Consumption Rules

How many of you will actually stoop down to pick up a penny off of the ground? If you’re like me, you don’t waste your time. That may be pride, or it might be just good common sense. Picking up a penny isn’t nearly as lucrative today as it once was. In fact, with inflation, a penny today is worth the equivalent of 0.000922 cents of buying power when it was first coined. (or at least since 1800 - 7 years after it was started [Inflation Calculator]) Production of the half cent ceased in 1857 after its practicality diminished. We need to pass legislation ceasing production of the penny, and rounding all prices to the nearest nickel.

Think about it this way: Let’s say you go to the store and buy something twice a week. Miraculously, every time you go, your purchase ends up costing $X.X6 dollars - or in other words, you get $0.04 back every time - the maximum number of pennies possible. Even more miraculously, you don’t throw those pennies away, or lose them, or give them away to those have-a-penny-give-a-penny- need-a-penny-take-a-penny things at gas stations. Instead you keep them in a huge jar at your house. If you were to continue at this miraculous pace for five years (and ignoring any inflationary effects) you would have $20.80 in the end. Good for you! You saved up enough money to actually purchase something. Or did you? Try taking that $20.80 and using it at the store to purchase something. Chances are they won’t take it, or if they’re really nice they’ll take an hour or more to count it. So then what are your options? There are a few banks, but mostly credit unions, that have coin counters where you can get them counted for free. It might take you a while to find one, though. Or you could just get the paper rolls and roll them yourself as your evening activity while watching Lost. Or the only other option is to take them to Coinstar, or some other coin counter that will charge you an additional 6% or more off the top! The point: $20.80 in pennies is not worth $20.80 legal US tender. The penny is simply not economical to continue; for either the government, retailers, or the consumer.
First of all, the penny costs almost as much to produce as it is worth. (.81 cents, according to the US Mint) It is by far the least efficient money to create. If the US Mint focused its resources on printing and coining more valuable money, it would save money over time.

There are those who want to keep the penny in circulation simply because of its historical value, and the fact that it pays respect to Abraham Lincoln. It needs to be remembered, though, that Lincoln is also on the five dollar bill (I think….it’s been a while since I’ve carried that much cash), so his presidential history will not be lost.

There are also those who think that getting rid of the penny will cause a reduction in their payroll, an increase in taxes, and an increase in prices. This worst-case rounding fear is simply unfounded. First of all, the probability of prices being rounded up or down is probably 50% either way - so taxes, payroll, and prices will both go up and down in an offsetting amount. But I would argue that there is strategy in prices, while not so much in taxes or payroll, so the probability in prices is skewed one way; which I would argue is a downward pressure.

Think about it - why are prices always $x.99? It’s always just below the dollar mark - especially with gas, right? You read a sign that says gas is $1.99, and most people think “it’s just over a dollar”, when really it’s pretty much two dollars. It’s a marketing gimmick (called odd-even pricing) to get you to think that prices are lower than they actually are. Afterall, $24.99 sounds so much better than $25.00!! (At least that’s what retailers think. Just open up a store’s ad to prove that point) What makes us think that suddenly the strategy of psychologically undercutting prices is going to go away when we get rid of the penny? Now, instead of being $X.99, all prices will just be $X.95! The retailers don’t care - they understand that when Americans have more money they just spend it - probably at that same store. So it keeps everyone happy.

Now, because the penny is such a small increment, it will only affect the marginal dollar. So here’s a simple scenario to sum it up: Let’s say something costs $0.99 now in a state with 7% sales tax. Production of the penny ceases, and so the price changes to $0.95 (see paragraph above). The taxes are 7% but knowing the government, they will probably round up. So they round up to $0.10. Before, the item would have cost $1.06 ($0.99 * 1.07), whereas now it costs $1.05 ($0.95 plus $0.10 tax). The retailer makes less on the marginal dollar, but makes more sales overall, the consumer saves money, and the government gets more than their fair share. Everyone is happier, and no one ever has to worry about copper being mixed in with their silver coins ever again!

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This entry was posted on Wednesday, March 8th, 2006 and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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