In today’s Friday interview, Carolina Journal’s Mitch Kokai discusses with Dr. Robert Whaples, professor of economics at Wake Forest University, whether the penny should be eliminated. The interview aired on Carolina Journal Radio (click here to find the station near you).
Kokai: You recently had a chance to address with the Shaftesbury Society of the John Locke Foundation on this very topic. Is it time to eliminate the penny? It wasn’t just a simple yes or no — you actually have studied this issue. What were some of the things you found?
Whaples: Well, my bottom line conclusion is that perhaps, sadly, it probably is time for us to eliminate the penny. And the main reason I would say this is — two main reasons. The first is that the penny is becoming a money loser for the U.S. government. The United States Mint used to make $20 million profit or so a year from the penny, but unfortunately the cost of making the penny has gone up considerably as the value of the metal in it has gone up. Zinc makes up 97.5 percent of the penny and with zinc prices soaring the value of the metal in the penny now is closing in on about .09 cents. So if it goes up just a little bit more, it will actually start paying for people to take their pennies and melt them down for the zinc and the little bit of copper that is in them. So the number one reason that maybe it is time to get rid of the penny is that it is costing more than a penny for the U.S. government to make it. If you take the value of the metal and then you add to it the cost of, you know, minting it, it is costing about 1.5 cents just to mint a penny.
Kokai: You had an interesting study also that looked at whether there would be some effects of price rounding — could you explain how that went?
Whaples: So the big fear that people have is that, if we did get rid of the penny, the customer would get gouged. And that is because, if you got rid of the penny, what would you have to do? Not being able to use a penny you’d have to round the prices to the nearest zero or five, since we use nickels, and if you’ve gone to the store you’ve seen that there are a lot of prices out there that end with a nine. So 99 cents would be rounded up to one dollar; $1.01 would be rounded down to a dollar. But there is a lot more 99 cents out there than there are $1.01. And so people fear that they would end up getting gouged in the process because there would be so much more rounding up than rounding down. And while that makes a lot of sense, especially if you are only buying one item, once you buy a few items, those things tend to cancel out. Especially once you throw in the old sales tax. That tends to cancel it out. So what I was able to do is actually get data from a convenience store chain — a Wilco chain headquartered in Winston-Salem where I live — and they have convenience stores in about eight different states — and I looked at data from all of their different states, and added up the numbers and found out that, in fact, today if you were to round those prices, the eights and the nines up to a zero, the ones and the twos down, etcetera, that in fact, the rounding would slightly go in favor of the consumer these days. It is not very much. I would use the word “miniscule” to describe it overall. Consumers would gain just a hair’s breadth. In fact, I found that of the 185,000 transactions that they sent me data on, consumers would have won about $100 on that. So that is 20 stores over a whole week and that is consumers, you know, getting a couple of bucks per store per week. It’s not very much. It came out to be a gain of about one-twentieth of a cent per transaction for customers. So one-twentieth of a cent is about zero as far as I am concerned. And that really means that the whole rounding issue disappears, goes away. People just wouldn’t be benefiting or getting harm from any rounding that would occur if we were to get rid of the penny based on this reasoning from a pretty big chain’s day-to-day experience.
Kokai: You also took a look at the issue of regressivity — would this harm poor folks more than those who have a lot of money. And you didn’t seem to find much evidence of that.
Whaples: That is exactly correct. What I did is I compared one of the Wilco convenience stores in a richer section of Winston-Salem to one of the ones in the poorer section and found the results to be basically identical — almost to the penny. That in fact, customers were gaining just a little bit in both the stores.
Kokai: Now also in looking forward to this, if for some reason we did eliminate the penny, you said that there are also some other opportunities that would open up, that would have a lot to do with the slots in the cash registers.
Whaples: Yeah, if you think about it, we kind of have a standard money institution here — it is the cash drawer in the United States. And there are four slots for coins. And if we were to get rid of the penny, that would open up another slot, and I think it would make retailers much, much more willing to start accepting the dollar coin. The U.S. government has tried a couple of dollar coins over the years — as we know the Susan B. Anthony, the Sacagawea that just never really caught on — and I think it is [that] they were just too cumbersome to use. Where was the clerk supposed to put them? If we didn’t have the penny though, now we would have this slot where they could put them and, in fact, that would mean a switch from having a dollar coin — switch from having a paper dollar to a dollar coin. And there are some economists at the Federal Reserve who have estimated that switching from paper to a coin for the dollar, because of the added durability, would actually save the country on net about $500 million a year. So I think getting rid of the penny would set off a little chain reaction of sort, of the forms of money that we use.
Kokai: Well some might say we’ve had the penny for years and years and years — there is no precedent for this. You actually have looked at years past and seen that there was — many people don’t know now — a half penny. And that at some point the half penny disappeared because of the inflation.
Whaples: And that goes way back. The half penny was taken out of circulation back in 1857, a few years before the Civil War. And if you look at it, the half penny, people were earning about a dollar a day back then.
Kokai: A dollar and one cent, if I remember you correctly.
Whaples: That’s right.
Kokai: So at that time, it was probably even more important, that cent.
Whaples: And they were working like 11 hours a day or so, so they were making 9 cents an hour. One-eighteenth of their pay would have been — their hourly pay — would have been that half penny. So what is one-eighteenth of the minimum wage today? That is closer to a quarter. When we got rid of the half penny it was about the equivalent of what a quarter is in society. And yet we got rid of it without too much of a problem — there wasn’t much complaining at the time. People were just sort of happy, it turns out, in most cases to get rid of the half penny, although they continued to use it in some places where they thought it was more valuable. That kind of leads you into what would happen if we did get rid of the penny — at least if the government stopped minting the penny in the United States. If people wanted to continue using it, they could continue using it, it. [It] would probably become a little scarcer and scarcer as time wore on. But people who really thought it was valuable and stores that thought it was, that their customers thought it was valuable, would probably continue to use it. And other places would get rid of it and go to that rounding to the closest nickel that we’ve talked about.
Kokai: But bottom line today, based on your examination, it might be time to stop with the penny?
Whaples: That’s right. I think the main reason really that we are hesitant about getting rid of the penny is that we’ve had it around for a long time. We’ve had Abe Lincoln on the front of our penny now for 97 years — we are coming up on his 200th anniversary of his birth, 100th anniversary of him being on the penny — and so it is really for those sentimental reasons. When I told my daughter I was coming over here to talk about eliminating the penny she had just a look of shock on her face, she punched me in the arm! It was like, “Dad, you can’t get rid of the penny.” This is blasphemy or something. But, in fact, there are some pretty high opportunity costs. Well, when you add them up — getting into the hundreds of millions of dollars — okay that amounts to a few dollars per person in the country a year. But that is essentially what we are paying for the sentimental, cultural set of values of having dear old Abe continue being on that little copper coin.