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Penny Lame

by George Selgin April 9th, 2012 5:48 pm

As Congress prepares once again to decide the fate of the penny, with deliberations to take place next week concerning whether to revive the WWII-era practice of striking pennies of steel, so as to at least avoid wasting more than a penny's worth of resources on each penny struck, penny (read: zinc) lobbyists--henceforth "pennysniffs"--have been busy making the case that messing around with the penny, especially by doing away with it but even by altering its metal (read: zinc) content, will hurt American consumers.

Of various bad arguments for keeping the penny--and all of them are bad to some degree--perhaps the worst is the one first promulgated by Zinc Lobby Penn State economics professor Raymond Lombra, and recently repeated by Eric Wen in The New Republic. It is that, if pennies are abolished, retailers will respond by rounding up to the nearest nickel, making everything cost more. Lombra calls it, ominously, a "rounding tax," presumably to win gullible conservatives over to his cause.

I'm tempted to stop typing now, and make this into a pop-econ quiz, the quiz question being: Why would any economist, or even any intelligent journalist, say anything so stupid? No, sorry, that's the second quiz question. The first is, Is this argument consistent with the most elementary principles of economics?

If you answered "no," congratulations! You have at least some grasp of how competitive market forces work, especially by recognizing how they would force rival retailers to come up with some alternative to merely "rounding up" prices in every instance, probably by rounding up some and lowering others, because under competition something called a "zero profit" condition holds, which is a fancy way of saying that if any firm in a competitive industry raises prices more than it has to to earn a normal return it will see its customers blazing a trail to some rival firm or firms smart enough to resist doing the same.

If you answered "yes," on the other hand, you too may have a future as a professional pennysniff, perhaps for Americans for Common Cents; alternatively you may qualify as a staff-writer for a neo-liberal monthly. But please have some consideration for others in choosing your vocation, and don't go 'round pretending to be an economist.

9 Responses to “Penny Lame”

  1. avatar Paul Marks says:

    Everything in this article is technically correct.

    However, it misses the basic point.

    This being that the Dollar is now so inflated that a penny is not even worth the zinc in it. That (the inflation of the Dollar) is the real problem.

    Still if one wishes to fight the "zinc lobby" the task is easy.

    The government could stop minting coins at all - and stop printing money also (after all no United States notes have printed in many decades, and if the Federal Reserve is abolished, as it should be, there would be no Federal Reserve notes either).

    Till the 1850s it was legal for private enterprise to mint coins. And, in the West, they developed a good reputation for not cheating in their coins (either in weight or purity).

    Of course if people prefered base metal coins (zinc or steel) that would be up to them.

    And if they prefered notes (private notes) that would be up to them also.

  2. avatar Paul Marks says:

    I suppose I would be expected to say "where the penny goes today the Dollar will go tomorrow".

    As inflation (i.e. the increase in the money supply) would eventually make the Dollar as worthless as the penny.

    However, the crises (and not just in the United States) will upon us shortly (my guess, not really "my" guess of course in that I am drawing on others, is that it will hit in 2013) - so it is rather pointless to write in terms of the long term.

  3. avatar W.E. Heasley says:

    An overlooked argument is the retailing “$19.99” phenomena. The proposition being that the consumer somehow sees $19 and does not see $20.

    If retailers are going to be consistent with their notion of perceived price, “$19.99” will need rounded down to $19.95 or else the consumer perceives the higher price.

  4. avatar Paul Marks says:

    Well a customer can only speak for himself (or herself) on the "99" or "95" thing.

    Personally I find it irritating - it puts me off if I do not see straight priceing (so much so that I tend to leave a store that does it).

    As for work - I have always strongly opposed playing with numbers. I do not believe that people are so stupid that they think "9.99" is really different from "10". And wasting time looking for change just holds up the line.

    Litterally holds up the line - if a customer offers me 9 Pounds (I am British) and one fifty pence coin and three twenty pence coins for a ten Pound ticket I will accept it - but if they then ask for a ten pence coin as change I will politely ask them to leave (taking their money with them).

    A customer like that is a game player - he (or she) will cause problems in all other sections of the enterprise (indeed causing trouble is why the person has come).

    Customer service is a two way street - just as an enterprise should not play games with customers, so customers should not play games with the enterprise (a person does not stop being a person when they go to work).

    If you tolerate game playing - then a person will start pulling stunts like paying a one hundred Pound (or one thousand Pound) bill, in penny coins - and insist you count it. Whilst there is a line of cars going into the public highway (holding up traffic and potentinally holding up police, fire and health vehicles).

