlation between income inequality and “informal” economy size. Which simply raises the question: why do they not use income inequality in their MIMIC and DGE models? Why? This is just bizarre and frankly very hard to defend, with some of the variables they do use pretty questionable. I note that Schneider, with whom I have had serious disagreements, has long resisted use of income inequality in all this, although he now admits it is in there. But that is a long and complicated story, although I note that he has serious ideological biases in a public choice direction and much prefers to emphasize tax rates and government regulations than income inequality. There is a lot more oh him, in particular, which you can aske Ed Feige about, if you ever see him, and which I shall tell you, if I ever see you again, but not suitable for a blog.
Since I am dumping on MIMIC and DGE, although I think they can be done better than they are here, I shall accept that they may be preferable for modeling what happens over time in terms of both trends and cycles, and the clear innovation of this paper is its analysis of cycles (with one oddity being that on the one hand they see formal and informal moving in opposite directions in cycles in some places while elsewhere they have them moving together). However, I and coauthors tended to do cross sections comparing countries at points in time, in which case I think some of the alternatives mentioned in the paper are superior, namely the currency demand model and the electricity demand model. The former has tended to be good for advanced economies, while electricity better for transition or middle income nations, with both of these weaker for poorer economies. I have always been suspicious of survey methods (“Excuse me, sir, how much unreported activity are you willing to report, given that not reporting is illegal?”). The problems with these tend to show up over time as the ratios of these to GDP change. Also more recently currency demand may weaken as more of this goes into cryptocurrencies.
That is all for now, although I could say a lot more, although I shall close by noting that the paper essentially takes it as essentially an obvious fact that they note but do not model that income inequality is linked to this “informality” phenomenon, and I shall indeed assert that Rosser, Rosser, and Ahmed, 2000, J. of Comparative Economics was the first paper ever to note this relation, now considered almost boringly true, if sort of put aside from the analysis.
Barkley Rosser: Should’ve cited, no disrespect intended. I wanted the most recent cross-country estimates I could obtain, and the paper cited was perhaps the most recent one available (plus Ayhan Kose is someone I often cite).
Menzie,
I was not complaining about you not citing. This is not your field, or not that I am aware of. I was complaining that the linked paper did not do so. But then, as I noted, they basically treated the matter of income distribution as kind of sideshow truism following our work that they did not consider further, although given that indeed this changes over time, quite substantially in some nations, they should have include it in their model for time-series analysis. But as I also noted there has been a strong tendency by these people using MIMIc and DGE to ignore, only one of the problems with those approaches, with others recognized in the paper.
I must add that our most cited paper, the first and worst one in 2000, used the terminology “informal” that I have bashed. It was precisely because we learned of the complications and implications of these terms that we stopped using it and moved on to “underground” and then to “non-reported,” which certain international agencies actually prefer, but which somehow has not gotten used as much as it should, although as I noted this is a very broad term that includes both the unmarketed forms of production important in developing economies as well as the outright illegal economic sector, on top of what this paper claims to be studying, activities marketed by not illegal per se although not reported.
Check out how Sean Hannity pulled a Bruce Hall here:
https://www.huffpost.com/entry/sean-hannity-dan-bongino-colorado-shooting_n_6059b190c5b6d6c2a2a9e4d6
A white dude goes into a Boulder shopping centers and kills 10 people including a police man and Hannity and his guest blame this on Black Lives Matter? Yea – Hannity is insane but there strikes me as straight out of the Bruce Hall play book.
Answering a related question that I consider important:
https://twitter.com/OVargas52/status/1374403785980661772
Ollie Vargas @OVargas52
Across Latin America, most people work in the informal economy. Lockdowns condemn those people to hunger in crowded households. I never see their leaders/unions interviewed in the media, except for in Bolivia where the MAS govt listened to people & didn’t impose such measures.
12:52 PM · Mar 23, 2021
Lockdowns can work in rich countries that can pay people to sit at home. No Latin American government has the capacity to do that, so the policy cannot be applied without a human cost even greater than that brought by Covid. Not everyone has jobs that can be done on zoom.
ltr,
Interesting that you focus on Latin America and mention Bolivia in particular. I note that in the paper linked to by Menzie by Elgin et al they find Bolivia to have one of the highest rates of “informal” (their term) economic activity in the world. It is well known that Latin America in general has quite high rates of this compared to other nations. That this is the case reinforces the global correlation that I and my coauthors found between the size of non-observed economies and degrees of income inequality, with Latin America notorious for having the highest levels of income inequality as a region in the world, even as there are some specific nations elsewhere that are higher, such as South Africa and Namibia. Again, we first discovered this relationship by looking specifically at the transition economies, but then later found that indeed the relationship tends to hold more broadly.
I also suspect you are right that at least some types of non-observed economic activity may especially strongly impacted negatively by lockdowns, although the one part of it that lockdowns probably affect the least is the informal activity that involves home production, which also happens to be more significant in poorer nations.
You all do realize how not accepting the reality of just how massive this dark matter of economics skews transactional policies, scholarly articles, and commonplace attitudes.
But then, using another simile, we collectively chose to act as if it were the love that dares not speak its name…
Speaking of the informal economy, I’ve long thought it very curious how low level drug pushers and users get busted…but never the US kingpins. If the drug trade is anywhere near the size estimated, how can there not be a large management, distribution, and recruitment infrastructure operating on US soil? Or are we really to believe that a major product can be magically self-distributed? And isn’t the media’s lack of interest also quite curious?
Dare I suspect dark money and corruption?
El Chapo escaped prosecution? Who knew?
El Chapo was arrested in the United States? Who knew?
https://en.wikipedia.org/wiki/Joaqu%C3%ADn_%22El_Chapo%22_Guzm%C3%A1n
Question is, could El Chapo really have managed the distribution network in the United States and recruitment of wholesale and retail sales operation entirely from Mexico? Could he really have gotten a net worth of $11 billion without large numbers of lieutenants in the US?
I doubt it. IMO there is lots of protection money being provided to shield the organization….and not just in Mexico.
But pgl lacks the curiosity to even ask the question.
Seriously? I guess you have never talked to a single person in law enforcement. Babble on idiot.
