Hurricanes Helene and Milton ripped through the southeastern U.S., leaving destruction in their wake. They also gave new life to at least two economic fallacies. In this episode of the Money Metals Midweek Memo, host Mike Maharrey explains why anti-price gouging laws don't help in a disaster situation and why the money spent cleaning up isn't some kind of stimulative economic boom.
Mike opens the show by talking a little bit about his experience with Hurricane Helene and his preparations for Hurricane Milton.
"I should note here that I’m recording this ahead of time for next week. I’m supposed to go on vacation. We’ll see how that works. So, by the time you actually hear this, Milton will be history. I’m hoping it’s not as bad as they’re projecting. At any rate, I didn’t want to leave you fine people with nothing to listen to the week I’m gone, so I needed to come up with something that would be evergreen and still make sense in a couple of weeks. So, I thought I would use these dumb hurricanes as an opportunity to teach some important economic lessons."
Mike focuses on two economic fallacies that tend to pop up during disasters.
The first is that price gouging laws that go into effect during a state of emergency help.
As Mike explains -- they don't.
"It sounds like a good thing. Your benevolent overlords in Tallahassee are protecting you. But the policy is dumb. If you want to be a little more generous, it’s really bad economic policy. And in the big scheme of things, it's hurting you, not helping."
Mike concedes that "price gouging" is pretty sleazy.
"I mean, I get it. The idea of greedy people profiting from people’s pain during a storm is pretty cringey. And I don’t deny that some price gougers may well be greedy. But that doesn’t mean prices shouldn’t be allowed to go up during an emergency. It is simultaneously possible to think raising prices during a storm is sleazy and that it shouldn’t be stopped."
Mike demonstrates the unseen consequences of price gouging laws with an imaginary scenario where it is going to rain for two months straight. You might think banning price gouging on umbrellas would be helpful. As it turns out, it actually makes the situation worse.
Ultimately, you need price signals to control supply and demand. When knuckleheaded politicians interfere, bad things happen.
"As I’ve already said, economic reality doesn’t care about your feelings. Nevertheless, most policies in this world are driven by feelings. Feelz are the crown jewel of politics. So, we cheer for the knucklehead politician and gripe when the shelves empty before a storm. The problem is you can see the results of price gouging. You feel the pain of the higher prices. It’s easy to finger-point at the greedy guy. Of course, you may also feel the pain of shortages. You see the empty shelves. But virtually nobody understands that the anti-price gouging policy caused it. The cause and effect are hidden."
That leads to a second economic fallacy - the notion that storm cleanup will create an economic boom.
The notion that disasters have a silver lining stems from the “broken window fallacy.” Mike explains this fallacy and why it's so prevalent through the writing of economist Frédéric Bastiat. The problem is people see the money spent on repairs, but they don't see the money that isn't spent because so much went toward storm cleanup.
Mike sums it up, saying, "A good economist always tries to account for the unseen. But most people aren’t good economists — and that includes a lot of economists."
"It should be clear breaking a window does not make society better off. It becomes even more clear when you magnify the destruction to the level produced by a Hurricane. Yes, billions will be spent to repair and clean up. Roofers, builders, and others will make a lot of money. But you have to stop and consider the cost to others. I doubt anybody in Florida, North Carolina, and other places impacted by Helene will claim they’re better off because their house filled up with water. And just stop and imagine what could have been done with those billions had the hurricane never materialized. It should be clear breaking a window does not make society better off. It becomes even more clear when you magnify the destruction to the level produced by a Hurricane."
But as Mike points out, these economic realities don't play well in our political world. Economists today mostly serve as court advisors propping up the regime.
"This is why you have to take care of your own financial house and take steps to protect yourself from the unseen consequences of government policies. One way you can do that is to hold on to real money – gold and silver."
About the Author
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.