Beneath L.A.’s economy

LIKE THE CITY ITSELF, THE economy of Los Angeles is marked by informality. And it’s getting more casual. The number of recorded workers in legitimate businesses in Los Angeles is lower now than in 1990. More people are working, but not in the formal economy.

That statistic comes from Dan Flaming, president of the Economic Roundtable, which was the partner of the Milken Institute in a recently completed project that studied the L.A. economy. Part of what the study shows is that the region’s growth increasingly depends on small businesses, immigrant labor and a growing sector that operates outside government regulation and taxation. Government can help those businesses, both aboveground and below, grow in practical ways, from more targeted business expansion loans to better-focused worker training.

The study, conducted at the request of the city, also says government must act to bring so-called informal businesses -- estimated to employ 16% of the city’s workers (far above national figures) -- into compliance with tax, wage and safety laws. Otherwise, honest businesses will face unfair competition, the burden on public health systems will increase, and worker mistreatment will continue.

The study, titled the Los Angeles Economy Project, has incremental ideas on how to do that, but its timing is unfortunate. It was ordered up by former Mayor James K. Hahn. By the time the institute and the Economic Roundtable had finished, Antonio Villaraigosa was in office.

The study was released this week not by the mayor but by Councilman Eric Garcetti. He is enthusiastic about it, and hope remains that it will be mined for its best ideas. Among them are providing expansion capital to small businesses (under 500 employees) without risking tens of millions of taxpayer dollars. A small amount of public funds could help guarantee loans overseen by foundations and other groups experienced in helping small and often immigrant-owned businesses that lack credit histories.

Flexible loans could also be a carrot dangled in front of economic outlaws, luring them into the aboveground economy. Flaming noted that outlaw businesses operate in cash as much as possible, offer no compensation to injured employees and often pay below-minimum wage. “Bare-knuckles capitalism,” he calls it. Businesses that employ people off the books also are unlikely to collect and pay sales taxes.

Aside from the maids, nannies and gardeners employed by individuals, such businesses could include small restaurants, apparel manufacturers, carwashes, beauty parlors and so on. Individually, these businesses may not seem like much, but as Flaming notes, the number of workers in legitimate businesses in Los Angeles has fallen in the last 15 years.

Yes, much of this problem is tied to illegal immigration and economic desperation. Yes, dealing with the status of immigrants requires a federal solution. Despite that roadblock, the mayor and the governor should use their bully pulpits to make the social harm of the underground economy clear.

There should be incentives to go legit, beyond access to capital. Businesses could be offered amnesty for past transgressions. Business education programs could offer both strategic advice and help in obtaining capital for those willing to comply. If such efforts were even half successful, public attitudes about the underground economy could shift, the city and county would be on a sounder financial footing and Los Angeles would be a better city, even if lunch might cost a dollar more.