Dan Miller: Penny Wise and Pound Foolish

I am pleased to host another guest post by Dan Miller, a student in my “Monetary and Financial Theory” class. (His previous guest post was “Sleep as a Strategic Resource.”) This is the 10th student guest post this semester. You can see the rest here.

I argued in “How Subordinating Paper Currency to Electronic Money Can End Recessions and End Inflation” and since for bringing paper currency off of its pedestal in order to eliminate the zero lower bound. Some of the emotional attachment to paper currency that makes my campaign to eliminate the zero lower bound more difficult shows up in people’s attachment to the penny. So it provides a good case study. 

The time has come to abolish the almost worthless, bothersome and wasteful penny.

You can’t buy anything with a penny anymore. A vending machine? Put a penny in and it will spit it right back out. Penny candy? Not for sale in my lifetime. Sometimes it pays to take a look at history: a dime today is worth less than what a penny was worth in 1950, and according to the US Mint’s 2013 annual report, every penny costs 1.8 cents to make. The U.S. military itself has already decided they’re essentially useless with Army and Air Force Exchange Service stores on bases rounding all cash purchases up or down to the nearest nickel. Despite this, the U.S. Mint keeps producing a billion pennies a month.

Where do the pennies go?

Two-thirds of them immediately drop out of circulation, into coin jars or behind chair cushions.  While quarters and dimes circulate just fine; pennies disappear because they are literally more trouble than they are worth. President Obama has stated his willingness to abolish the penny on February 15th, 2013.  Saying, “Anytime we are spending money on something people do not use, its something that we should change.”

The remaining 300 million or so–that’s 10 million shiny, useless items punched out every single day by government workers who could be more usefully employed–go toward driving retailers and consumers crazy. They cost more in employee-hours, waiting for buyers to fumble around for them, count them, pack them up and take them to the bank, than it would cost to toss them in the garbage. And as Greg Mankiw stated in his argument to abolish the penny, time is our economies’ most valuable resource. That’s why you see penny cups next to every cash register. When looking at the costs and benefits in aggregated terms, there have been studies that have shown that the penny results in an annual loss of $900 million in the US economy each year. How did they come by this number? The economist Robert Whaples stated that every cash transaction that involves pennies takes two extra seconds because people are fishing them out of their purses and pockets.  He also argues that eliminating the penny could make people keen on using $1 coins, which would save the US an additional $500 million a year because coins are more durable than bills which are torn and lost easily.

What purpose does the penny currently serve?

The penny pinchers argue that those $9.99 price tags save the consumer cents because if the penny was abolished, merchants would round up to the nearest dollar. That’s just foolish: the idea behind the 99 cent price is taking advantage of the psychological phenomenon that, “its less than 10 dollars.” In general, we cannot predict what merchants would do because they could just as often round down to $9.95, saving consumers billions of dollars over time. Indeed, it could become an even more obsolete of a fear if we were to increase our use of electronic currency.

What’s really behind America’s clinging to the penny?

The answer has to do with zinc, which composes approximately 98% of each penny minted since the early 1980s. The powerful zinc lobby has enough of a foothold in congress to persuade the senators and representatives to swat the “Penny Abolition” legislation away, as they have done twice in the last decade.

In addition, popular support for the penny is still high, at 67%, and national inertia does not seem to be moving in the direction of the tossing the penny. Sentimentality could be playing a major role in this phenomena.  “A penny saved is a penny earned,” and “A penny for your thoughts” are iconic phrases that Americans love to use and they most certainly do not want them to become obsolete.

Finally, abolishing the penny is a symbol of inflation and would be criticized as such. “The Obama administration is so inflationary that they abolished the penny!” Even though, in fact, a big failing of the Obama administration is that it let inflation be below target by not stimulating the economy enough.

Can the penny be eliminated?

The zinc lobby is powerful, but if more and more transactions are done electronically, the penny, along with other forms of cash, will become less and less relevant, and people’s emotional attachment to it will weaken. Already, the younger generation is less attached to the penny than older generations. So there is hope that someday we will be free of the curse of pennies. Perhaps if we threw every penny we get into a wishing well, wishing for the end of the pennies …