This story explores an important economic question: When a kid loses a tooth, how much should the tooth fairy pay? That may sound like a joke, but the tooth fairy’s payoff provides an example of inflation—the amount the price of goods increases each year—and of the economic principle called “income elasticity of demand.” Listen to the story to find out what teeth are going for these days, and what economists have to say about it.
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PrintROBERT SIEGEL: The Federal Reserve raised its benchmark rate this week by 25 basis points or a quarter of a percent. Top Wall Street banks anticipate two more rises this year and at least three more next year. It’s all part of the Fed’s main duties, which is keeping an eye on inflation.
That measure has been ticking at about 2 percent except in one important category which has seen prices far outpace the rate of inflation. Here’s reporter Kenny Malone from NPR’s Planet Money podcast and his dive into a sector of the economy where normal economic theory does not seem to apply. It’s a dreamy, otherworldly sector.
KENNY MALONE: Sometime around January of 2014, a handful of members of the White House economic team were sitting around a table in the West Wing. Among them was Betsey Stevenson.
BETSEY STEVENSON: And honestly, I can’t even tell you what the meeting was about.
MALONE: Well, we know what it became about, don’t we?
STEVENSON: (Laughter).
MALONE: She laughs because what that meeting became about for at least a few minutes is one of our most enduring financial questions.
STEVENSON: What is the tooth fairy paying these days?
MALONE: So why would some of our nation’s top economists hold an informal tooth fairy summit – well, mostly because Betsey Stevenson’s daughter had lost her first tooth.
STEVENSON: And I think she had lost it that morning.
MALONE: And we’ll get back to that – but more generally because lately the tooth fairy doesn’t seem to be following the typical rules of inflation, and that’s made pricing a lost tooth the kind of thing that you may want a Ph.D. to deal with.
ALAN BLINDER: Yeah. This is Alan Blinder professor of economics at Princeton University.
MALONE: I called Blinder because in the 1990s, he was vice chair of the Federal Reserve Board. And I explained to him that there’s surprisingly good data on the going tooth rates. The Delta Dental insurance company has been conducting a nationally representative tooth fairy poll for almost 20 years. An average tooth these days is pulling in almost $5. But what’s more notable is the trend. Over the last decade, dental inflation has averaged over 10 percent per year.
BLINDER: Teeth, you say?
MALONE: Yeah, teeth.
BLINDER: I can’t think of anything that’s gone up at 10 percent.
MALONE: For comparison, Blinder says, actual inflation over the last decade…
BLINDER: Must be right around 2 percent.
MALONE: Now, to measure that inflation rate, we look at a giant list of things that a grown up might have to pay for – everything from fuel to bananas to a house. And then inflation is essentially just how much that basket of goods changes in price every year.
But kids don’t care about most of that stuff. So I wondered, what if I made a basket of goods just for kids? Would my kid inflation rate be closer to that 10 percent dental inflation?
And can I just read you the list of things? All right, kids have mentioned – Barbies…
UNIDENTIFIED CHILD #1: Nerf gun.
UNIDENTIFIED CHILD #2: Ice cream.
UNIDENTIFIED CHILD #3: Rock and roll.
UNIDENTIFIED CHILD #4: Guitar.
UNIDENTIFIED CHILD #5: And Pokemon cards.
UNIDENTIFIED CHILD #6: Fruit snacks.
MALONE: Broad strokes of these kids from around New York City – toys, electronics, candy. Blinder said, actually, a lot of that stuff has gotten cheaper over the last decade. Technology is constantly making electronics less expensive. Toys are manufactured in China for very little these days. By this measure, the tooth fairy should be paying kids less than a decade ago.
BLINDER: Yeah. I think the kids are making out like bandits here.
MALONE: Do you think an intervention is necessary from your…
BLINDER: No. I wouldn’t (laughter) – I wouldn’t advocate government intervention.
JUSTIN WOLFERS: The tooth fairy – I should be absolutely clear – is real and economically rational.
