Edgar L Feige
Edgar L. Feige is Professor of Economics Emeritus at the University of Wisconsin-Madison. A graduate of Columbia University (BA. 1958) and the University of Chicago (Ph.D, 1963) he has also taught at Yale University ; The University of Essex; Erasmus University and held the Cleveringa Chair at the University of Leyden. Feige has received numerous awards, including Ford Foundation Doctoral Dissertation Award, election as a Fellow at the Netherlands Institute for Advanced Study and twice received the Fulbright Scholar Award in Spain. In 1998-99 he received a third Fulbright Research Scholar Award serving as Visiting Research Scholar at the Institute for Public Finance, Zagreb and Visiting Research Scholar at the Croatian National Bank. In 2003 he served as a World Bank Visiting Scholar at the Center for Economic and Financial Research in Moscow and in 2004 was awarded a Rockefeller Foundation research residency at Bellagio.
Feige is the author of more than eighty publications in books and scholarly journals and has been called "the father of Underground Economy analysis" based on his thirty years of research on underground economies throughout the world. His books include The Demand for Liquid Assets, Prentice Hall, 1963; The Underground Economies: Tax Evasion and Information Distortion, Cambridge University Press, 1989 and Underground Economies in Transition: Unrecorded Activity, Tax Evasion, Corruption and Organized Crime, Ashgate, 1999. He has served as a consultant to the United States Treasury Department, Bureau of Engraving and Printing; the Financial Crimes Enforcement Network (FinCEN); the Agency for International Development; the Los Alamos National Laboratory; the Board of Governors of the Federal Reserve System; the Instituto Libertad y Democracia; the International Monetary Fund, the Croatian National Bank, the Central Bank of Albania, and served on the National Academy of Science Research Council Task Force on Economies in Transition. Recent research activities include work on the Underground Economies of Transition Countries; Unofficial (de facto) Dollarization; and Tax Reform for the 21st Century.
Feige is the author of more than eighty publications in books and scholarly journals and has been called "the father of Underground Economy analysis" based on his thirty years of research on underground economies throughout the world. His books include The Demand for Liquid Assets, Prentice Hall, 1963; The Underground Economies: Tax Evasion and Information Distortion, Cambridge University Press, 1989 and Underground Economies in Transition: Unrecorded Activity, Tax Evasion, Corruption and Organized Crime, Ashgate, 1999. He has served as a consultant to the United States Treasury Department, Bureau of Engraving and Printing; the Financial Crimes Enforcement Network (FinCEN); the Agency for International Development; the Los Alamos National Laboratory; the Board of Governors of the Federal Reserve System; the Instituto Libertad y Democracia; the International Monetary Fund, the Croatian National Bank, the Central Bank of Albania, and served on the National Academy of Science Research Council Task Force on Economies in Transition. Recent research activities include work on the Underground Economies of Transition Countries; Unofficial (de facto) Dollarization; and Tax Reform for the 21st Century.
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Forthcoming in Crime, Law and Social Change.
Keywords: Overseas currency, currency abroad, underground economy; unreported economy; tax gap; tax evasion; cash payments; monetary aggregates.
JEL Classifications: E26; H26; O17; E41; E52
Reference: Crime, Law and Social Change (2012) Vol.57 No.3 pp. 265-285
Citation: Feige, Edgar L. (1986) Sweden's Underground Economy. IUI Working Paper 161
Provided in Cooperation with:
Research Institute of Industrial Economics (IFN), Stockholm
The paper was presented at the International Symposium on Taxation held in Vancouver, British Columbia, Canada on August 27-29, 1980.
The appropriate citation for the publication is “Macroeconomics and the Unobserved Economy” in W. Block and Walker. M eds. Taxation: An International Perspective, The Fraser Institute, 1984
In Transforming Post-Communist Political Economies, J. Nelson, C. Tilly and L. Walker eds. National Academy Press , Washington D.C. 1997
decade and finds a disturbing lack of convergence between them, calling into question the reliability of GDP figures (which in
varying degrees now include non-transparent imputations for the “non-observed economy”) as well as the macro model estimates
of the unrecorded economy. A corollary of this finding is that substantive results from many studies examining the consequences of
the radical transition from planned to market economies must be viewed with considerable skepticism. Underground (unobserved,
non-observed, unrecorded) economic activities play a major role in transition economies. Evaluations of the success and failure
of the transition experience should be based on estimates of total economic activity (TEA), namely, recorded plus unrecorded
economic activity. We examine the conceptual and empirical relationships between new National Income and Product Accounts
(NIPA) methods for obtaining “exhaustive” measures of total economic activity and the two most popular macro-model approaches
(electric consumption and currency ratio models) for estimating the size and growth of the unrecorded sector. Our updated empirical
results detailing the size and trajectory of unrecorded activities obtained from different estimation methods reveal a disturbing lack
of convergence. Until these important differences are resolved, investigations of the relationship between economic reforms and
economic outcomes during the transition decade must be viewed with considerable caution. Given the shortcomings of conventional
macro model estimates of the underground economy and the lack of transparency and consistency of NOE estimates, it is high time
that the profession acknowledges how little we really know about underground economies and their causes and consequences.
