Corruption: How The Underground Economy Exists Within Our Legal Economy

The term 'The Underground Economy' or as we commonly know it 'The Black Market' can trace its roots all the way back to after World War 1. However, it can also be argued that the black market officially existed the moment currency or goods were exchanged for illicit activities, i.e. the world oldest profession.

The official definition according to Britannica’s Encyclopedia (2019):

The underground economy, also called the shadow economy, transaction of goods or services not reported to the government and therefore beyond the reach of tax collectors and regulators. The term may refer either to illegal activities or to ordinarily legal activities performed without the securing of required licenses and payment of taxes. Unfortunately, things are not so easily defined in today's modern economy. What has emerged today is a blurred line between the legal economy and our government and a set of interrelated, mutually supporting black markets. According to Naylor (2004), “No longer isolated, these black markets are institutionally embedded in the legal economy”. If the rules are put in place that the production or selling of certain goods or providing certain services are prohibited by law, then why are some of our biggest companies and even our government, allowed to conduct these acts in plain sight? Let's briefly examine the Boeing scandal and a few other scandals as it correlates to the underground economy and how they are intertwined.

In 2010, there were only two companies that held the market in building planes used for domestic and intra-European flights: Airbus and Boeing. Trying to get a leg up on the competition, Airbus came out with a fuel-efficient model, the A320neo. They were able to use the existing A320 model and put a bigger more fuel-efficient engine on it. Fear of losing customers and contracts to the more fuel-efficient competitor, Boeing engineers came out with the 737 Max 8. Due to how low the 737 sat to the ground, the engineers had to mount the bigger engine more forward. This changed how the plane flew in the air fundamentally. To compensate for the new position of the engine, the engineers installed a software upgrade called Maneuvering Characteristic Augmentation System, or MCAS.

In 2019, after the investigation into the recent plane crashes of Lion Air Flight 610 in October and Ethiopian Airlines 302 in March, where a combined 346 people were killed, information came to light that MCAS was to blame. The investigation also uncovered that Boeing had MCAS installed on the 737 Max planes without notifying or training their pilots. Instead of building a new plane that could use the bigger engine, Boeing decided to go with the cost-effective route. Boeing knew building a new plane would be too costly and a new certification process would take too long. Plus, the training of pilots on the new equipment would be extensive and expensive. The eagerness to get the 737 Max 8 plane out to market put pressure on Boeing. This caused reports to be hurried and in some cases fudged. Executives were overlooking fundamental flaws with the plane and the training required to fly it. The FAA seems to have accommodated this reckless behavior, helping to push the plane through the certification process. Managers signed off on uncompleted reviews and made decisions while being concerned with timetables, rather than by the agency’s technical experts.

The lack of protocol by the regulatory body seems to be political in nature. The idea of a major military contractor for the U.S. Government and one of the biggest lobbyists in Washington D.C. losing to its European competition just could not happen. So FAA delegated crucial safety reviews to Boeing, allowing them to push the project through. Politics and greed superseded safety and common sense. Each year Transparency International releases a report on 180 countries and territories by their perceived levels of corruption. This index is reached by experts and business-people who use a scale of 0 to 100, where 0 is highly corrupt and 100 is very clean. In 2018, the United States had a score of 71 out of 100 and was ranked 22nd out of 180. Not exactly perfect but better than 158 other countries. What this score does indicate, however, is that even though the United States is considered one of the most industrialized nations in the world, it faces the same governance and corruption challenges as everyone else. Our political corruption has simply adapted to modern times and become more sophisticated.

A former director of governance at the World Bank, Kaufmann (2009), states the following about corruption:

“One neglected dimension of political corruption is 'state capture,' or just 'capture.' In this scenario, powerful companies (or individuals) bend the regulatory, policy and legal institutions of the nation for their private benefit. This is typically done through high-level bribery, lobbying or influence peddling.” There are too many examples of 'state capture' corruption in the United States. The Boeing scandal presented above, the early 2000s Enron Scandal, and the sub-prime mortgage crisis of 2008, also known as the Great Recession. There are numerous reports on how the 2008 recession happened but many agree the underlying cause was banks relied too much on derivatives. To keep the steady supply of those derivative flowing, the banks sold too many bad mortgages. This led to the 2008 stock market crash and eventually the $787 billion stimulus package. Each of these scandals had complex issues, however, they all have the same thing in common: black-and-white rules of accounting were fudged, to which the end result was more money taken out than there legitimately should have been. After cooking the books, those involved tried to hide their deceitful work by using complex obscure loopholes in hopes that the populace would not notice and for the most part, it worked. This is the underground economy in a nutshell. The black market is permeated throughout society. We live in a capitalist economy, that produces what we want or what we think we want. As Naylor (2004) put it, 'Never in history has there been a black market defeated from the supply side. From Prohibition to prostitution, from gambling to recreational drugs, the story is the same. Supply-side controls act'. As long as there is a supply-side, there will always be some entity, whether an individual or a government, willing to take advantage. The 'Underground Economy' will, therefore, always exist when there is someone or something willing to exploit for personal gain.

References

1. Amadeo, K. (2019, February 11). How Derivatives Could Trigger Another Financial Crisis. Retrieved from https://www.thebalance.com/role-of-derivatives-in-creating-mortgage- crisis-3970477
2. Baker, S. (2019, March 28). FAA boss says it let Boeing partly self-regulate the software thought to be behind both fatal 737 Max crashes. Retrieved from https://www.businessinsider.com/faa-let-boeing-self-regulate-software-believed-737- max-crashes-2019-3
3. Encyclopedia. (2019). Retrieved from https://www.encyclopedia.com/social-sciences-and- law/law/crime-and-law-enforcement/black-market
4. Hall, A. (2019, January 08). Underground economy. Retrieved from https://www.britannica.com/topic/underground-economy
5. Kaufmann, D. (2012, July 11). Corruption And The Global Financial Crisis. Retrieved from https://www.forbes.com/2009/01/27/corruption-financial-crisis-business- corruption09_0127corruption.html#6edfc7c961b3
6. Naylor, R. T. (2004). Wages of Crime: Black Markets, Illegal Finance, and the Underworld Economy. Montréal: McGill-Queens University Press.
7. Transparency International. (2018). Corruption Perceptions Index 2018. Retrieved from https://www.transparency.org/cpi2018