Scott Sumner  

A penny for our thoughtless society

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Slate.com linked to a group opposed to the penny:

According to the U.S. Mint's 2011 annual report, the current cost of a penny is 2.4 cents per coin. With nearly 5 billion pennies minted in 2011, the U.S. spent almost $120 million to produce less than $50 million of circulating currency. When production cost is added to the opportunity cost of using the penny economists say that the penny drains almost $900 million from the national economy every year.

Right, left, or center, all parties know that the country needs to save as much money as possible, and it's impossible to save money when it's being wasted.


The Slate article said "The main arguments for keeping the penny these days seems to come from the zinc industry and relate to vague fears that getting rid of the single-cent will cause merchants to round up all their prices." As if stores are more likely to round up from $9.99 to $10.00, than round down from $9.99 to $9.95.

Corruption and stupidity. And if you look around the world, you find that theme repeated over and over again. Unneeded weapons systems costing tens of billions get paid for because of both special interest politics and lazy thinking about national defense. The mindless way on drugs occurs because our criminal justice/industrial complex profits off of it, and because many lazy voters vaguely think legalizing pot would "send the wrong message."

People often like neat and tidy monocausal explanations of policy failures, but if you look closely an awful lot of what's wrong with the world is caused by a mixture of corruption and stupidity. You might say that stupidity enables corruption.

Back in the early 1990s I published a paper advocating the privatization of coin issuance. Even then it was obvious that the penny was a waste of money. Many also think we'd be better off replacing the dollar bill with a dollar coin, but that's a closer call. In any case, a private firm would have an incentive to maximize profits, and thus would not waste money producing coins like the penny. The rights to each denomination could be auctioned off, so that they'd have an incentive to produce the correct form of money at the $1 denomination. In theory government could do the same, but government is structured in such a way that it's decisions are much more likely to reflect the interaction of corruption and stupidity. A private company has no reason to worry about people's cognitive illusions about the rounding of prices, nor does it need to worry about campaign contributions from the zinc mining industry.

Not everything can be privatized. But when we do so, we will usually get smarter decisions about the allocation of resources. Private schools might not be able to produce higher test scores, but I don't think anyone seriously denies they can produce the same test scores at far lower cost. And I'd expect the same if we moved to a truly private and deregulated health care system--lower costs and the same life expectancy.


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CATEGORIES: Money




COMMENTS (20 to date)
E. Harding writes:

Wouldn't privatizing coin issuance just lead to the companies making coins conspiring with the zinc industry and politicians to keep both their profits at perpetually above-market rates?

Nodnarb the Nasty writes:

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Sam writes:

@E. Harding, I could imagine statutory language compelling the Mint to subcontract coinage operations to the most competitive bidder, using an auction mechanism that is unlikely to result in patronage. However, that's not particularly likely given the history of how procurement tends to work in our government. So I agree with your general point. But as to your specific point, it's not clear that in equilibrium the zinc mining lobby would dominate -- perhaps we'd end up back with (expensive!) copper pennies!

Regardless, there would be little incentive in Congress to reduce costs by eliminating unnecessary denominations of coinage. Heck, they'd probably add a new 2 cent piece for added pork!

Steve J writes:

"a truly private and deregulated health care system"

I hear this often but never get a good explanation for who is overpaid in the current system. Where are the cost savings going to come from? "Truly private" does not mean anything to me. As far as I can tell doctors are private businessmen now. Deregulated has much more potential. If we allowed anyone to practice medicine I agree costs would come down quickly. We'd soon have many antibiotic resistant infections running rampant but certainly healthcare would be much cheaper.

Rajat writes:

Another reason to retire down under, Scott! Australia got rid of one and two cent coins in 1992 (and NZ did in 1990), for this precise reason. A proposal was floated a few years ago to get rid of Australia's five cent coins, but it wasn't pursued. I fear even here, policy-makers are becoming more stupid and corrupt over time.

Tom writes:

Here in Canada we replaced both the one and two dollar bills with coins some time ago. The penny was eliminated almost a year ago (Feb 2013).

In spite of the various dire predictions regarding these actions we have found that the sun continues to rise in the east and set in the west. The ongoing decline of Western civilization does not appear to have been accelerated, the Apocalypse has not come.

And yes, some round up, some round down, nobody really cares which way, as near as I can tell.

Scott Sumner writes:

Steve, Even in a free market you might want to regulate antibiotic use, due to the externality problem.

Regarding costs, most of the health care that I have purchased during my life would not have been purchased if I had to pay out of pocket, despite the fact that I could have easily afforded to do so. I know other people for which the same is true.

simon writes:

Tom, you seem to have missed a year. It is now 2015 - almost two years after the elimination of the penny.

