Tuesday, March 18, 2008

Save Abe!

A college friend asked for my take on the penny. I’m one of those people that practically throws them away, although I once sold 17 lbs of Canadian pennies on Ebay for my father-in-law (that’s a different story.) Currently it cost about 1.7 cents to make a 1 cent penny (link). In part the rising cost is due to increasing cost of the materials used to make them. It is currently illegal to melt pennies for profit.

So if millions of dollars could be saved by getting rid of the penny, why not do it. First as the US Treasury Secretary points out “it’s not politically doable” since people have an attachment to pennies. I agree a smart move may be to make pennies out of cheaper metals.

Here is another thought. It might be a good idea at some point to get rid of the penny. Now is not the time. Because if we got rid of the penny there would be a cost to converting prices to the nearest nickel. Restaurants would have to print new menus and all super market products would have to be relabeled. There would be a cost to changing these prices (economist call this cost menu costs). When most of Western Europe converted to the Euro, the inflation effects were small 0.12 - 0.29 % (according to this paper). Given the current state of the US economy and other possible inflationary problems, if we are going to do away with the penny let’s wait until a good economic time.

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Esther said...

Thanks Seth! I don't mind the penny, and I get a little protective when people suggest we do away with it. Plus I don't get how sales tax would work -- would we be rounding all the time?

Working as a waitress, you see just how much people value their pennies: give them 29 cents in change and they'll take the quarter and leave old Abe on the table! And you can be pretty sure it's out of convenience and not as part of your tip :)

Gregorus said...

Establishments wouldn't necessarily need to change their prices. A lot of people pay with debit cards these days, and they could still have their transactions take place to the cent.

You could just round up (or down) all cash transactions to the nearest .05 as an incentive or disincentive for people to use cash, depending on your preference.

Dan said...

Yup, the menu price critique is a red herring. There's no reason that unit prices be payable in currency; check out the price of gas (which is, say, $3.259, not $3.26). Few people go to the store and buy only one item. Add them up and at the end round up or down -- store's choice on policy, but I imagine I know which way it would go.

Or more humorously, remember how they got rich in Office Space?

Seth Gitter said...

Thanks for the comments. Sales tax impacts would be interesting, although the government could round up.

I think getting rid of the penny should have lower menu cost than converting to Euros, but there would still be a cost. As I said in the post the inflation from Euro conversion were small .2%, so US nickle rounding would be smaller.

However, I'm a little worried about inflation right now, so I don't want to do anything to mess with it. Sounds to me like the best solution is to make the penny out of something cheaper.

Or watch Office Space again!