Tuesday, February 2, 2010

Does buying local help recover disaster areas?

A friend who visited New Orleans recently said there is a strong "buy local" movement there, with the added kick that it will help the city recover from the damages of Hurricane Katrina.

I freely admit it took me a little time to sort out the fallacy, but I see no reason why recovering from a disaster would change the economic principals here. Since the buy local philosophy doesn't improve a stable economy, why would it help one with a major setback?

There is no such thing as "keeping the money in the community." Money is just a means of exchange. It's important to look not only at the money the merchants are taking in, but also the money the customers are spending. If the people of New Orleans buy local goods at a higher price, they will be poorer than if they had brought from afar.

Why would a disaster change anything? There are other ways to recover, such as borrowing money from a bank.

But there is a silver lining here. As long as consumers outside of the disaster area feel emboldened to help New Orleans recover, city merchants can use that good will to their own advantage. Slapping a "Support New Orleans" label on a product from the area can attract charitable customers from outside the city. This will give an aesthetic advantage to New Orleans products.

However, once they get that money, businesses should resist the urge to buy exclusively from one another. Instead, they should buy whatever is the best deal for their own business. If this means buying from a local person, all the better. If the best deal is from a different state or country, then they should feel no shame in taking it.

This means resources will come into the area at a normal rate, but bring in more money when they leave the area. New Orleans businesses will build up money, but see no increase in their expenses.

So back to the original question, an internal "buy local" movement will not help New Orleans recover, but a "buy New Orleans" movement aimed at everyone outside the city will.

By the same token, the people of Haiti can help draw wealth to their area if they use a "Buy Haitian" advertising scheme to sell goods abroad. This may come as a shock to the people who are offended that cruise ships still want to stop there. Perhaps they believe it will offend the earthquake gods if wealthy tourists spend their money at Haitian resorts or buy trinkets from Haitian artisans.

Please note, there is no silver lining from the damages in either New Orleans or Haiti. Yes, Gross Domestic Product rises after a disaster because things have to be built to replace demolished goods. However, this is not a stimulation of the economy.

As Frédéric Bastiat wrote, it wouldn't make sense to burn down Paris to stimulate jobs in rebuilding houses. In his parable of the broken window, he argued that while a broken shop window would mean more work for the glass maker, that positive effect comes at the expense of the shop owner. He could have spent his money at the tailors instead. The economic stimulus looks the same - a business owner in town takes the shop owners money - but instead of the shop owner possessing a new suit, he had to spend his money on getting his window replaced.

I don't hear anyone saying Hurricane Katrina or the earthquakes were good for those economies.

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