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How They (And You) Make Money Off Disasters

Steven Horwitz, professor of Economics at St. Lawrence University in Canton, N.Y., makes the case that private industries have proven to be more effective than federal relief efforts in the aftermath of disasters such as Hurricane Katrina. Their role in getting communities back on their feet is ultimately profitable for their bottom line.

"The best example of a successful private-sector response is that of Wal-Mart (WMT - Get Report) and other 'big-box' retailers, such as Home Depot (HD - Get Report)" and Lowes (LOW - Get Report), he wrote in the paper Wal-Mart to the Rescue: Private Enterprise's Response to Hurricane Katrina. "Wal-Mart's successful response to Katrina, along with the failure of FEMA and other government agencies, seems to confirm the more general conclusion of modern political economy that private institutions better mobilize resources than do public agencies."

He credits the supply chain sophistication of big-box stores and their focus on "business continuation" plans and protocols.

"The incentives for private firms to protect their own capital led them to begin preparations for the storm well before its landfall," Horwitz says, noting that Wal-Mart uses its own hurricane-tracking software and hires private forecasters to keep it up to date with storm information.

At the peak of the Hurricane, 126 of Wal-Mart's stores and two distribution centers were closed due to power outages and flooding. Within 10 days, all but 15 had reopened.

In the three weeks after Katrina's landfall, Wal-Mart shipped nearly 2,500 truckloads of merchandise to the affected areas and had trucks in place to ship relief supplies, he says. Home Depot provided more than 800 truckloads of supplies. Those goods were sold in stores, as well as distributed free in many cases to affected residents and the organizations helping them.

"Profit-seeking firms are often criticized for supposedly being interested only in short-term gains, but private ownership as well as capital and equity markets ensure that such firms have to take longer-term interests into account," Horwitz wrote. "This reality was clear during Katrina as the big-box stores chose to give up some potential short-run profits in order to gain in the long run and, in so doing, better served the community. A Home Depot executive commented that any profits it might lose in the short term were more than compensated for by increased customer loyalty: 'If we can be there when a customer needs us most, we can win that customer for life.'"
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