Listen to our podcast episode on this topic, “What can Elmo teach us about economics?”
Hordes of adults rioting in decent Fredericton over a kid’s toy in short supply at 3 am? Toy scalpers selling a modestly priced toy for thousands of dollars? The Tickle Me Elmo craze of 1998 not only demonstrated a few basic points about economics and human nature; it also highlighted various issues regarding out modern economic state.
Manufacturing Tickle Me Elmo
Tickle Me Elmo is a cute kid’s toy. Based on Elmo of Sesame Street fame, he is essentially a fabric plush toy with an imbedded micro-chip. A poke to his cute belly elicits a giggle and a “Don’t tickle me” response. Fabric, microchip and labor in a cheap Asian assembly plant probably combine with royalties to put his cost a few dollars at the top end. Why then were adults, who should have known better, waiting in line, grasping, pushing and even offering thousands of dollars in their frenzy to buy “Tickle Me Elmo” for their kids’ Christmas present?
A Lesson in Supply and Demand
Tickle Me Elmo represents an economic truth. When the demand for Tickle Me Elmo exceeded the supply, the price rose until “the market cleared”. When a well-known talk show personality showed Tickle Me Elmo on her show as a cute Christmas gift, it caused a huge increase in demand for this previously unheralded toy. The suppliers, not knowing this would be the case, probably had ordered modest amounts of this plush toy, not wanting to get stuck with a large inventory after the Christmas selling season. Given the poor Christmas showing the last few years, our distributor friends were no doubt cautious in their ordering!
The fact that prices for Tickle Me Elmo rose quickly when demand exceeded supply is not remarkable. What is remarkable is that the price rose so much. There are a few lessons in this for us, and the people in charge of monetary policy in the United States and Canada.
Supply Side Economics
Now let’s look at the basics. We don’t have to spend a lot of time on the supply part of the supply and demand equation. When the suppliers of Elmo submitted their orders and production geared up a few months later, shipping from Asia had to be taken into account and deliveries were made to the distributor in the spring and summer. The distributor probably shipped to retailers in the fall, to have Elmo at the firing line for the all-important Christmas selling season. Apart from traders and speculators shunting Elmo’s between geographic areas, which would not be substantial since everyone is experiencing the Elmo craze, we can consider the supply fixed.
Demand Side Economics
The demand side is another issue. Demand really breaks down into the underlying or “fundamental” demand for a product and “speculative” demand. The real or “underlying” demand reflects the use or benefit that a product has. In this case, we have mostly the psychographic benefits of hugging and snuggling a plush toy like Elmo for the child involved. We can even give a large impact to the Christmas morning high experienced by the parents of knowing that their child is the only one in the neighborhood with “Tickle Me Elmo”. The monetary value of these benefits is relatively high compared to other toys, but is not stratospheric. What is stratospheric is the speculative demand attached to Elmo.
Speculative demand is pure and raw emotion. It combines healthy doses of fear and greed. Think it over for a minute. You’re at WalMart. The announcer machine-guns over the PA system that Tickle Me Elmo has arrived. You don’t particularly need one, you might not even have kids. But you’ve heard the buzz. You know Elmo is in short supply. Greed consumes you! You rush to the toy section. Fear grabs hold. There’s only one left. A massive derriere is the only thing between you and Elmo. You accelerate, swinging wide. Your moment has arrived. With the grace of an accompished running back you spin, throwing your hip out. Your competitor for Elmo is knocked akimbo. You grab Elmo and make the dash for the check-out. It’s only in the car that you realize that your kids are all teenagers, there’s no grandchildren on the horizon. A grin settles over your puzzled visage. You’ll take out an advertisement in the local paper. You have become a “toy scalper”.
This scenario plays out in the financial markets every day. Accumulate a stock. Make the shorts pay. Hit the bid. Take your profits.
The fact that it occured in the kid’s toy market says a lot about the state of the economy. It’s bad, you think. Job losses. Cutbacks. No raises.
Think again. The last time we had this craziness over a kid’s toy prior to Elmo was 1986, with the Cabbage Patch Kid craze. We came out of the Recession in 1982 due to loose monetary policy. Rapid growth and incipient inflation were followed by a tightening of monetary policy. Slower growth and an inventory correction in 1984-85 was met with a substantial loosening of monetary policy and plunging interest rates. In 1986 inflation bottomed and the economy seemed destined to slowly groove its way forward with ever rising financial markets. Except for rising wages and inflation which were met with a tightening of monetary policy in 1987. Crash went the markets. The economy, however, kept up its substantial head of steam until 1990, when it too slowed.
Tickle me Elmo as an Indicator
A necessary condition for a rapid price increase is the availability of money to buy that good or service. A benign and loose monetary policy in 1986 led to many things increasing in value, including the Cabbage Patch Kids. In 1996, the monetary policy in North America was similarly benign. For economists it seemed likely that Tickle Me Elmo was serving as a leading indicator of sorts. Elmo, when you tickle his tummy, told us that the economy was in much better shape and the Christmas season would be much better than most experts though. Perhaps with dire consequences for the “feel good” slow-growth market consensus. Rising wages, inflation and interest rates are one of the last things that the financial markets expect.