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Penny Politics
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.
Posted by Alex Tabarrok on September 26, 2006 at 07:15 AM in Current Affairs | Permalink
Comments
The financial unit we really need to eliminate is the .9 cent piece we use only when buying a gallon of gasoline.
Posted by: triticale at Sep 26, 2006 8:06:33 AM
Why is it crazy to expect a one-time burst of inflation? There is usually a pent-up demand to raise some prices, but for fear of losing consumer goodwill. Changes in monetary arrangements usually accelerate such price hikes. True, the costs there are small, but they can easily add up to cancel out the benefits of abolishing the penny, which are also small.
Posted by: Tyler Cowen at Sep 26, 2006 8:08:06 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
Posted by: Don Lloyd at Sep 26, 2006 8:21:50 AM
Trivial.
Abolish pennies, but keep constant the current metallurgical mix of 1 and 5 cent coins by increasing zinc content of nickles.
Posted by: michael vassar at Sep 26, 2006 9:32:46 AM
How about introducing a 99-cent piece?
Posted by: len at Sep 26, 2006 9:43:12 AM
Let's get serious about this and abolish the nickel (and maybe the quarter, too). Let's round all final transactions to just one decimal place instead of two.
Posted by: EclectEcon at Sep 26, 2006 9:57:12 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.
Posted by: neil at Sep 26, 2006 11:04:22 AM
"Why is it crazy to expect a one-time burst of inflation?"
Wait would people really round thier prices up to 1.00, or would they push them down to 95c?
Mabye we could get some inflation relief.
Posted by: rws1st at Sep 26, 2006 12:06:02 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.
Posted by: JJ at Sep 26, 2006 12:13:32 PM
It's a sad commentary on how debased our currency has become that there are serious discussions to abolish the penny.
- Josh
Posted by: Wild Pegasus at Sep 26, 2006 12:20:48 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.
Posted by: Chris Durnell at Sep 26, 2006 12:39:38 PM
Neil: I don't know why Americans haven't done it yet, but many foreign countries post prices inclusive of sales tax. This includes many small shops in developing countries that don't even use cash registers. They just plug in the tax figure on the receipt and then subtract that from the purchase price to find the "pre-tax" sale price. Not rocket science. And virtually costless when we're talking about barcodes at the checkout aisle.
Posted by: Dan K at Sep 26, 2006 1:42:14 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?
Posted by: Jacqueline at Sep 26, 2006 1:47:13 PM
"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."
If you buy 8 items for 99 cents, the total is $7.92. If you buy the same 8 items for $1 each, the total is $8, which, of course, is higher than $7.92. I'm not sure how it would ever be possible to have a bill round down by rounding up?!?
Posted by: Doug at Sep 26, 2006 1:55:38 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.
Posted by: happyjuggler0 at Sep 26, 2006 2:27:32 PM
The penny is clearly a bad deal considering that a large number of pennies exit circulation the minute they are distributed. In other words, they wind up in people's desk drawers and piggy banks. So even if prices were to be rounded up instead of down (highly unlikely considering that merchants charge $0.99 for psychological reasons and would likely start charging $0.95 instead) it would have no measurable effect on the welfare of those who are not obsessive-compulsive about taking their pennies to the bank or spending with exact change. 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 should also point out that even by developing country standards, the penny is quite worthless. In Thailand, coins of less than 1 baht (about $0.025) rarely circulate. In India, similarly, 1 rupee ($0.02) is the smallest coin in widespread circulation. Most merchants, even if they charge in fractions of a rupee, do not bother to keep smaller coins on hand to make change and will laugh at you if you insist on correct change (the giving-candy-as-change method Jacqueline mentions is often used, though).
My understanding is that there was no measured "blip" in the inflation rate in most European countries when the Euro was adopted. There are anecdotes of merchants taking the opportunity to increase prices. I have heard, for instance, the Berlin U-Bahn used the same nominal fare in Euros as Deutschmarks which means a virtual doubling of fares. But according to the inflation data, this seems to have been matched by other merchants cutting prices and possibly even rounding down -- these are the anecdotes you will never hear, of course.
Posted by: Mark at Sep 26, 2006 3:58:09 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
Posted by: asiequana at Sep 26, 2006 4:48:06 PM
Josh is exactly right, it's so funny to me at least, that the big concern about the penny is that "Oh no, the penny might actually be worth a penny then the mint won't be able to make all that necessary seignorage off the penny." Color me unimpressed. If our reason for getting rid of the penny is because the government isn't making enough profit off of it, well, it's hard for me to jump at the suggestion.
(Getting rid of the penny would therefore increase inflation to some degree, as bad money begins to chase out the good, that is nickels over pennies.)
Posted by: Joel B. at Sep 26, 2006 5:14:36 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
Posted by: Don Lloyd at Sep 26, 2006 7:21:53 PM
No conflict of interest there. ;-)
Posted by: Chris Meisenzahl at Sep 26, 2006 9:19:32 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?
Posted by: Anthony at Sep 26, 2006 11:06:31 PM
Australia ended its 1 and 2 cent coins in 1992. .01 and .02 totals are rounded down to .00, while .03 and .04 totals are rounded up to .05. Stores still use the 99c price - you get the 1 cent off if you pay electronically. The welfare gains from not having to carry lots of small coins vastly outweigh whatever trivial losses may occur in rounding. Personally, I think the 5 cent piece should be abolished too. It's just a nuisance.
Posted by: Andrew Norton at Sep 26, 2006 11:18:52 PM
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.
Posted by: John Mansfield at Sep 27, 2006 8:41:26 AM
None of the comments take into account the sales tax. Where I live, there are several different rates, depending on the product and the jurisdiction. Without the penny, I suspect that all transactions will get rounded up to the nearest nickel.
A lot of my neighbors empty their pockets of pennies when they get out of their car. I know because I pick them up.
But I almost always pay with a credit card so I never get rid of the pennies except at the coin counting machines.
Posted by: JOHN BENNETT at Sep 27, 2006 10:43:35 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!
Posted by: Mr. Econotarian at Sep 27, 2006 11:42:27 AM
When did the penny start effecting us, and why are we concered about getting rid of it. There is no reason
to get rid of the penny becuase if we do every price will have to be rounded up 5 cents. Which could cost you
more money in the long run. Right? But I see this as a pointless arguement that has no real arguement. Keep
the penny and stop the pointless arguing.
Posted by: Tanner M. at Sep 27, 2006 11:29:55 PM
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?
Posted by: Arnold D'Souza at Sep 28, 2006 1:02:05 AM
Sales tax, Arnold.
A 99-cent piece? Excellent. Efficiency wise though, a better solution is coins of 3c, 9c, 27c, 81c. 3 is close to e, you see. Maybe too much math there though. ^^
Posted by: bhauth at Oct 1, 2006 4:09:42 AM
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
Posted by: xXxreversemulletxXx at Nov 14, 2006 9:44:09 PM
Why can't we use the pennies already minted. Also, how do you abolish a coin that everyone owns. The Stores shouldn't just say "no pennies accepted" The government should make pennies in shorter supply to save money. Once pennies become less common, people will start to see them as money, and save and use them accordingly, which would be easier than elimintating them all together. It's just a suggestion
Posted by: Bella L. at Jan 16, 2008 10:07:28 PM
