Sex, Drugs, and GDP

Britain is counting prostitution and narcotics revenues as part of its GDP. What's up with that? And is it an idea the U.S. should follow?

Jun 7, 2014 at 12:15PM

The United Kingdom is making news his week as the media picks up on a story coming straight out of England (and Italy). Turns out, both countries have decided to begin counting illegal activities such as drug abuse and prostitution as part of their gross domestic product.

Mary Jane. Coming soon to a Bureau of Economic Analysis report near you? Photo: Wikimedia Commons.

Giving in to peer pressure
According to news reports, the countries have made this seemingly prurient move for the most banal of reasons: to better align their economic reports with those of other European Union countries, where these activities are legal, and already counted as part of GDP.

Prostitution is legal in the Netherlands. Certain listed narcotics are also legal Dutch treats, and both therefore get reported as part of the nation's GDP. Meanwhile, the countries of Estonia, Austria, Slovenia, Finland, Sweden, and Norway, where prostitution and drug use are still illegal, do nonetheless try to estimate the value of these illicit activities and count them toward GDP.

So really, all the British are trying to do here is "fit in." In counting sex and drugs in GDP, they're bowing to peer pressure.

The benefits of counting green money from black markets
There may, however, be a fringe benefit to counting these fringe activities in GDP. The UK estimates the value of these activities to its economy at $16.7 billion annually, amounting to a 0.7 boost to its total GDP. Italy, which is making a similar move, expects to "grow" its economy nearly twice as much -- 1.3 percentage points  -- by putting sex and drugs in the mix.

Why is this important? Under EU law, Article 126(2) of the Treaty on the Functioning of the European Union urges member states to keep their annual budget deficits under three percent of their annual GDP. Total government debt is not supposed to exceed 60% of GDP.

So when the UK uses illicit activities to up its estimate of the size of its GDP -- it actually increases its ability to legally overspend its budget, and to take on more debt, and the same is true for Italy.

Of course, it's hard to be certain about the accuracy of the UK and Italian estimates. Black markets are, by their very nature, opaque and hard to quantify. But we do have some data to work with, and it suggests that the British and Italians may actually be leaving some money on the table.

Black Markets researcher, whose figures have been quoted as authoritative by such mainstream media outlets as Bloomberg NewsNational Geographic, and The Atlantic Monthly, estimates that drug trafficking alone is a $28 billion market in the UK. Overall, Havocscope puts the size of the British black market at $62 billion. This includes not just sex and drugs, but such other illicit activities such as counterfeiting, cigarette smuggling, and human trafficking. If accurate, this would make Britain's black market the 9th largest in the world -- and correspondingly would make the country entitled to run even bigger budget deficits than its government now lays claim to.

Italy's black market is estimated at $111 billion in value, the world's fifth biggest. And America's, estimated at $625 billion in total, is the richest black market in the world. It includes $14.6 billion worth of prostitution revenues, $215 billion from drug trafficking, and $225 billion from counterfeiting of goods for sale (our biggest black market).

What it means for the red, white, and blue
What would happen if the U.S. decided to follow the example of its friends across the sea, and count all of these ill-gotten gains as part of our own GDP?

Well, for one thing, the U.S. economy would instantly get bigger. With America's GDP estimated at $16.8 trillion in 2013, a $625 billion black market boost to GDP would add 3.7%. That would look awfully nice on the Commerce Department's next Bureau of Economic Analysis report.

Even better would be if we could find a way to tax this market. Taxed at the top U.S. corporate income rate of 35% -- which seems appropriate, because clearly, these underground industries are "big business" -- America's black market could generate $219 billion in annual tax revenue.

That's 7.5% of the U.S. budget. It's more than the annual budgets of the Departments of Education and of Labor -- plus NASA, the Environmental Protection Agency, and the Commerce Department -- combined.

And in fact, with $2.6 billion in legal, taxable marijuana sales (both "medical" and not) expected to be conducted in the U.S. this year, this process may already have begun.

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Rich Smith still insists that "he didn't inhale." And he's not buying the microcap marijuana penny stocks, either. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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