Hurricane Katrina has had a direct impact on members of the Motley Fool family and there are a number of heavy hearts today at Fool HQ. Our thoughts and prayers go out to all of the survivors who are recovering in the aftermath of the storm.
Leaving that personal note aside, we are a business dedicated to investing, and that requires an understanding of some basic economic concepts. With that in mind, I'd like to tackle an economic fallacy that has been cropping up in some of the hurricane coverage.
The argument that I saw today in the Charlotte Observer -- and that you're likely to see or hear as well -- goes something like this: Disasters like Hurricane Katrina stimulate the economy as people make purchases to replace what they have lost. No doubt, many trips will be made to Home Depot
At first glance, it might appear that this spending boosts the economy, but a closer look reveals that the benefits just aren't there. In the book Economics in One Lesson, Henry Hazlitt dispels what he terms the "broken window fallacy" with a very simple example of a boy who breaks a window (more on the book can be found here and here). The window then needs to be replaced, and much like in my example above, there are certain parties who do benefit from the man paying to have his window replaced.
The point that is missed is that before Hurricane Katrina made landfall -- or before the window was broken in Hazlitt's example -- all of those folks had houses that were intact, cars, and savings that they had planned to spend on other things. In Hazlitt's book, the man with the broken window has to take money that was earmarked for a suit and spend it to replace the window. Instead of having a suit and a window, he then has only a window.
The story is much the same for the folks on the Gulf coast. Insurance may cover some of the damages, but the out-of-pocket expenses will still be high and many a planned purchase and vacation will be skipped to replace basic necessities. Money that might have gone to purchase a new shirt or pair of jeans at TheGap
In some way, all of the companies that would have received income from those purchases will now suffer. So as you watch all the spending that occurs in the aftermath of Katrina and events like it, don't forget about the spending that won't happen.