Should we make cents? Our northern neighbors in Canada no longer think so. They will stop minting new pennies next year on the theory the penny is now more of a nuisance than an item of transaction. “It costs the government 1.6 cents to produce each new penny,” Finance Minister Jim Flaherty explained as he presented Canada’s budget to its parliament on Thursday.
So how will people buy an item on sale for $9.99? People will be free to use the pennies now in circulation, but gradually, experts say, cash transactions will be rounded to the nearest five-cent increment. That was how it was done in New Zealand and Australia when they ditched their one-cent coins, and, despite some public fears, there was no uptick in inflation.
We should follow Canada’s example.
Pennies are more of a burden than a help to us. This year, the U.S. Mint will churn out 4.3 billion of them, more than twice the annual output of all other coins combined. Because the penny costs more than a cent to produce, the Treasury loses more than $100 million per year on the coin’s production. Production is up in part because of hoarding, and in part because more and more people are throwing them in jars or drawers and never taking them out again. Few people now bother to pick up a penny when they see it on the street. It’s simply not worth the effort.
A growing number of experts are concluding the penny is too picayune to bother with. “The purpose of the monetary system is to facilitate exchange, but the penny no longer serves that purpose,” Harvard professor N. Gregory Mankiw, a former chairman of President Bush’s Council of Economic Advisers, has argued. “When people start leaving a monetary unit at the cash register for the next customer, the unit is too small to be useful.”
When the half-cent was abolished in 1857, it was worth more than eight cents in today’s currency. People afterward had no problem living and conducting business, even though the new smallest unit of currency — the penny — was worth more than today’s dime. No major problems with transactions were reported, even at a time that predated the many cashless means of electronic transaction we enjoy today, which, even after penny abolition, can preserve prices to the exact cent if people so choose.
“In the old days you might have said ‘A penny for your thoughts’ as a nice kind way of saying, ‘You know, whatever you’re daydreaming about, it’s worth something.’” says Stephen Dubner, the co-author of the popular economics best-seller Freakonomics. “Now, it’s an insult. ‘A penny for my thoughts? What? It’s only worth a penny?’”
Pennies have also become a great time waster. Jeff Gore, an MIT scientist, has come up with an equation to calculate how much time people spend counting out pennies in stores, giving them back in change and putting them in penny jars. He says each of us on average wastes 2.4 hours per year with the grubby little discs. “Pennies are costing each of us nearly $50 a year given the average wage per hour,” he concludes.
But every cause has a lobby, and so does the lowly cent. Mark Weller, the spokesman for Americans for Common Cents, claims that rounding up will cost Americans $600 million a year. He calls it “the rounding tax.” But, as CBS News has pointed out, Weller is by no means a disinterested observer. He is a lobbyist for Jarden Zinc, a Tennessee company that sells materials to the mint that are turned into Lincoln pennies. Today, every penny is 97.5 percent zinc and only 2.5 percent copper.
Weller also ignores the fact that already the sales tax in states is rounded up to the nearest penny with no detectable complaints. Nor were there any real problems with shortchanging when pennies were eliminated in Australia or New Zealand.
I visited New Zealand in 1990, when they ditched their cents, and found people happy with the changeover. Prices didn’t rise in the way that critics assumed they would. Many retailers rounded down in favor of the consumer. Others used a system by which transactions ending in “1” or “2” went in favor of the consumer, and those ending in “3,” “4,” or “5” (and similarly for 6–9) were rounded in the store’s favor. But most supermarkets I visited continued to price items to the nearest cent with only the final bill being rounded to the nearest five cents, and then only for those customers paying cash.
But let’s say the critics have a point and businesses in the U.S. were to round consistently against their consumers, ignoring any complaints. On average, the customer will lose two and a half cents in each transaction. If someone engages in two such transactions per day, over a year they would lose $18.25 compared with the person given their pennies. That cost is significantly less than the $50 a year in time wasted for each person year, in addition to the $100 million per year lost to the U.S. Treasury.
Professor Mankiw has argued it’s not even a close call as to what should be done with the penny: Consign it to the history books. “I know that some people are upset when their favorite aphorisms become anachronistic,” he noted, “but a nickel saved is also a nickel earned.”