Penny Politics

by on September 26, 2006 at 7:15 am in Current Affairs | Permalink

Eliminating the penny is about the most straightforward, obviously beneficial public policy that one can imagine.  The idea that eliminating the penny would increase inflation is a joke.  (Note also that although many products are priced at _.99 most purchases are of more than one product so many bills are of the form _.01 or _.02 so many bills will be rounded down even when prices are rounded up.)

But politics infects everything even the most technocratic of decisions.  The main lobbying group in favor of the penny, for example, is Americans for Common Cents, which is funded by the zinc industry (zinc being the main ingredient in pennies).  Thanks to AfCC we will have at least four new pennies in 2009 to honor that famous penny pincher Abraham Lincoln.

On the opposite side is representative Jim Kolbe who Sebastian Mallaby calls an Olympian statesman for his opposition to the special interests and dedication to efficiency.  Well maybe, but it’s no accident that Kolbe is from Arizona the dominant producer of copper the main ingredient in… you guessed it… the nickel.

Hat tip to Roger Congleton.

1 triticale September 26, 2006 at 8:06 am

The financial unit we really need to eliminate is the .9 cent piece we use only when buying a gallon of gasoline.

2 Don Lloyd September 26, 2006 at 8:21 am

Alex,

I can see no justification whatever for any changing of prices whether or not the penny continues to be manufactured. Certainly something like 50% or more of purchases are made with checks, or credit or debit cards, for which no effect can exist. This is a trend which will only accelerate. If retailers cannot come up with some alternative to pennies, let them pay 3 cents for pennies and see if that motivates them. Even if we let them manufacture their own plastic tokens, there is no danger of inflation if no mass redemptions are allowed. It is hard to believe, although impossible to predict, that retailers will not evolve a system that is highly satisfactory for both themselves and consumers.

Regards, Don

3 len September 26, 2006 at 9:43 am

How about introducing a 99-cent piece?

4 neil September 26, 2006 at 11:04 am

Just because the penny exists doesn’t mean that it has to be used so much. The majority of cash sales result in the exchange of multiple pennies. Why? The combination of state, county and city sales taxes would make it fairly stressful for merchants to make it so their prices all round cleanly to the nearest nickel. (And forget the poor fools of Santa Cruz County, with their 8.25% sales tax, should they try to venture down this path.)

What if businesses offered to round your bill up to the nearest 5 or 10 cent increment, and donate all the collected pennies to a charity of some sort? I’m fairly amazed that Wal*Mart hasn’t already tried it.

5 JJ September 26, 2006 at 12:13 pm

While there may be a welfare gain from abolishing the penny, one benefit of
the penny is that it approximates a perfectly divisible medium of exchange.
If you accept that divisibility is a useful characteristic for money, then
you want the smallest denomination to be almost worthless.

6 Chris Durnell September 26, 2006 at 12:39 pm

Didn’t people fear that the introduction of the Euro would lead to noticable price inflation? At that time all the economists said the idea was ridiculous. Yet I’ve read at least one article that showed that merchants did use the euro transition as an opportunity to raise prices. On that example, I’ll trust my instincts and say abolishing the penny will raise prices.

7 Jacqueline September 26, 2006 at 1:47 pm

In Bali the small coins are so worthless that sometimes you get pieces of candy instead of coins in your change.

Unfortunately if we adopted such a system here it would just contribute to the American obesity “epidemic”, wouldn’t it?

8 happyjuggler0 September 26, 2006 at 2:27 pm

If we allow rounding, then the most likely course of events would be lower prices paid, and identical prices listed. Buy three items at $0.99 and the price is $2.97 for a rounded down bill of $2.95.

Better yet, if instead of abolishing the penny we simply stop minting it instead. Then whenever you are about to round up (e.g. $1.98) you can give the clerk enough pennies to pay the bill in full and save yourself 2 cents. Woooooo hooooo!!!

Another option for the consumer is to pay via credit card or debit card (yes, this slows things down and is annoying when there is a line). The credit card bill won’t be paid in cash, and therefore the pennies there are irrelevant. Your bank account(s) will be billed in 1/100 of a dollar increments, but only really become relevant when you close out your account, at which point the rounding will likely become as relevant as, well, as a rounding error.

9 asiequana September 26, 2006 at 4:48 pm

At least in NYC it’s also true that merchants often ignore pennies. If your change is ~.97-.99 they will usually just give you a dollar.

The political momentum necessarily to eliminate the penny isn’t worth it. As we become increasingly a cash-less society the mint will reduce the amount of metal and paper money produced anyway.

It would be interesting to see the amount of physical money produced on a per capita basis over time. I suspect it must be going down for all denominations

10 Don Lloyd September 26, 2006 at 7:21 pm

Mark,

…A piggy bank full of pennies does you no good if you never spend them or roll them up and deposit them in the bank….

I have a branch of the Salem Five (Mass) bank nearby that allows even non-customers to use their coin counting machine in the lobby for free with 100% teller redemption, no rolling required.

Regards, Don

11 Anthony September 26, 2006 at 11:06 pm

We could deal with the Lincoln fans by putting Lincoln on the dollar coin. Perhaps we could find an attractive copper-zinc alloy to make it with, to satisfy the metals interests?

12 John Mansfield September 27, 2006 at 8:41 am

If eliminating pennies were a worthwhile gain, then people and businesses would do so on their own. No one makes you carry them in your pocket or till.

13 Mr. Econotarian September 27, 2006 at 11:42 am

“The welfare gains from not having to carry lots of small coins vastly outweigh whatever trivial losses may occur in rounding.”

While Australia might have gotten rid of its smallest coins, it retains its largest ones, and I DESPERATELY HOPE that the US doesn’t follow the rest of the developed world with $2, $3, or $5 coins! (or even aggresive use of the existing $1 coin…)

My pants almost fell down due to change weight during recent Australian and Swiss trips. At least you don’t feel so bad throwing away pennies, but you can’t really go tossing 5 CHF coins or 2 AU$ coins!

14 Arnold D'Souza September 28, 2006 at 1:02 am

I didn’t get how “purchases of more than one product” cause “many bills to be of the form __.01 or __.02”. This means that we’re buying almost a 100 items (or in multiples of a 100), and we hardly ever do that. Can anyone explain?

15 xXxreversemulletxXx November 14, 2006 at 9:44 pm

I understand that if prices were rounder both up and down, it would pretty much even out. But given the chance to raise prices, i believe most merchants would chose to and not many prices would be rounded down. if any information about that could be given, i am writing a paper on this subject for Stretch (gifted students) and it would be greatly appreciated.

Elodie

16 Anonymous October 14, 2008 at 2:04 am

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