Don't overlook the less obvious

By DAVID MOON, Moon Capital Management, LLC
June 26, 2011

My car is in the shop being repaired for hail damage. I'm hoping that the body-shop employees are better at repairs than they are macroeconomic theory.

While describing the massive amount of automobile work that resulted from the April hailstorm in Knoxville, one of the shop employees suggested that a nationwide hail storm is the type of economic stimulus this country needs. It would put millions of people to work – plus offer the added benefit of getting everyone's door dings fixed, thereby extending the life of their cars.

I responded that if he believed that, he should propose a local ordinance contracting unemployed teenagers to pummel undamaged vehicles with baseballs.

Sadly, he agreed.

As Frederic Bastiat described in his essay about the fallacy of the broken window (1850), this young man was only seeing the small evidence of the hail storm - the obvious results in his life and his paycheck. What he didn't see, however, were the billions of dollars of losses incurred by automobile owners. Some of those losses were uninsured. Those people will either spend money on repairs that they would have otherwise spent on consumer items or, heaven forbid, would have saved.

Some uninsured motorists won't repair their automobiles, but will end up needing to replace their cars far sooner as a result of the damage.

The billions in insured damages come out of the pockets of the insurance companies. This may suit you fine, until you realize those losses are actually incurred by the insurance company shareholders - including pensions, policy holders, individual mutual fund accounts and 401(k) plans.

That puts a different spin on the broken windshield stimulus plan, doesn't it?

There are always two forces at work: the obvious one and the unseen one. The unnoticed force is often the most powerful one.

I love Walmart. Since I generally detest shopping, it is great for me to be able to buy bananas, a boat battery, a birthday card and shotgun shells at the same time and place. I understand if you hate Walmart because it's too crowded. I have the luxury, however, of being able to go early in the morning and avoid other shoppers.

But if you hate Walmart because you believe they are ruining our economy, you should also be hoping for more hailstorms or teenage thugs with baseballs.

My friend Glenn and I each bought sneakers last week. He bought his adidas shoes online for $80. My pair of Starters came from Walmart and were $12. Since we each wear size 13, we sampled our respective purchases; Starters may not be as chic as adidas, but I preferred the fit and feel of the $12 shoes.

Glenn can afford $80 sneakers, but a lot of people can’t. When Walmart’s detractors focus only on the competitive pressure the giant puts on other retailers (not just small ones), they miss the unseen force: the incredible economic stimulus offered by lower prices and lower overall inflation.

When you focus on just the obvious, it’s like hoping for more hail.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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