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Today's Economic Mystery

NEW YORK ( TheStreet) -- Today's economy is a mystery to investors.

We're told unemployment is almost 8% and that growth is anemic. It's so bad the Fed keeps interest rates at zero and monetary stimulus flooding in.

Yet despite the sequester taking billions out of the economy, and despite the payroll tax hike taking out billions more, the stock market keeps rising, as do home prices and consumer confidence.

I had thought last month that the impact of austerity and of economic growth would cancel one another out, leaving us with an economic nothingburger. But what if I'm wrong because I don't have all the data? What if we're all wrong?

According to Edgar Feige, a professor emeritus at the University of Wisconsin, we are all wrong. He estimates that $2 trillion of our economic activity is now "underground," in what he calls the "gray economy," costing the government $500 billion in taxes each year. The official size of the economy is $15.7 trillion. According to Feige, it's closer to $18 trillion.

At Feige has proposed what he calls "The Automated Payment Transaction Tax" to capture this activity, and he says that if 0.35% of all electronic transactions went to the government, all other taxes could be eliminated.

According to The Transaction Tax, which advocates for Feige's proposal, this would mean that each time you pulled $100 out of an ATM, 35 cents would go to the government. It would make Visa (V - Get Report) and MasterCard (MC - Get Report) into our tax collectors. But you would have no more income tax, no more corporate taxes, no more sales taxes or property taxes. And no more forms to fill out.

Such a system might help companies repatriate some of the trillions of dollars in assets now thought to reside in tax havens like the Cayman Islands -- all without the necessity of an invasion, which I fantasized about last year.

The point is, tax avoidance doesn't just hurt the tax man. It hurts investors and policymakers, denying us the data we need to know what's going on in the real economy. Bernard Baumohl of the Economic Outlook Group told James Surowiecki of The New Yorker recently that retail sales are currently where they should be with unemployment at 5%-6%, not 7%-8%. The difference is the gray economy.
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