I should have known you were going to ask.

I will bet on up.  Remember when Western Europe moved to the Euro?  A disproportionate share of retail prices went up, leading to the designation "the Teuro."  ("Teuer" means "expensive" in German.)  It seems that retailers had wanted to increase their prices in the first place, but were afraid of irritating their loyal customers.  The regearing of the monetary unit gave an "excuse" for price increases plus not everyone noticed the higher prices in the new monetary unit.  I predict similar results, albeit smaller ones in absolute terms, from abolishing the penny.

How bad an outcome would this be?  Ironically it was Greg Mankiw who wrote of excessively high prices, by a small degree, leading to large welfare costs for the economy as a whole.   But this model may not apply to abolition of the penny.

Under one scenario, prices go up but they would have gone up sooner or later anyway.  Within a year or two, inflation has caught up with the price increase.  In the long run the whole thing is more or less a wash, although we do suffer from higher prices and higher deadweight loss for just a little while.

Under a second scenario, prices go up and remain at a permanently higher plateau.  Future price decisions are taken from this new reference point.  For this model to work, we must assume that price is a signal of quality and that the frame of reference for interpreting the meaning of a price is based upon an observed status quo.  So the price boost comes, everyone assumes that is just how much food (or whatever) is now worth, and that is our new marker for judging future price movements.  Keep in mind that these assumptions cannot be true globally (there cannot be Walrasian slack at every margin), but only have to be true across relatively small price increases (N.B.: many tricks lie in here, since the price increases will be large in percentage terms for some goods).

I would bet my money on the first scenario, as I assume Greg Mankiw would as well.  If you believe in the second, you probably shouldn’t want to abolish the penny.

You can modify these scenarios in many ways, including through the explicit recognition of option value.  Do you know of any empirical tests on which model of prices is the better guess?

Barry Chiswick, head of the economics department at the University of Illinois at Chicago and a respected scholar of immigration, had a surprisingly poorly argued op-ed in the NYTimes.  Here’s the opening paragaraph:

It is often said that the American economy needs low-skilled foreign
workers to do the jobs that American workers will not do. These foreign
workers might be new immigrants, illegal aliens or, in the current
debate, temporary or guest workers. But if low-skilled foreign workers
were not here, would lettuce not be picked, groceries not bagged, hotel
sheets not changed, and lawns not mowed? Would restaurants use
disposable plates and utensils?

On the face of it, this assertion seems implausible.

… If the number of low-skilled foreign workers were to fall, wages would increase.  Low-skilled American workers and their families would benefit…

Bizarrely, the rest of his op-ed explains why these statements are mostly wrong!  First, the lettuce:

A farmer who grows winter iceberg lettuce in Yuma County, Ariz., was
asked on the ABC program "Nightline" in April what he would do if it
were more difficult to find the low-skilled hand harvesters who work on
his farm, many of whom are undocumented workers. He replied that he
would mechanize the harvest. Such technology exists, but it is not used
because of the abundance of low-wage laborers. In their absence,
mechanical harvesters – and the higher skilled (and higher wage)
workers to operate them – would replace low-skilled, low-wage workers.

In other words, if the number of low skilled workers were to fall the lettuce would no  longer be (hand) picked and low-skilled American workers would not benefit from an increase in wages!

What about lawn mowing and hotel cleaning?

Facing higher costs, some homeowners would switch to grass species
that grow more slowly, to alternative ground cover or to flagstones.
Others would simply mow every other week, or every 10 days, instead of
weekly…

Few of us change our sheets and towels
at home every day. Hotels and motels could reduce the frequency of
changing sheets and towels from every day to, say, every third day for
continuing guests, perhaps offering a price discount to guests who
accept this arrangement.

And how about this for a pathetic attempt to get the environmentalists on board the anti-immigration bandwagon?

Less frequent lawn mowing and washing of hotel sheets and towels would reduce air, noise and water pollution in the bargain.

Note how reduction in services, denied in paragraph one, has now become a virtue!

Chiswick also points out that:

With the higher cost of low-skilled labor, we would import more of some
goods, in particular table-quality fruits and vegetables for home
consumption (as distinct from industrial use) and lower-priced
off-the-rack clothing.

That is correct, but this is another reason why restricting the immigration of low-skilled workers will not much increase the wages of low-skilled Americans.

Chiswick makes statements in his op-ed like the "increase in low-skilled workers has contributed to the stagnation of wages for all such workers."  But unlike my Open Letter he never tries to quantify these assertions.  Yet he surely knows that an 8% decline is on the high end of such estimates and a zero percent decline on the low-end.

Quantifying, however, would put the immigration and wages issue in perspective which is that immigration is at worst a small contributor to the decline in the wages of low-skilled workers.  Indeed, economists are agreed that technology, not immigration, is by far the more important force which is why any serious attempt to raise the wages of low-skilled workers must begin with efforts to raise skills.

In my TCS article I said:

Immigration makes immigrants much better off. In the normal debate
this fact is not considered to be of great importance — who cares
about them? But economists tend not to count some people as worth more
than others, especially not if the difference is something so random as
where a person was born.

Chiswick, however, lets the economists down.  He never once mentions the benefits of immigration to the immigrants.

Greg Mankiw says yes, and I am inclined to agree.  When I lived in New Zealand, they didn’t have Kiwi pennies and no one minded.  My problem, however, is that I don’t know what to do with sales tax (New Zealand had a General Services Tax [correction: Goods and Services Tax], akin to a VAT).  In essence we would have to abolish sales tax on "small" items.  That idea warms my libertarian heart, but what is then to stop suppliers from selling a car piece by piece, painted inch by painted inch?  (But of course they wouldn’t ring it up that slowly at the cash register.)  Must we eliminate sales taxes altogether?  Or can the law accurately specify what is the "natural unit" of a given commodity purchase?  Inquiring minds wish to know…

Here are some relevant links on penny elimination.  It is an interesting microeconomic (macroeconomic?) problem to figure out which prices get rounded up to the nearest nickel and which prices get rounded down.  A related question is why businesses do not already round to the nearest nickel; of course some do.