    Some consider me a cynical person, but after more than 20 years in security work (all sorts of security work - from the highest to the very lowest) and (since my health fell apart) four years of car park work at an amusement park (yes I am litterally a "Red Neck" as, even in Britain, working outside gives a person a red neck), I am strongly of the opinion that the vast majority of people are O.K.

    Only a tiny minority of people are ....... and a business enterprise is much better of without these people as customers.

    For example, the sort of person who is really interested in "99" (or pays a Pound price in penny coins) is also the sort of person who will be found later (in a different part of the enterprise) doing criminal damage.

    Tell them (I repeat they are tiny minority) to take a hike as soon as you spot them - believe me, it saves a lot of grief later on.

    However, I repeat, this is all a minor matter anyway.

    The real point is the inflation (the increase in the money supply) that has made the coins worth less than their metal content.

    And it is not just a matter of zinc.

    As George Selgin must know, coins (ordinary coins used every day - in things like change on a bus) in both Britain and the United States were part silver till the early 1960s.

    Why would that be incredible today? Because of the inflation of the currency (the increase in the money supply).

    This is the real point - not some sillyness about "99".

  5. avatar Martin Brock says:

    To my great-grandchildren (and possibly my grandchildren too), this debate will seem quaintly archaic. They'll hardly remember coins or paper money. The vast majority of my monetary transactions are electronic now. Pennies are doomed regardless of inflation. So are nickels, dimes, quarters and paper bills of every denomination. We might as well discuss wagon wheels.

  6. avatar Paul Marks says:

    The wheel is still used Martin.

    Pol Pot may have believed that political ideology could create a new society that could ignore experience (so irrigation systems could be built that relied on water running up hill, and political speeches could replace the use of wheels), but he was mistaken.

    As for electronic transfers - they are perfectly possible with commodity money.

    All an electronic transfer is, is a transfer of ownership. Credit cards (and so on) are perfectly practical under a commodity money system.

    It is like when gold is moved between the ownership of two countries - in practice ships are not needed, all that happens is that the record of who owns what gold in the vaults of the Federal Reserve in New York is changed (and that can be done electronically).

    Of course there are doubts about that (for example the Swiss people have never forgiven the Fed for its gold grabbing during World War II - and Comrade Chevez is rather keen to have his country's gold under his physical control at home, for a socialist he shows an interestingly realistic grasp of at least this matter).

    But these are political and commercial doubts - not technical doubts. Technology has naught to do with the matter.

    By the way it is the common mistake of certain forms of collectivist (for example Marxists) to think that new technology means that new economic PRINCIPLES are needed - they are not, the "forces of production", technology, do not "determine the ideological superstructure", as the "ideological superstructure" is actually logical principles that are NOT relative to time and place - see Carl Menger "The Errors of Historicism" 1883, part of the general "War of Method" between the Austrian School and the German "Historical School".

    Still back to the present matter.

    No one doubts that elentronic means can be used to transfer the ownership of gold money (or any other form of money) without having to use physical trucks.

    Although, yes, physical trucks (with physical wheels) are needed when doubts arise over the reliablity of the people with physical control of gold (or any other material).

    For example, leaving physical gold in the hands of the New York Fed may be seen as rather foolish (and a lot sooner than the time of your "children and grandchildren"). If people do not want to trust ships and aircraft, they should at least truck any gold (or other valuable commodity that belongs to them) over the border into Canada.

    Of course the word "stolen" would not be used - but "freezing" assets has the same effect.

    It is best to take assets out of the physical control of people who may grab them (whatever form of language they may use).

    Although (of course)the best physical means of moving the assets may change with changes to technology.

    I hope I have never denied that.

    And (which I hope I also have never denied) new assets may be discovered that were unknown in the past.

    It is only the principles of economics (as part of the general principles of human reasoning - human action)that do not change. What things are valued (and for what) may change a great deal.

    This is why I reserve judgement on things like "Bitcoins".

  7. avatar Mark Brady says:

    Rather than speculating on the rationality of customers and retailers, economists have another explanation for the $19.99 phenomenon: that it requires the clerk to provide change (in this case for a twenty dollar bill) to ensure that she rings up the transaction so discouraging theft by the clerk.

  8. avatar Paul Marks says:

    Interesting Mr Brady - I had not heard of that before, and I should have, so many thanks for pointing it out.

  9. avatar Bill Stepp says:

    Presumably modern technology, with bar coding of products and what not, has obviated the need for the clerk to provide change (for a twenty). Is the economists' rationale obsolete now?

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