The rapid growth of substitutes for cash, particularly debit and credit cards, has led economists to predict the advent of the “cashless society”. Yet cash holdings in most developed economies continue to grow and in the U.S., per capita currency holdings now amount to $3000. This paper revisits the long-standing controversy concerning the whereabouts of U.S. cash. Specifically, we employ a previously confidential data source on net shipments of U.S. currency abroad to re-estimate the fraction of U.S. currency held overseas. Contrary to the widely cited figure that 65 percent of U.S. currency is abroad, we now find that direct evidence supports the notion that overseas holdings amount to less than 25 percent.
Currently, the official figure for the percent of U.S. currency held abroad as published by the Federal Reserve in their Flow of Funds Accounts and by the Bureau of Economic Analysis in the U.S. Balance of Payments Accounts is 37 percent. This official figure is based on a proxy variable that is supposed to mimic the previously confidential data series maintained by the New York Federal Reserve. Judson (2012) made this series public enabling us to discover that the official estimates of currency abroad require downward revision to reflect accurately the newly released data on actual cash shipments abroad.
We also review the “indirect” approaches to estimating the fraction of currency overseas employed by Porter and Judson (1996) and Judson (2012). We find that these indirect methods to be innovative but deeply flawed due to violations of their restrictive assumptions. Moreover, sensitivity analysis reveals the estimates highly sensitive to alternative specifying assumptions.
The paper also examines the temporal pattern of overseas holdings of U.S. currency and finds that the observed decline in the demand for U.S cash abroad coincides with the growing popularity of the Euro and its growth as a second currency held outside the Euro area between 2003 and 2008. These new findings have significant implications for estimating the domestic money supply and other domestic monetary aggregates; for estimating the net benefits of seigniorage earnings of the Federal Reserve; for forecasting changes in output and prices and for estimating the amount of unreported income and tax evasion in the U.S.
We find that the percentage of U.S. currency currently held overseas is between 30-37 percent rather than the widely cited figure of 65 percent. This finding is based on the official Federal Reserve/Bureau of Economic Analysis data which is a proxy measure of the New York Federal Reserve’s (NYB) “confidential” data on wholesale currency shipments abroad. We recommend that the NYB data be aggregated so as to circumvent confidentiality concerns, and be made readily available to all researchers in order to shed greater light on the questions of how much U.S. currency is abroad and on the particular location of overseas U.S. dollars.
The newly revised official estimates of overseas currency holdings are employed to determine the Federal Reserve’s seigniorage earnings from 1964-2010, which have provided a $287 billion windfall for U.S. taxpayers. Overseas currency stock data are also used to derive estimates of the domestically held stock of currency as well as narrow and broad measures of domestic monetary aggregates. These domestic monetary aggregates are believed to be better predictors of future economic activity than traditional monetary aggregates and are tested to determine their ability to predict fluctuations in real output and prices.
Domestic cash holdings are finally used to estimate the size of the U.S. unreported economy as measured by the amount of income that is not properly reported to the IRS. By 2010, we estimate that legal and illegal source unreported income” is $1.9 - $2.4 trillion, implying a “tax gap” in the range of $400- $540 billion. Currently, we estimate that 18-23 percent of total reportable income is not properly reported to the IRS.
Reference: Crime, Law and Social Change, (2012) Vol. 57 No. 3 pp.239-263
Porter and Judson (1996) employing “indirect” methods claimed that “between 55 percent and 70 percent of the U.S. currency stock is currently held outside the country”, whereas the “official” Federal Reserve figure published in it’s Flow of Funds (FOF) accounts puts the estimate at 37 percent abroad at the end of 2010. The Federal Reserve obtains its published estimates using a proxy for a confidential data series collected by the New York Federal Reserve Bank of bulk shipments of U.S. currency by wholesale currency dealers into and out of the U.S. Judson (2012) recently published these confidential aggregate shipment data, enabling a reexamination of the veracity of the “official” Federal Reserve Flow of Funds estimates of currency held abroad. We find that the FOF published proxy tracks the previously confidential shipment data closely between 1988 and 2001. Thereafter, the proxy begins to overstate the series it is supposed to mimic. Taking account of the direct net bulk currency shipments abroad reported to the New York Fed as well as additional channels by which currency can flow into or out of the U.S such as immigrant remittances and travel, we find that by 2012 roughly 25 percent of U.S. currency is abroad. We strongly urge the Federal Reserve to come to some agreement concerning the amount of currency held abroad so that the current discrepancies between their published data, their internal data and their public pronouncements can finally be put to rest.