Try reading your own Wikipedia links. 20 years plus of DEA agents (one of which is a running partner of mine) risking their damn lives to bring down this cartel. Yea he used his money and power to keep evading law enforcement. But a little know nothing wimp like you thinks he has the right to degrade the efforts of brave narc agents like my running partner? Pathetic. BTW my friend has been losing it lately – the job will do that. I hope he never figures out who you are as he gets really angry when know nothing wimps question the efforts of his crew.
Al Capone stated that half his money went to paying off police, judges and the press. I think it’s important to understand that black markets are a knowable type of business and market, in which the protection of property from rivals, customers, employees and the government must be internalized. That is, a drug dealer cannot turn to the police if his stash is stolen or seek relief in the courts if a customer refuses to pay.
These costs are historically substantial, and budgeting half of revenues to this end is probably not a bad guess.
“Steven Kopits
March 25, 2021 at 7:43 am
Al Capone stated that half his money went to paying off police, judges and the press.”
Most of whom were not the big shots that JohnH likes to claim are the source of all evil. Of course you sir think that going to free markets solves all problems. Well yea getting rid of prohibition destroyed Al Capone’s little monopoly but talk to MADD about drunk driving. Of anyone hooked on cocaine. I’m all for less regulation on the beer I enjoy at home but free markets are not the nirvana you preach.
Pgl: show me the beef. Where is the evidence showing the widespread detention and conviction of drug cartels’ middle management operatives operating in the US?
What’s keeping the DEA and law enforcement from publicizing its successes at management levels of US operations?
pgl has absolutely no idea what kind of infrastructure it takes to manage a multi-billion dollar personal sales operation.
Hint: Amway has 16,000 sales people, not including the management and distribution infrastructure.
The drug trade has to have large numbers of people on US soil supervising and recruiting retail sales people…plus distribution.
Or do drugs magically distribute themselves?
A day without another pointless insult from this village idiot is like a day without sunshine. Get a new gig as your rants are all too predictable and boring.
Amway? You do know multi-level marketers spend a lot of money distributing a bunch of junk products like the overpriced crap like Herbalife. But are you trying to tell us that Amway is peddling crack? Lord – you really are a dumba$$.
I just had to check the 10-K filings for the slime buckets known as Herbalife and they note they have 565,557 “sales leaders” so your 16,000 employees for Amway is peanuts. Actually these sales leaders are snake oil sales people peddling overpriced crap but hey that is typical for multi-level marketing firms. Let’s see over $5.5 billion in worldwide revenue driven by over $2 billion in sales and marketing costs. Now that is a distribution network.
Herbalife is also a tax evader but at least these slime balls are a publicly traded multinational so if you want to read their 10-K and all of its misleading intellectual garbage – have at it. Wait – you do not know what a 10-K even is or what the SEC does.
But Amway????
556,557 sales leaders? Imagine the management infrastructure needed to support that.
Conclusion: the management of US drug sales and distribution operation must be pretty big…and virtually untouched by law enforcement.
John –
You might consider watching Narcos on Netflix. It’s not only great drama, but quite instructive in the microeconomics of black markets, eg, franchises versus direct distribution; wholesale v retail, etc.
@ “Princeton”Kopits
I thought you and donald trump got all your best moles on what is happening in the informal sector working in the cast of “Sicario: Day of the Soldado”??
https://www.msnbc.com/rachel-maddow-show/has-trump-peddled-bogus-claims-about-the-border-because-movie-msna1189076
Kopits, what about old Miami Vice episodes on Hulu?? Can we get some good microeconomics there from Sonny and Tubbs?? I know wholesale vs retail is a very complex topic. BTW Kopits, ever since you recommended I skip learning Macroeconomics and watch Brian De Palma’s “Scarface” I only buy wholewheat now, retailwheat is for losers.
The extent and nature of the informal economy through Latin America explains to me the difficulties health officers have had in limiting the spread of the coronavirus and treating many of the cases. I knew of the informal economy in, say, Mexico but did not properly consider it. Also, I understand why a president such as López Obrador focused all through on protecting rural Mexicans, who comprise much of the informal Mexican economy. No wonder an Evo Morales of Bolivia was criticized so by development specialists in the United States, who never considered the needs of the necessary subjects of development.
This post and comments have been especially helpful to me….
in light of the recent massacre in colorado, one wonders if rick stryker is still a great defender of assault weapon murders, or has he come to his senses and embraced the idea of eliminating assault weapons from society.
I’ve often wondered about this shadow or underground or informal economy, but it seemed to be a rather mysterious creature that did not have a clear description. Was it all legal and illegal economic activity. Did it include bartering or trading services? Was it more prevalent in cities or rural areas?
I realize the idea of breaking down this shadow economy or non-reported economy into those sorts of categories is probably too much to ask. I found a 6-year old paper from the St. Louis Fed that estimated this segment as averaging 13% in “developed countries” versus what appears to be 17% on the chart above (without captions on the left and right vertical axes). https://www.stlouisfed.org/publications/regional-economist/january-2015/underground-economy
I’m fascinated by this on the micro level in this geographic area (SE Michigan). There are many skilled workers who have stayed in the are despite changes in the employment opportunities. It’s not that uncommon for them to translate their construction jobs into cash-only handyman businesses which seem to be either the full income or a good supplement to a day job. One such “retiree” nearby is on everyone’s speed dial for small to large construction jobs with a discount for cash.
But my first exposure to how businesses conducted this underground economy was a neighbor who was a tailor from Iran. He left Iran when the 1979 revolution occurred. One day in March he came over to ask about a tax bill he had received on the house he purchased (with cash) next to ours. He wanted to know how he could get the tax man to come over so they could talk about the tax assessment and get it reduced. I told him that since it was a new construction with a recorded sales price, it was doubtful that the “tax man” would change the bill. He said in Iran, when they saw the tax man coming they would send home most of the workers and then sit down over drinks to talk about how bad business was and get that bill reduced. He just didn’t understand why we didn’t do things in that way. That was the only reasonable way.
So I can see why “developing” countries would have a much larger “unreported economy”. I’m sure there might be a little cash under the table for the tax man, too.
Bruce,
Two comments on the paper you linked to by Restrepo-Echavarria.
One is that while it provides a nice discussion of various methods that have been used to estimate non-observed economic activity (to use my preferred term), it does not report how the estimates based on these approaches vary from each other. As a matter of fact they vary quite a lot in most countries. Among the reasons i and my coauthors tended to favor the currency demand and electricity consumption methods at least for cross-section studies is that estimates based on them tend to show up kind of in the middle of estimates based on these various approaches that she discusses across many nations.
