EDITORIAL A DOWNWARD SPIRAL L.A. SUFFERS AS ITS MASSIVE SHADOW ECONOMY BOOMS.

LOS Angeles leaders often remark that ours is a world-class city, among the ranks of Paris, London and Tokyo.

A better comparison might be Calcutta, India, or Rio de Janeiro, Brazil.

Economically, much of L.A. more closely resembles the Third World than anywhere else. In a city with a languishing formal economy and the departure of all its major banks and Fortune 500 companies, the underground economy flourishes, thereby denying local governments much-needed revenue and depriving workers of decent, high-paying jobs.

And the problem's only getting worse.

A new study co-authored by David Flaming, president of the Economic Roundtable, finds that as many as 1.5 million of the workers in L.A. County are paid in cash, under the table. Figures from Joy Chen in Mayor James Hahn's office confirm the study's findings.

With 28 percent of the county work force paid in cash, the result is a roughly $1.1 billion shortfall in payments to Social Security, workers' compensation and other programs.

Then there are the untold millions - if not billions - lost on tax receipts.

Yet while underground workers don't pay taxes, they continue to draw upon public services, send their children to public schools, drive the region's roads and use its public transit. The result is a gross public-sector imbalance, with more people taking out than putting in, and an ever-worsening quality of public services.

Economically, the entire region suffers. Small, law-abiding businesses are deterred from opening up shop in Los Angeles for fear that they won't be able to compete with their illicit counterparts that can save a bundle in taxes and wages. Major corporations that could bring thousands of quality high-paying jobs are scared off by a culture rampant with illegality.

When shadow businesses infest the regional economy, local workers, especially those with little or no skills, have no choice but to collect sub-par wages, without benefits, under the table. The region, in turn, becomes a magnet for those who might not be able to find work elsewhere, thus luring in yet more illicit businesses in search of cheap labor.

Nationally, the underground economy is shrinking. Only in L.A. is it on the rise.

The root causes are many. Chief among them is a busted federal immigration policy, and that attracts an inordinate number of unskilled, uneducated and easily exploited workers into Southern California.

Then there's L.A.'s dismal schools, which leave too many of their graduates unqualified for anything but low-paying work.

Finally, there's the city's convoluted corporate-tax system, which makes compliance with the law all but impossible for many small businesses.

It also doesn't help that the state, which is responsible for combating the underground economy and enforcing compliance with labor and tax laws, hasn't been fulfilling its legal obligations.

L.A.'s booming underground economy and its ailing above-ground counterpart are testament to the failures of government at many levels. They are a reminder that such failures have real victims, whether it's underpaid laborers in downtown sweatshops or taxpayers who consistently fail to get their tax dollars' worth.

This is a genuine crisis.

The more the region's work force goes underground, the closer its economy gets to six-feet under.