MALONE: This is economist Justin Wolfers. And remember that little girl whose missing tooth got the White House economists talking? Well, Wolfers is her father. And I asked him, if inflation and kid inflation can’t explain why the price of a tooth is so high, what might?
WOLFERS: If you want to work some economic jargon into this, economists talk about something called the income elasticity of demand.
MALONE: Think of it like this. If your salary doubled overnight, there are some things, like maybe food, that you wouldn’t necessarily spend twice as much money on. But then there are other things you might spend more than double on. Wolfers suspects kids fall into that category.
WOLFERS: And so it doesn’t surprise me to hear that the tooth fairy has outpaced inflation because the tooth fairy is one of those vehicles with which we give more to our kids.
MALONE: So back to that West Wing tooth fairy summit.
STEVENSON: Sitting around the table, waiting for Jack Lew, the treasury secretary, to walk over…
MALONE: Some of our nation’s top economists are hashing out the finer points of that value. Stevenson says she got about 50 cents as a kid.
STEVENSON: An inflation-adjusted number might put you something closer to $3 a tooth.
MALONE: Other economists with kids weigh in.
STEVENSON: Five to $20.
MALONE: Whoa. And when the tooth fairy finally visited the Stevenson house that night…
STEVENSON: We’re a family that we take in data. And the median seems to be a great place to be. And that’s exactly where our family was. The tooth fairy brought $5 dollars.
MALONE: Besides, Betsey Stevenson says, even if the tooth fairy wanted to leave three or four bucks, this is a cash business, even a magical fairy can’t always have singles laying around.
© 2017 National Public Radio, Inc. Used with the permission of NPR. All rights reserved. Vocabulary
- summit – a meeting of government leaders
- inflation – an increase in prices accompanied by a decrease in the purchasing value of money making out like bandits
- elasticity – the ability of something to change; flexibility
- median – a value that is at the midpoint of a range of values, so that half the values are less, and half are more than it
Listening Comprehension Questions
- What is the annual inflation rate in the United States? How does it compare with the inflation rate on lost teeth?
- Reporter Kenny Malone wanted to compare the tooth inflation rate to something more specific than the overall inflation rate. To what did he compare it, and what did he discover when he did?
- What is “income elasticity of demand”?
- How does income elasticity of demand explain the tooth inflation rate?
Discussion Themes
- If you were to take on the role of tooth fairy, how might knowing that the inflation rate for teeth is unusually high affect your future behavior? Why?
- What other products and services do you think would be affected by income elasticity of demand? Explain why you think so.
Teacher’s Guide
Activate student knowledge: Open class by asking students to remember back to when they were little kids. Ask: When you were little and one of your teeth came out, did you put it under the pillow? Then ask kids how much money they found when they woke up in the morning. If you think this might be a sensitive topic (different households may have very different incomes) give each student a note card and have them write down the amount. Then read aloud the amounts on the cards. Ask students with younger siblings if these youngsters are getting the same amount, more, or less than they did.
Introduce the story: This story looks at how much the tooth fairy leaves for children when they lose a tooth. You may be surprised to find that this seemingly silly situation can help you understand a few things about economics. In particular, you’ll learn about two important economic concepts: inflation and income elasticity of demand.
Active listening supports:
- The T chart “Questions and Answers” will guide students’ listening by posing questions that help them focus on the key points of the story. Have students come up with follow up questions for their answers. This could be a good way to provide continuity the next day of class.
- The Language Identification organizer allows students to follow along and track important phrases while listening to the story.
Reflect on the story: Take time for student reflection on the audio story and then have students read (from the materials section) about people who got big financial windfalls (in other words increases in income) and predict how people’s economic behavior might change. Have them connect their predictions with what they have learned about income elasticity.
Paired Text: Pair the explainer “Income Elasticity of Demand” with this audio story. Have students use it to be sure that they understand what income elasticity is and why it matters. In addition, have them use the examples provided on the website to spark their own brainstorming of examples.