The other is that curiously enough she does not mention the two methods that are the focus of the paper cited by Menzie in his post, the MIMIC and DGE methoeds, which are in some sense both models based on collections of essentially arbitrary variables, chosen arbitrarily. She does not mention them at all, which I find a bit odd. But in fact I share her apparent disdain for these methods, while recognizing they may be useful for looking at trends over time given how some of these other methods depend on stable relations holding over time between variables that we know are not stable.
The sector is non-market. In some NIPA it is partially included. In all cases, prices have to be somehow inferred. The problem of the economist who marries her butler who continues his duties as a husband is a situation where the economist lowers National Income. It has been around since I was an undergraduate.
Eisner in his TISA and the National Academies visited this problem and posed solutions 40 and 20 years ago.
When will people read the literature and stop reinventing the wheel?
Barkley Rosser:
I note that in the paper linked to by Menzie by Elgin et al they find Bolivia to have one of the highest rates of “informal” (their term) economic activity in the world. It is well known that Latin America in general has quite high rates of this compared to other nations. That this is the case reinforces the global correlation that I and my coauthors found between the size of non-observed economies and degrees of income inequality, with Latin America notorious for having the highest levels of income inequality as a region in the world….
[ An especially important comment. A critical aspect of ending poverty in China, has been making economic activity “formal.” This has meant providing for formal ties between small farmers or rural vegetable growers and small vegetable sellers in urban markets, complete with 4G video links and businesses in a phone capabilities and logistics allowing for smooth transport from farm community to markets. Informal economic activities have been increasingly turned formal through China.
Especially important. ]
What I realize then is that an aspect of the poverty program in China has been making viable with infrastructure development and formalizing millions of small businesses, which has meant infrastructure development especially extending to and from poor areas. I remember the battle over water delivery to poor areas in Bolivia that brought Evo Morales to the presidency, a battle that was dismissed in reporting by the New York Times and immediately by a prominent United States economist.
formal activity is much easier to monitor than informal activity. i do not think that was lost to the chinese government when they assisted with these ties.
Because of this post and comments by Barkley Rosser, and selectively reading through work on poverty done in China, the work done becomes all the clearer to me. I understand especially how important 4G connection was to the effort and 5G promises to be even more important. The point being to allow for economic activity that is already there even that of people who are in poverty to become increasingly productive. The nature of the economic activity need not be changed.
“That this is the case reinforces the global correlation that I and my coauthors found between the size of non-observed economies and degrees of income inequality, with Latin America notorious for having the highest levels of income inequality as a region in the world….”
And that paper would be?
Informal markets appear when free markets are prevented from operating. The typical causes are 1) price or volume constraints, eg, fixed selling prices (Venezuela); 2) minimum wages or rent control (all over the place); 3) prohibited transactions (eg, drugs or money changing); 4) non-price restraints like licenses, monopolies, or cumbersome permits; 5) corruption from state-owned enterprises; or 6) excessive bureaucracy, for example, in obtaining residency permits or tax id numbers.
We had all these in post-communist Hungary.
The easiest fix for all these is to pay politicians for performance, eg, for GDP growth minus growth of debt. All this stuff would go away very quickly in that sort of regime.
Steven Kopits: In an earlier comment, Professor Rosser cited I believe this one: Rosser, Rosser, Ahmed, “Income Inequality and the Informal Economy in Transition Economies,” J.Comp.Econ. (2000).
“Various causal mechanisms may operate in both directions, an increasingly large informal economy causing more inequality due to falling tax revenues and weakened social safety nets, and increasing inequality causing more informal activity as social solidarity and trust decline.”
This is not my experience. It’s a one-way street. Bad policy leads to bad outcomes.
In Hungary, corruption and black markets well preceded the collapse of communism, but many of these practices — particularly related to bureaucratic procedures — persisted well into the post-communist era because it simply took a long time to get around to reforming various things. However, where the private sector was allowed to operate, these practices disappeared overnight.
For example, in early 1990, we used to change money with the Syrian Christians in the back alleys off Vaci utca (Vaci street), the main tourist street in Budapest. Two days after exchange rates were liberalized, the money changers were gone. Just like that.
At communist era tax rates, the effective rate of taxation on someone making, say, $3,000 / year could be 70-80%. You think you’ll have tax evasion under the circumstances? Of course.
All this is absolutely no different that illegal immigration: economic pressures without legal recourse. So you get a black market. I understand this is beyond Barkley’s capability to grasp, but it’s duh simple. It was in Hungary. And this was not academic to use. This was our daily reality.
Your experience? Please. You toss out a lot of undocumented babble but you cannot be bothered to read a paper published in a refereed journal? Oh yea – you are still campaigning for another seminar over at OANN.
Beyond Barkley’s capacity to grasp? Damn I never knew an economic know nothing could have such an overinflated ego.
Barkley can speak for himself.
Barkley –
I stand by what I said.
In my experience, transactions costs matter when they involve the government. For example, my brother brought over his Virginia-plated car to Hungary in the 1990s. He received a two-year waiver on making modifications to neet Hungarian standards, which is an expensive proposition. After two years, he put his Virginia plates back on the car. I never took my Maryland plates off. So compliance was both difficult and expensive.
Now, we could have bought cars in Hungary. My car, an Eagle Talon, cost about $17,000 in the US. In Hungary, it would have cost around $43,000 — that’s transactions costs for you! Again, all driven by the government.
The easiest course of action was to ship across a car with US plates and just drive that. You can call that part of the gray economy or an informal activity, but that’s where the economic incentives took us. Otherwise, I never saw transactions costs as a material barrier. Of course, we never bought clothes, electronics or jewelry in Hungary because VAT was 27%. But again, that’s a government transactions cost, not a business cost.
Very importantly, our behavior did not reflect a desire to avoid compliance with the law. This is very important to understand. Non-compliance with the law is stressful for the individual. I was stopped fifty times by police in my car. Many of those were because the police wanted to take a look at what looked to be a supercar; many were for sobriety tests (they had roadblocks all over Budapest late at night); and some were fines of one sort or another. (With a foreign driver’s license, the fine for speeding was $5 with no official record. It was a fast car.) Now, when you’re pulled over with foreign plates — US at that — that was a stressful experience. And I was pulled over often.
