Italy and the United Kingdom have made headlines in recent weeks by announcing that from now on, they will count illegal drug sales and prostitution as part of their countries’ Gross Domestic Product. If the U.S. did the same, the economy would “grow” by $114 billion.
The decision has been a gift to newspaper headline writers, but so long as we are going to define GDP as the total value of goods and services purchased from producers in a given year – and we do – it’s hard to make an argument that illegal activities should not be counted right alongside legal businesses. Drugs are goods, and prostitutes offer, well, services. We may not like the impact the businesses have on either the provider or the consumer, but in purely economic terms, it’s a transaction that has economic consequences.
In Italy, the move has been criticized as a political stunt that will artificially inflate GDP and allow the cash-strapped government to present its spending and deficit as representing a smaller share of national output than it would otherwise. In the UK, the decision has been met with a collective yawn. But both are actually responding to a European Union decision to be more honest about measuring total economic activity.
So, what would the United States’ GDP look like if drugs and prostitution were counted? It’s hard to say for sure, but the UK’s Office for National Statistics offers a starting point. The agency in charge of statistical analysis of the British economy determined that drugs and prostitution account for about 0.7 percent of Britain’s economy.
Whether U.S. citizens’ appetites for hookers and drugs is greater or less than Brits’ is unclear, but if for argument’s sake we accept that we’re in the same ballpark, the 0.7 percent estimate gives us a rough estimate.
To put this in perspective, if prostitution and illegal drug sales actually do make up 0.7 percent of U.S. GDP, then according to the Commerce Department, that would put those two illegal industries on par with the motion picture and recording industries in terms of total contribution to the economy. It would also mean that on an individual basis, they add more than coal mining, air transportation, and other significant sectors to U.S economic output.
According to the Commerce Department’s Bureau of Economic Analysis, the U.S. GDP in 2012 was $16.25 trillion dollars. If we assume the contribution of drugs and prostitution were the same in the U.S. as U.K. statisticians found, that means they contributed about $114 billion to the economy in 2012 alone.
The number may seem large, but research suggests it’s not far-fetched. The Urban Institute earlier this year published a study that found that prostitution alone accounted for as much as $290 million in economic activity across just eight U.S. cities (only two of which are in the top 20 U.S. cities by population.)
Stepping away from the headline-grabbing question of sex and drugs’ contribution to economic activity, the fact is that those two activities are only a small portion of the off-the-books economy in the U.S. or, most likely, any other country.
From nannies and housekeepers paid off the books to teenagers cutting grass, a significant amount of economic activity in the U.S. is not subject to any real measurement by the government.
A study published in 2011 by Richard Cebula and Edgar Feige found that “18-19 percent of total reportable income is not properly reported to the IRS.” That translates, in terms of the BEA’s measurement of the economy in 2012, into about $3 trillion in unmeasured economic activity.
While boosting GDP numbers through the addition of unreported activity wouldn’t have a real impact on the economy itself, more inclusive measurements suggest that the share of GDP dedicated to government spending is somewhat less than conventional measures show.
Cebula and Feige estimate the total unmeasured activity in the United States in 2011 alone cost the government nearly $500 billion in unpaid taxes.
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