Smuggling Fluff: How Beanie Babies Became Contraband
Everybody loves to recall the Beanie Baby craze in the late 1990s. It's the perfect reference point for bubbles like Pokemon cards and NFTs, and they're a good story about monopolistic competition. But these stories rarely remind us of the massive smuggling problem that created situations like this:
The restrictions come at a time when Beanie Baby smuggling has dramatically increased. More than 8,100 have been confiscated since February at the Blaine crossing.
"Last year, we didn't detain any Beanie Babies," Lisius said. "Now, people are smuggling Beanie Babies in similar places where they hide drugs, such as hidden compartments and the spare tire holders."
Nor do we remember the political scandal that ended it, and the thousands of toy animals burned by the government. So, today, we're revisiting that story.
First, a brief primer on Beanie Babies. I used to think that Beanie Babies were just toys with really good marketing, but they had an actual (physical) innovation. Most stuffed toys contained so much stuffing they looked like overinflated balloons. This made them stiff and stuck in a single pose. Beanie Babies, on the other hand, were understuffed. This gave them their classic floppy look. Furthermore, the stuffing was distributed in a way to make them posable. This innovation sparked the initial interest in the toys.
Abraham Lincoln once said that patents, by creating property rights over ideas, “added the fuel of interest to the fire of genius.” But this kind of innovation did not warrant a patent since it was so obvious. Thus, to profit, Ty had to add the fuel of marketing to the fire of stupidity.
Ty's marketing was pretty straightforward. At the beginning, some toys underperformed. These toys took up space on the shelf where better performing toys could have been placed. Just like movie theaters will reduce showings of underperforming movies, Ty wanted to get rid of the low-marginal-revenue toys. But this is where they introduced the marketing twist. Instead of just saying, "No one liked these toys, so we stopped making them," Ty introduced the concept of retiring toys. Suddenly, there was scarcity.
Scarcity is not a sufficient condition to create high prices. After all, I could create a 1 of 1 NFT of a selfie and list it for $10,000. No one's going to buy that. It could be the last surviving picture of me, and I don't think my wife would buy it. (If you're thinking, "I would!" then maybe you should just upgrade to a paid subscription.)
A big thanks to V, who became a paid subscriber last week. And welcome to the 19 subscribers who started reading the newsletter this last week.
In addition to scarcity, you need demand. And, somehow, the Beanie Baby craze exploded. As far as I can tell, a group of women thought the toys were fun and were willing to pay high prices to complete their collections. This snowballed into the whole country being convinced that these low-quality toys actually had value. But that detail is irrelevant. The key is there was demand.
The second key is that in the 1990s, markets were not perfectly integrated. If they were, then the law of one price would rule. This law says that any price discrepancies across markets will be arbitraged away as savvy traders buy the goods from regions with low prices and sell them in markets with high prices until the price is the same across markets. In a previous video, I showed how the introduction of cell phones to Indian markets opened the gates to the law of one price.
Since markets were not integrated, Beanie Babies were more available in Canada than they were in the U.S. For some reason (which maybe I'll hypothesize about in a later version of this), Canada had not been consumed by the Beanie Baby craze. Just as the law of one price says, savvy traders went to Canada, bought the excess supply, and brought them back to the U.S.
Until it was illegal.
Somehow, Ty convinced U.S. customs to stop Beanie Babies from crossing the border. Only one per family could cross. Ty, of course, had no nefarious intents. It was just trying to protect consumers. Here was their story:
Ty, which introduced Beanie Babies in 1993, was finding that some Canadian shop owners would only sell popular Beanies, such as Erin the Bear or the exclusive Canadian polar bear, if a collector bought 10 other less-popular animals.
Sellers saw that there was incredible consumer surplus on some Beanies, and they wanted to extract some of it by getting them to buy the lower consumer surplus toys. I expected Girl Scouts to do the same thing when their new cookie was selling for five times the list price. And this is basically what Ty did by retiring the less popular toys.
The real reason is clearly that Ty had built up the Beanie Baby brand on scarcity. The market failure was working for Ty because limited supply in the U.S. continued to feed the mania. But the spillovers into less-obsessed Canada was starting to hurt the brand abroad. Stores refusing to sell you a toy unless you bought 10 is not good for building a brand. So Ty went to the government and said, "You have to stop this."
And the weirdest thing is how the government just went with it. I tried finding the origin of the restriction, but I never found the exact regulation. All of the articles I found about the lifting of the restriction place the blame squarely on Ty. For example, "Ty allowed the import of only one Beanie Baby per family." Good job, US Customs Service, on learning your messaging from Pontius Pilate and washing your hands of that mess.
This restriction stopped some Beanie Babies from entering the U.S. Obviously this didn't stop all Beanie Babies from crossing the border. People started smuggling them. As the quote mentioned above, over 8,000 were confiscated at one checkpoint. We were one step away from Canadian cartels digging tunnels into the U.S.
We were saved from this horribly polite cartel by the political scandal. Maybe you're thinking the political scandal was by shady agents at the Customs Service selling Beanie Babies on the black market. After all, what else are you going to do with 8,000+ toys? Well, here's your answer:
Customs has already seized thousands of undeclared Beanie Babies. They will probably be burned.
But that wasn't the scandal. In July 1998, President Bill Clinton traveled to China. Upon return, it was discovered that one of the officials in the delegation had brought home some Beanie Babies. Although it was initially unknown how many were smuggled, it was later revealed that this official had brought 40. The revelation came because the official had asked their legal staff to review the trip and make sure everything was clean.
The best part about the story? The official was the U.S. Trade Representative, Charlene Barshefsky.
The official in charge of representing America's interests in trade, the one in charge of monitoring and enforcing trade relationships, got caught smuggling Beanie Babies.
Of course, she was not trying to break laws. And as soon as it was discovered, the “they’ll probably be burned” soon became definitely:
After weeks of incarceration at Dulles Airport, the Beanies were burned last month.But 10 days after this scandal, suddenly Ty was allowing families bring up to 30 Beanie Babies across the border.
We typically look at Ty and the Beanie Baby phenomenon as a classic example of monopolistic competition, where companies restrict supply to get higher prices and profits, and asset bubbles. But they are also a great example of using the government to restrict competition. They created deadweight loss by literally destroying product (and Beanie Baby's much less successful successor Funko Pop is doing the same). And the situation only changed because there was a shock to the political equilibrium.
We have two people on the referral leaderboard. They’re both anonymous, so I can’t acknowledge them by name. But they’re awesome! You can be awesome too!
Weekly Trivia
Last week when discussing the economics of Duolingo, 41% of you correctly responded that the first PhD in economics was in 1875. Here is the claim.
Here’s this week’s question.