Illegal immigrants have that same stress every day. So I understand their world in a way you do not. But the takeaway is that the natural human impulse is to comply with government requirements. It’s not a matter of enforcement; it’s principally a matter of creating structures that let the individual comply with the law within their means. That’s why on-demand entry is, for example, an important element of a market-based visa program.
As for spending: There is only so much any government can take from its citizens without creating tax evasion and related problems. So it’s a matter of a government living within its means. Those governments struggling for tax revenues — eg, Argentina — are almost inevitably characterized by dreadful governance. (And of course we can create good governance by aligning incentives!)
Good behavior starts with good policy.
Steven,
I certainly agree that governments are responsible for lots of transactions costs, but there are plenty of transactions costs that are not due to governments. I suggested earlier that you read the definitive and much-cited work by the late Nobelist Oliver Williamson on this topic, with him generally regarded as by far the world’s leading expert on this. I also note that this is the basis of new institutionalist economics and ultimately derives from the famous article by fellow Nobelist, the late Ronald Coase, “The Theory of the Firm,” Economica, 1937.
On the matter of where this got started, I have said I am not necessarily against your marketed visa program. I disagree with you that it would simply eliminate all these border immigration issues. Heck, there is already a market, although a black one, in getting to the border, the coyotes and all their ilk, charging plenty of money for their services. The seriously poor are already shut out of that sort of thing, although I imagine there are some of them still getting in anyway, and they will keep coming even if your plan is implemented, sorry..
I hesitate to waste peoples’ time with this, but I find your now repeated efforts to somehow show I have no idea what I am talking about, at least compared to you with all your experiences in Hungary increasingly hilarious. Earlier you declared I did not know what was in elementary textbooks, although since I have explained that I and my coauthors overturned a portion of the textbook story, so, sorry, we most definitely know it. Our overturning of it is now so widely accepted it has become a cliche simply taken for granted by anybody remotely seriously studying this, even if it took Friedrich Schneider a long time to get on board.
Then you have several times, including in this latest post, somehow claimed without evidence that you have this far superior knowledge of black markets and I guess the real world than I have. Well, last time I made any mention of these matters that person who most recently was criticizing various Asian-American women here, one of them for meanly tweeting about poor snowflake GOP senators, got all on my case for daring to make reference to such things, especially when I said I was not going to go on about them. But indeed, that remains the case. Do at a minimum keep in mind that I am someone who successfully battled both the US and Soviet governments to get my then fiancee (and later coauthor on these topics) out, a matter of public record. I know you have no idea what that involved, despite your profound experiences being stopped frequently by police in your car in Hungary. I in fact do know a lot about black markets, but I am not going to go on in detail about any of it both because I do not wish to and because I am not supposed to in some cases. But you really need to keep in mind who I am and what I have done and where I have been just based on what is in the public record, quite aside from what is not and will remain that way. Really, Steven, you should know better than to make such silly remarks.
Oh, and then there is this bit where you somehow claim that I am “not capable” of understanding things you are saying. Well, Steven, there is a lot I am leaving out of the discussion here because I think most people would not understand it, ranging from a slew of hairy econometric issues (which Menzie and some others here might really love getting into) to the underlying theoretical model that is highly mathematical. I have kept this discussion to hopefully pretty clear arguments easily understood by most readers here. I have to ask: did you study real analysis by reading baby Rudin or grandpa Rudin or one of the lesser competitors?
Barkley –
I have never claimed that ending black markets ends all associated problems. Prohibition saw alcohol use rise, if I recall correctly, and alcohol abuse is even today credited with some $250 bn in lost economic output per year in the US. Marijuana legalization will not prevent drug addiction. That’s not the case for legalization.
The case for legalization is that 1) enforcement will only reduce consumption modestly, maybe 15% or so per the experience with alcohol; but 2) enforcement requires enormous societal investment of money and effort to achieve those modest results; and 3) the side-effects of prohibitions, notably violence, corruption, crime, fear, incarceration, exploitation and degradation of civilized norms are typically far worse than the underlying problem.
I have stated that legalization will end the debate as a political matter. This was true in the case of alcohol, gambling, and now, marijuana. Do you recall all those terrible stories about marijuana legalization in the last year? Me neither. They weren’t there, at least not in the media I read on the left, right and center.
And that is exactly what we expect with the legalization of migrant labor flows. Once it becomes a well-regulated market, it will in essence disappear as a political issue. But that doesn’t mean we won’t have migrants who knock over liquor stores, rape women, or kill someone driving drunk. These happen in the US across ethnic lines. (OK, maybe not East Asians.) But the issue will normally be treated as a crime perpetrated by an individual, not representative of an ethnic group of people.
There is, however, an important caveat. The US public will not tolerate an unlimited numbers of migrants into the country. Therefore, we need to find a way to regulate the flow. And — because we’re all economists here — we know we do that with prices. So you can pick any number of migrants you’d like to let in. It could be an absolute number, say, 250,000 incremental H2-M visas per year, and set the price at a level which clears that market (ie, one incremental visa is available on demand at all times). I prefer to set border apprehensions at ‘zero’ (that is, 150 / day) and allow activity to adjust to whatever dollar amount and visa number that implies.
We can talk all day about informal economies, but economic and policy analysis does not get any simpler than this. And I am well aware that you and Menzie could probably do the graphs and math for this better than I could.
I am, instead, calling out your moral courage, your willingness to stand up and champion a solution which your analytics tells you in the right approach. For you and Menzie, and many others in the immigration space, it is not about math or knowledge. It is about personal courage, the bravery to say that we are not mute witnesses to preventable suffering and that the economics profession has a view on the topic.
Steven,
I disagree that your scheme would end the political controversies about immigration, although they might be lessened. Whatever number would be selected to allow in, there will always be people who think it is too high and others who think it is too low, for whatever reasons, and they will probably make their views known through the political system.
In that regard I note that we have had several long-running of “legalized migration flow” policies, most of them for temporary labor and certainly not perfectly resembling your plan. While many went on for years not generating big political fusses, they have all in the end had such fusses accrue to them.
I also continue to deny that acceptance of your scheme could possibly bring about “zero border apprehensions.” I have already given arguments several times why I think that, and I think you have failed to refute them. Of course that is a further reason why I doubt your plan would end the political controversies about immigration, even if they might be reduced somewhat.