Andy writes:

All the factors you cite as reasons for the penny to stick around would exist if currency production were privatized. The "penny problem" is really a political limitation and isn't due to a lack of government manufacturing efficiency. Privatizing currency production does little about the penny problem unless you give private currency manufacturers the power to independently decide what denominations they'll produce, which will require the political authority to allow them to do that.... So, not sure how you get there from here and besides - I don't know about anyone else, but I don't really want a company's bottom line determining what currency is produced for reasons that should be rather obvious.

Michael Byrnes writes:

Isn't there a difference, though, between privately funded enterprises (say, a private school that accepts no public funds) versus publically funded businesses (say, a defense contractor or a private school that accepts public funds)?

In the latter case there is still going to be corruption and stupidity, no?

Micke writes:

Prices shouldn't change if the penny is abolished. The only thing that changes is that there will be a rounding done after the total has been added up. Also, this rounding should only be done when paying with cash. If you pay by card, there is no reason to abolish the penny. Charging $16.73 shoud be no more or less complicated than charging $16.75.

This has been implemented in Sweden, with the lowest denomination now being 1 krona (~16 cents). Prices are still in "öre" (e.g. 9 kronor 95 öre) if needed.

Scott Sumner writes:

Andy, In my 1995 JMCB paper I advocated privatizing a range of possible denominations (say one cent to 99 cents, and one dollar to $9.99, etc.), and letting the private firms pick the denominations.

Steve J writes:

Scott, thanks for the response. Agree with both your points. I like the idea of Obamacare (subsidized private healthcare) but the implementation (insurance plans with low deductibles and low copays) leads directly to unnecessary healthcare purchases you describe.

Andrew_FL writes:

Maybe I just have no sense of the costs involved, but I have a hard time believing that it would be cheaper to mint coins than print dollars.

Is there some reference for who thinks this might be the case? I'd be interested in why.

Gary writes:

Without consumer choice and real prices, we can not know if the costs of the penny, dollar coin, bill, etc are worthwhile, right?
Even if the government is losing money on each penny, maybe there are positive externalities.
Am I missing something?

Nathan W writes:

In this day and age, is it really worth anyone's time to even count the change?

Round up if they will, and let the gains be redistributed via traditional means. Then we can share in the wealth of not wasting money to make pennies.

While we're at it, why not get rid of the nickel and $1 bill? The smallest bill in Canada is the $5 bill, and this saves millions a year, not counting for the cost of fixing holes in pockets.

Michael Byrnes writes:

Andrew wrote:

"Maybe I just have no sense of the costs involved, but I have a hard time believing that it would be cheaper to mint coins than print dollars.

Is there some reference for who thinks this might be the case? I'd be interested in why"

The theory is that, while it costs more to produce a dollar coin than a dollar bill (33 cents vs. 5 cents), dolar bills have a much shorter half-life and thus require repacement much more frequently. (I think a $1 bill lasts for only a few months).

In the simple case (i.e. we assume that the use of dollar coins by the public will be no different than its use of dollar bills), I think dollar coins would be a no-brainer.

Of course, real life may be different from the simple case. Apparently a recent study from the Fed argued that it would not, in fact, be cheaper to switch to dollar coins:

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/12/12/the-fed-doesnt-think-its-a-good-idea-to-replace-dollar-bills-with-coins/

I'd be curious to see how it turned out in countries that have recently made the switch.

In the eurozone, some states already do this. The rounding rule is defined by law and nobody seems too bothered.

There was some discussion of doing this throughout the eurozone, but naturally, the Germans were against it.

In any case, this can be implemented at state level by simply passing a law that cash purchases are rounded.

J.V. Dubois writes:

"... vague fears that getting rid of the single-cent will cause merchants to round up all their prices."

I know that this is engaging with stupid arguments, but there is an easy and tested method for this applied in many countries: swedish rounding. You do not have to round the price of every item, but you do this for the whole purchase.

Andrew MacKay writes:

Entering a discussion concerning the health care industry and trying to apply the same simple S/D framework to the myriad drugs and services as you would anything else is a total joke.

There are so many layers and complications to this stuff that make it far from any semblance of a functioning market that a deregulate wand would make some things more cost effective, sure, but the real discussion comes with what happens thereafter. Given that health care services are typically not luxury goods, you have gigantic political and legal considerations and externalities all over the place that go way above and beyond the usual just paying more for nicer stuff vs settling with the budget version kind of binary decision you find in basic consumer behavior.

The list of exceptions and assumption breaks is so vast that it doesn't look at all like a market anymore. Why do we keep trying to cram standard market framework down out own throats? I think it's habitual and really lazy discourse considering the gravity and importance to all of our lives.


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