By Jo Craven McGinty
When the U.S. calculates its gross domestic product, it only
includes things that are legal. But if the wares of drug dealers,
pimps, bookies and other black-market denizens were included, the
GDP would expand by more than 1%, according to one estimate.
It would also align our national accounts more closely with
those of the European Union, whose members already incorporate some
illegal activities in their tallies.
Countries all over the world measure the size and structure of
their economies based on international standards published by the
United Nations and known as the System of National Accounts, or
SNA.
"It's the set of recommendations every country uses across the
world," said James Tebrake, assistant director of the statistics
department of the International Monetary Fund. "The key thing is we
all do it the same way so we can compare the U.S. economy to the
Canadian economy to the European economy."
GDP, one of several metrics in the SNA, measures the total value
of the final goods and services produced within a country in a
year. It's the main measure of economic output, and it typically
includes things like clothing, food and housing.
But the SNA has long recommended including illegal activities as
well because, it argues, omitting them distorts a nation's GDP,
undermines its monetary policies and upsets the uniformity of the
accounts.
"If France does not include illegal activities, and Germany
does, the German economy will be bigger," Mr. Tebrake said.
In the past, countries resisted accounting for illegal goods and
services because of the difficulty of assessing their value and
because they assumed the activity might not be significant.
But Canada has found that accounting for illicit sales of
cannabis alone would add around 0.4% to its GDP. The U.K. has
estimated that prostitution and illegal drugs represent around 0.4%
of its GDP. And in the U.S., Rachel Soloveichik, a research
economist with the Bureau of Economic Analysis, has estimated that
in 2017, illegal activities would have added more than 1% to the
GDP. She presented her analysis last month at the IMF Statistical
Forum.
The EU began accounting for illegal activities in its national
accounts about five years ago.
"The standard is not really new," Mr. Tebrake said. "What is new
is that more and more countries have decided, yes, it's time to put
it into our national accounts."
The EU has focused on drugs and prostitution, but Dr.
Soloveichik explored how four illegal activities -- drugs,
prostitution, gambling and theft from businesses -- would affect
the U.S. accounts.
To estimate the value of illicit activities, she used other data
as proxies, including fraud and embezzlement arrests as a proxy for
the number of people stealing cash and arrests of female
prostitutes for the number of illegal prostitutes.
According to her estimates, illegal drugs would have added $111
billion to the U.S. GDP in 2017; illegal prostitution would have
added $10 billion; illegal gambling would have added $4 billion;
and theft from businesses would have added $109 billion.
As a percentage, the amount would represent a larger portion of
the GDP than agriculture, forestry, fishing and hunting. But
including the value of illicit goods and services in the national
accounts wouldn't necessarily change economists' view of the
strength of the economy.
"If it grows at the same rate, it doesn't matter," Mr. Tebrake
said. "But if the illegal economy were growing at, say, 1% faster
than everything else, that's a dynamic we might want to pick
up."
Such a shift might signal that government policies or
regulations need to be adjusted.
In the U.S., Dr. Soloveichik found that real illegal output did
grow faster than overall GDP during the 1970s and after 2008 -- but
she concluded the growth ameliorated the economic slowdowns that
occurred in those periods.
Dr. Soloveichik worked on her analysis for two years but
considers it a first cut, and for now, the U.S. isn't ready to
include the illegal activities she documented in its national
accounts.
"We have to explore if this is something we could possibly do
going forward," a spokeswoman for the BEA said.
Until then, illegal sex, drugs, gambling and theft will remain
off the books.
Write to Jo Craven McGinty at Jo.McGinty@wsj.com
(END) Dow Jones Newswires
December 06, 2019 05:44 ET (10:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.