Given that I think you are exaggerating the virtues of your plan, I think attempting to lecture me (or Menzie) about “moral courage” or “personal courage and bravery” is rather out of place, especially given even the little bit you know of my bio that is on the public record and has been stated here, and to which i shall not add further here.
Steven,
So in your experience in Hungary bad outcomes do not lead to bad policy. Well, I have noted that Hungary is kind of an intermediate case on all this that does not show all that much, although showed some very specific outcomes in certain specific markets..
I remind you of the point you never responded to, that transactions costs matter and vary across situations. So some areas are easily resolved by simply letting markets work, with indeed freeing up forex markets pretty much getting rid of black markets in forex. But this does not work so well or perfectly in other markets where even though there are more or less free markets there are still complications that lead to some production being done in an unreported nero lavoro way.
But let us deal with your unsupported claim that somehow “bad outcomes do not lead to bad policy.” The issue we looked at was the two -way relation between income inequality and the size of the unreported economy. So a large unreported economy can lead to more income inequality because the lack of tax revenues can make it hard for a nation to fund a large social safety net that tends to make income more equal. But the other direction is that a high level of income inequality can lead to a larger unreported economy, with much of Latin America being an example. So in a nation with high income inequality and where the rich are able to pressure the political system to keep their taxes low, then poorer people face higher tax rates, not to mention feel alienated from society and mistrusting and unsupportive of the government, large numbers of not so well off people will be more likely to work in the unreported economy, whether in the home production/barter trade “informal” sector, the legal but marketed for money sector you like to call “grey,” or the outright illegal sector such as drug production and running.
Got it, Steven?
Oh, that first paper only looked at the transition economies. We had several later papers, although with them less cited than that first one, but in later ones we expanded the data set to the global level and found this two-way relationship to still hold up.
Barkley Rosser:
So a large unreported economy can lead to more income inequality because the lack of tax revenues can make it hard for a nation to fund a large social safety net that tends to make income more equal. But the other direction is that a high level of income inequality can lead to a larger unreported economy, with much of Latin America being an example. So in a nation with high income inequality and where the rich are able to pressure the political system to keep their taxes low, then poorer people face higher tax rates, not to mention feel alienated from society and mistrusting and unsupportive of the government, large numbers of not so well off people will be more likely to work in the unreported economy, whether in the home production/barter trade “informal” sector, the legal but marketed for money sector you like to call “grey,” or the outright illegal sector such as drug production and running….
[ Importantly described. ]
Yes, transactions costs matter and they can dominate at least for time periods up to several investment or hiring cycles. Modigliani observed that when telling stories about adjustment costs, most are about training workers but adaptation of capital to build ships and install new gorilla glass facilities are counter examples.
But to return to the topic of non-market economies. in sectors and countries where there is a non-market sector such as home production, there are shifts from market activity to and from non-market activity as incentives change.
Too many of the comments to this thread of non-market economics are really off topic and ad hominem.
Elevate the discussion please; this is not Facebook.
“In my experience, transactions costs matter when they involve the government.”
Your “buddy” Princeton Steve does not know that transactions costs exist in free market systems. I feel for you debating an arrogant nitwit like Princeton Steve!
Ah, you’re saying that ltr was quoting Barkley. I see. I thought is was ltr’s paper, rather than ltr’s negligence in using quotes or italics.
Steven Kopits: ltr quotes text, then indicates his/her opinion/commentary within square brackets. It is somewhat confusing but he/she *is* consistent.
You mean [consistent].
Barkley did write:
“Rosser, Rosser, and Ahmed, 2000, J. of Comparative Economics was the first paper ever to note this relation, now considered almost boringly true, if sort of put aside from the analysis.”
Now pray tell us the referred journal publication that you drew you latest free market triumphalism from?
China is quickly amassing weapons and systems to militarily overwhelm Taiwan, an action it could be poised to take within the next six years, the admiral chosen to be the next commander of US forces in the Pacific warned Tuesday.
“My opinion is this problem is much closer to us than most think,” Adm. John Aquilino said before the Senate Armed Services Committee, which was reviewing his nomination to lead the US military’s Indo-Pacific Command.
China considers establishing full control over Taiwan to be its “number one priority,” added Aquilino.
The current head of the command, Adm. Philip Davidson, told a hearing earlier this month that China could be prepared to take Taiwan, the self-governed democratic island that Beijing claims as its sovereign territory, by force within the next six years.
But Aquilino said Beijing is establishing a track record of using force to achieve Communist Party goals sooner than US planners forecast.
From CNN.
https://www.cnn.com/2021/03/24/asia/indo-pacific-commander-aquilino-hearing-taiwan-intl-hnk-ml/index.html
For someone who told us that Biden’s temporary burst of fiscal stimulus would lead to so much aggregate demand that all hell will let loose – it is odd to see you gunning for World War III with China. I guess the advanced Princeton Junk Science Consulting model has a low multiplier on military adventures!
Now if China does own all those Taiwanese Semiconductor Manufacturing facilities, then Bruce Hall’s paranoia over a semiconductor shortage might actually become a real deal. Of course Biden is already trying to get more domestic semiconductor production. And maybe in all of your begging to get back on Fox and Friends that you failed to notice that Biden is taking a tougher stance on China than Donald the Wimp Trump.
You are not debating me. You are debating the admiral nominated to lead the US military’s Indo-Pacific Command.
I imagine you believe you are better informed than he is.
But you are obsessed with having a war with China. Especially since you will not be on the front lines. Princeton Chicken Hawk Stevie pooh.
I put the odds of war with China at 60% in the next three years. yes. More likely than not. I believe the admiral has it right.
Is that prediction up there with $200 a barrel oil? For the sake of God – let’s hope your forecasting record remains pathetically bad.
@ “Princeton”Kopits
This is your 2nd “doozy” you have said in the last two weeks. I hope Menzie is making note of these outlandish and absurd predictions of yours and saving the hyperlinks for future reference. There are many patent idiots and morons who lead the U.S. Military and have the title “admiral” or “general”. No doubt, three of your personal heroes General Michael Flynn, General John Kelly, and General McChrystal reside somewhere at the top of that list of knucklehead buffoons.
https://www.miamiherald.com/news/local/immigration/article231235763.html
I suggest you read this book when you’re not making nutjob forecasts on the price of oil or car fuel at the pump.
https://www.amazon.com/Operators-Terrifying-Inside-Americas-Afghanistan/dp/0452298962
Maybe if the U.S. Army can attract some Asian Americans dumb enough (I think an extremely minute group of Asian Americans fitting that descriptor) to choose Junior ROTC over attaining their Master’s or PhD in one of the STEM majors to get somewhere in life, we can lower the percentage of old white village idiots running the U.S. Armed Forces. We should look forward to that hypothetical day.
At least 20 Chinese military aircraft entered Taiwan’s air space on Friday, according to Taiwan’s defense ministry.
Why it matters: It is the largest incursion by China’s air force since Taiwan’s defense ministry has announced almost daily Chinese military exercises into its air space, per Reuters.
A person familiar with Taiwan’s defense planning told Reuters that the Chinese military was simulating an operation against U.S. warships sailing through the Bashi Channel.
China has said the exercises are meant to show its determination to defend the island, which it considers part of Chinese territory, though Taiwan’s status is one of the most sensitive political issues between Washington and Beijing.
https://www.axios.com/china-incursion-war-planes-taiwan-airspace-3d5994f1-71d1-41f7-a4c8-f825d6043262.html
Please forgive me. I was only commending this post by Menzie Chinn and the comments of Barkley Rosser for several ideas about development that are of interest to me. I am sorry that I was and evidently have been confusing.
My comments were only intended to express gratitude.
ltr: Maybe helpful to use the “blockquote” and “/blockquote” html commands I think.
China has now completed a primary program in which severe poverty was ended for hundreds of millions of people. A secondary program to improve the well-being of as many people as now have proper homes and water and electricity and clothes and nutritious food and healthcare and education and pensions and rewarding work has begun and will continue for years. A vast country with a people of per capita income that was 57% that of India in 1980, now has a per capita income that is 273% that of India, and a people free of severe poverty.
The efforts and accomplishment of China against poverty are monumental and offer a model, many models, for many other countries and peoples. The Chinese efforts beyond the development and extension of basic infrastructure through the country need to be studied for respecting the ways in which people lived even though poor and building on those ways to allow for and offer a rewarding well-being. I am then interested in the ways in which subsistence raising of sheep in Inner Mongolia could become the sustainable, profitable raising of sheep along with the growing of a widening variety of vegetables that can be and are sold all through China. This in a steadily greening Inner Mongolia.
Development in Inner Mongolia, I realize, has importantly meant turning informal economic activities to formal, and I am grateful for the idea.
Menzie – is it possible I have missed an update on the recent “update to the comment moderation policy”? I’m seemingly unable to locaate any blog post addressing another update so I’m curious if there have been any addendums potentially lost within the comment sections? I’ve been very weary of what to post and/or reply to within the comments as it seems nearly every blog post since the much needed update to the site’s moderation policy has veered away from said policy (which seemed very clear and definitive as outlined in the link below). Please let your readers know how to interact with one another given any additional updates we may have missed. Cheers.
(https://econbrowser.com/archives/2021/02/update-to-the-comment-moderation-policy)
EConned: I am sorry that you are weary. In the spirit of free exchange, you can write whatever you want, as long as it is not misoygist/racist/homophobic. If you can’t deal with the occasional tangents, I urge you to look elsewhere for interaction.
That should’ve been “wary”… such is a problem with ‘smart’phones.
Thanks for the update to the moderation policy – it’s tough to keep track of your “policies”. No need for encouragement – I’m well aware of a plethora of sources providing lively, focused, and meaningful debate/discussion on economics throughout the web. I just try not to miss JDH’s posts and as such I occasionally read your various musings… if you’re offended by my seeking clarification of your unenforced stated “policies” I do apologize. Cheers!
EConned: To my knowledge, there has been only two posts on commenting policy over the last five years, so it’s not like there’s a welter of revisions.
econned, your complaints almost sound like rick stryker, but that cannot be so, because he is still too busy defending assault weapon murders in colorado. i am sure you are one who agrees that we should eliminate access to such weapons as a logical reduction in mass murders.
To look at all that China has accomplished, from exploring the moon and readying an international space station to raising rice and ducks and fish and crabs on what would otherwise be barren, saline land, to communities in which comfortable libraries are open all night … and to portray such a China, such a generous China, as ominous is beyond saddening:
https://news.cgtn.com/news/2021-03-23/Xi-Jinping-inspects-Shaxian-County-in-Fujian-Province-YS2YqEdq36/index.html
March 23, 2021
Forestry, healthcare, rural revitalization highlighted in Xi Jinping’s Fujian inspection
Forestry reform, reform of the medical and healthcare system, and rural revitalization were highlighted in Chinese President Xi Jinping’s second day of his inspection tour in east China’s Fujian Province on Tuesday.
Visiting the Shaxian District of Sanming City on Tuesday, Xi went to an assets and equity exchange to learn about local efforts to deepen reform of the forest tenure system and a hospital to learn about local reform of the medical and healthcare system.
He also went to a village to inspect work on promoting rural revitalization.
‘Lush mountains and lucid waters are valuable assets’ …
ltr,
I thought you might find this recent article interesting: https://www.thebalance.com/china-s-economic-growth-cause-pros-cons-future-3305478
China didn’t have much choice except to reform its policies and economy after Mao Zedong crippled the nation with his strict, radical communism. The newer hybrid system has seen some spectacular successes and some spectacular waste through the use of massive debt, command economy, limited capitalism, piracy, and low-paid or forced labor to subsidize state programs and policies.
The question of sustainability is addressed here: https://www.economist.com/finance-and-economics/2020/09/24/can-chinas-economic-miracle-continue
I wouldn’t characterize China’s economic growth as a type of Ponzi scheme sustained by cheap labor and forced low interest rates, but there appear to be some elements of that.
“China didn’t have much choice except to reform its policies and economy after Mao Zedong crippled the nation with his strict, radical communism.”
WTF? Mao rule from 1949 to 1976. Now if you think China’s per capita income in 1948 was terrific, then you are dumber than I gave you credit for. And the reason Mao was able to overthrow the previous government was it was not that great either.
Thanks for you input.
From the beginning, China’s leadership and that of Chinese Communist Party Chairman Mao Zedong, in particular, explored alternatives to these rigid central controls. The result of these explorations more often than not was economic disaster, leading to the 1959–1961 famine in which roughly thirty million people are believed to have died. The government and the leadership also pursued political goals, notably during the Cultural Revolution (1966–1976), that disrupted the economy and slowed economic growth.
https://www.oxfordbibliographies.com/view/document/obo-9780199920082/obo-9780199920082-0016.xml
China may have not been South Korea or Japan but since you were too stupid to read what I said – let me repeat myself:
‘Now if you think China’s per capita income in 1948 was terrific, then you are dumber than I gave you credit for. And the reason Mao was able to overthrow the previous government was it was not that great either.’
Maybe you forgot to read your own link (again) but it did not address either one of my points. Good God man – please pay attention to your preK teacher. Maybe one day little Brucie boy will learn to read.
“
This link has an actual answer to my question:
https://medium.com/@mattflorence/china-before-and-after-the-communist-revolution-f4aca7504641
China was an underdeveloped country which was divided between numerous warlords, tribes, and hereditary landlord dynasties which fought among each other for power and wealth. The average lifespan of a Chinese person was mid 40’s and hospitals were a luxury mostly reserved for the wealthy. Illiteracy was common and remote tribes practiced slavery. Some areas of China were so backwards and underdeveloped that people conducted headhunting rituals where they would kill people and put their heads in baskets outside their villages because they believed it would make the crops grow. Women were treated as property and were kept out of education, many were even bought and sold as slaves under the guise of ‘domestic servants’.
Gee Bruce – China before Mao sounds like your ideal nation! MAGA!
pgl, why don’t you take China’s economic situation back to the Ming dynasty.
I made no mention of Mao other that to say that the Chinese government had no choice but to move away from the direction he set. I presume because China, after the devastation of WWII didn’t have much of an economy, forgives everything that Mao did to further destroy the lives of the Chinese… in your mind.
You can cite all you want about the pre-Mao economy with complete disregard for WWII if that makes you feel better about your support for Mao and his policies. But even the CCP knew that his policies were a mistake despite their public reverence for him.
“I wouldn’t characterize China’s economic growth as a type of Ponzi scheme sustained by cheap labor and forced low interest rates, but there appear to be some elements of that.”
Another fact free bout of stupidity from Bruce “no relationship to Robert” Hall. China’s interest rates are actually a bit higher than ours are. And wages in China have grown substantially. I even put up a chart on this after one of your really stupid smears of Biden’s economic proposals. Good God man – can you please get just one single thing right in your pathetic life. Just one.
Our host has asked us many times to actually check reliable sources of data.
But Bruce Hall has consistently refused to do so. Look we should all be either embarrassed or insulted by his utter disdain for reliable data but since he has claimed falsely that China has grown through low interest rates, here is a reliable source for the interest rate on its 10-year government bond rate, which is 3.2%.
http://www.worldgovernmentbonds.com/bond-historical-data/china/10-years/
Let’s see if this incompetent fool can figure out what this rate is in places like the US, Australia, Japan, Germany, or the UK.
“a type of Ponzi scheme sustained by cheap labor”
Cheap labor is a Ponzi scheme from a rightwing troll? This is too rich to pass up. China has never imposed a policy of wage ceilings. In fact, its wages have grown considerably over the years. Everyone knows that except for the village idiot Bruce Hall.
But who does suppress wages? Try the US via monopsony power, which we have noted extensively here. Now if we raised the minimum wage, we could reverse this suppression of wages which Bruce Hall now calls a Ponzi scheme? But Bruce Hall opposes an increase in the minimum wage rate which means he is advocating an American Ponzi scheme.
Yes it is so much fun watching rightwing know nothings use terms that have not thought through!
I had assumed that this post by Menzie, was at least partly inspired by the women who had been murdered in the Atlanta mass shooting, and not by some narcissist thinking that a blog host’s postings were invariably inspired by himself. With perhaps the subtextual/undercurrent message that these women are human beings trying to make ends meet, and that therefor their method of “paying their mortgage/tuition off” etc, though maybe not “ideal” was worthy of inclusion in economics numbers. My efforts at mind reading of our gentleman bloghost have failed once again.
Moses Herzog: The post was inspired by Steven Kopits‘s declarative yet unsubstantiated by statistical analysis statements regarding the informal sector.
My views in the wake of the Atlanta mass shooting are still represented here.
Which was?
Steven Kopits: This comment where you quote a peer reviewed article, and then critique with your views.
@ Menzie
I’ll be honest with you, as I generally do my best to be. I probably lean less to the racist slant on this, than an emotionally/psychologically messed up adult, who, though I hate to use this term, fits the noun “loser” (or “aimless in life” if one prefers) and was looking for someone to blame for bad decisions and a lack of self-control. On the other hand, the “coincidental” timing right after donald trump’s term ended, happening in the South, and choice of target, it is super hard to argue racism wasn’t a factor. At this point, I view it as 75% mixed up young adult, and 25% racism, but whether this particular case in Atlanta is racist or not is arguably a side issue (though I feel that’s a poor way on my part to word it, “tangential” issue??) in that there can be no doubt in the drastic rise in violent racism towards Asian Americans in the last two years or more.
I should add, donald trump has done America “a favor” in that he has brought to the surface characteristics which have been there this entire time, so that we can see them more clearly in the mirror. Sort of like the old quote attributed to Warren Buffett: “You never know who’s swimming naked until the tide goes out.” MAGA and donald trump has kind of been like “the tide going out” in terms of unveiling many racists in America, and has shown us the preponderance of racists many Americans had assumed were not there.
WTF? The Korean American ladies were running businesses in Atlanta. The businesses were described as massage parlors not prostitute shops. Now I get it that sometimes certain sexual things go on in so called massage parlors. And I used to take cardio kick boxing classes in that part of Buckhead, which is a little shady. But who knows and who cares how these ladies ran their business. The little creep himself was hoping to open a massage parlor.
But no – it was clear to me that the shootings were not the reason why our host rightfully lashed out at the absurd self promotions of one Princeton Steve.
https://www.imf.org/en/Publications/WEO/weo-database/2020/October/weo-report?c=924,134,534,158,111,&s=GGXWDN_NGDP,GGXWDG_NGDP,&sy=2007&ey=2020&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1
October 15, 2020
General government gross debt as a percent of Gross Domestic Product for China, Germany, India, Japan and United States, 2007-2020
2020
China ( 62)
Germany ( 73)
India ( 89)
Japan ( 266)
United States ( 131)
I wouldn’t characterize China’s economic growth as a type of Ponzi scheme sustained by cheap labor and forced low interest rates, but…
[ Whether public or private debt, China has markedly low debt levels relative to GDP. Chinese debt is overwhelmingly in Yuan, and Chinese foreign currency reserves are importantly high and stable. Chinese interest rates reflect little general inflation and short-term sectoral inflation that policy makers work to correct, as with a recent rise in pork product prices that is just about resolved as domestic production has been completely reorganized and is rapidly increasing. China handled a sharp short-term increase in oil prices by setting a price ceiling in rural communities and ensuring enough supply was shifted for agricultural needs. So, interest rates are healthily low. As for labor costs or earnings, they have generally increased rapidly in line with rapidly increasing per capita growth. There has been an emphasis on increasing earnings in sectors such as rural or recently in logistics where earnings have been too limited.
As for growth, well, there are all sorts of articles about how unfortunate Three Gorges Dam has been, but the project has been as important as the Tennessee Valley Authority was for development of the American South. High-speed rail was supposed to be unfortunate, but has rather been astonishingly important. There is an entirely new city being added to Beijing just now, and ever so necessary. Building for the future is what Chinese development is about, and the intent is to build soundly, imaginatively and productively. ]
@ ltr
You wouldn’t bother to characterize many things happening in China right now, including the kidnapping of laowai, who have committed no crimes.
https://www.nytimes.com/2021/03/22/world/asia/china-michael-kovrig-spying-canada.html
Watch how kidnapping works for you with your business partners. Then Beijing will be required to have even more intellectual property hacking from western nations done through the internet, as joint ventures will be less apt to happen when Western expats are being kidnapped and imprisoned by secret Chinese courts. Short term you and Beijing may think it’s cute to imprison foreigners, longterm it’s apt to slow down your development. Most of your navy carriers are still an open joke. And we can go down the laundry list, but you get the point. That is why no one takes your false claims on international waters as anything more than the kid with toothpick arms telling neighborhood kids they can’t play touch football on the street in front of his home.
https://fred.stlouisfed.org/graph/?g=AkWq
August 4, 2014
Real per capita Gross Domestic Product for China, Germany, India, Japan and United States, 1977-2019
(Percent change)
https://fred.stlouisfed.org/graph/?g=AkWC
August 4, 2014
Real per capita Gross Domestic Product for China, Germany, India, Japan and United States, 1977-2019
(Indexed to 1977)
https://fred.stlouisfed.org/graph/?g=AXYG
August 4, 2014
Real per capita Gross Domestic Product for China, Turkey, Brazil and South Africa, 1977-2019
(Percent change)
https://fred.stlouisfed.org/graph/?g=AXYJ
August 4, 2014
Real per capita Gross Domestic Product for China, Turkey, Brazil and South Africa, 1977-2019
(Indexed to 1977)
I am going to add a bit more on what lies behind the argument as to why a highly unequal income distribution can lead to a larger share of a nation’s economy being unreported. This will involve some name dropping, which may set off some usual suspects here.
So a central issue is the matter of social capital, another one of those ideas that does not generally appear in elementary textbooks. While he did not invent it, the leading expositor of this concept is Harvard’s Robert D. Putnam, author of _Bowling Alone_. I was slow to check things here yesterday because I hosted him giving a virtual seminar at JMU yesterday afternoon for well over two hours, plus a lot of prep. He is also somebody I have known well personally for a long time. In his work he has shown an empirically close link between various measures of social capital and income equality. Thus highly unequal societies tend to have low levels of social capital, a major part of which is generalized trust, which is a major part of the argument I made above about people in such societies (like Argentina) not trusting their governments and not being willing to pay taxes, with this leading them to be more likely to go into the non-reported economy so as to avoid taxes.
Where Putnam first got this argument going was in his book from the early 90s, _Making Democracy Work: Civic Traditions in Modern Italy_, where a central theme was the effort to explain the much better socio-political-economic performance of northern Italy compared to southern Italy. In the end he claimed that it was largely a matter of major differences in social capital. And, of course, the Mezzogiorno has a much larger non-reported economy, with a lot of it involving outright illegal activity as with the mafia and its relatives dominating things so heavily.
He and others later on posed this as essentially involving a multiple equilibria situation societies can face, with this argument widely made in the sociology of crime literature. However, most of this did not involve formal mathematical models but rather a lot of handwaving and anecdotes. My coauthors and I became aware of a paper in 1997 in Comparative Economic Studies by Maria Minniti that applied a model due to Brian Arthure and some Russian mathematicians involving Polya urns to derive such multiple equilibria models, with this directed at criminal activity. I and my coauthors took this and ran with it further (the model did not appear in our 2000 paper due to editor not wanting it, came out later elsewhere). I will further brag and name drop in that I have recruited Brian to be a keynote speaker at a conference I am now organizing for July of the Society for Chaos Theory in Psychology and Life Sciences, of which I am president. It will be vurtual, and, yes, Brian is also a good friend fo mine from way back.
Let me give an intuitive picture of what is involved in these competing equilibria, which involves two stable ones separated by an unstable one. One is a high crime/unreported economy one (southern Italy) and one is a low crime/unreported economy one (northern italy). As father of three daughters I am aware of the social dynamics involved when a young man seeks the hand of a father’s daughter. In the low crime situation a underground economy potential groom will be viewed unfavorably by the father (and family) since he might well end up in jail and is viewed as immoral. But in the high crime situation he will be a good breadwinner for the daughter and grandchildren, might even be able to pay for them to go to Harvard. Some well-behaved school teacher will just be a sucker fool no proper father would want his daughter wasting time on. Again, note we are talking about society-wide situations that are atable equilibria.
A key part of all this has to do with enforcement costs. When there is little non-reported activity or criminal activity, it is relatively easy for enforcers to catch those breaking the law, whether just not reporting income to avoid taxes or more serious crimes. So this reinforces the fear of a father that a criminal possible son-in-law might end up in jail, as well as maybe be a really bad guy who would beat his daughter.
But when there is lots of non-reported or more generally criminal activity it is much harder to enforce the law and most get away with their conduct. The key in moving from the zone of attraction to the low crime equilibrium to the zone of attraction of the high criminal state involves a bifurcation associated with a rising percentage of the economy being non-reported or criminal.