- Category: Penny Policy
Consumers and the government would lose if the penny were removed from circulation. At the same time, the potential benefits that have been associated with the coin's demise are illusory. Some of these myths are discussed below.
#1 Myth: Cessation of penny production will save the government money.
Reality: The government would actually lose money without the penny. How?
First, the Mint's fabrication and distribution costs include fixed components that will continue to be incurred whether or not the Mint produces the penny. These fixed cost components and other overhead allocated to the penny would have to be absorbed by the remaining denominations of circulating coins without the penny.
Second, under current Mint accounting, the nickel costs eleven cents to manufacture. Since nickel production will increase without the penny, it's hard to see how you save money by making more nickels that are losing more money.
These fixed cost components, and other overhead allocated to the penny, would have to be absorbed by the remaining denominations of circulating coins without the penny.
# 2 Myth: The penny doesn't really have value.
Reality: The penny aids charities in raising hundreds of millions of dollars each year for important causes -- yes, one cent at a time -- and clearly demonstrates the coin's value. Notable charities like Ronald McDonald House Charities, the Leukemia & Lymphoma Society and countless local groups rely significantly on small, yet critical, penny contributions. Indeed on Lincoln's birthday in 2009, the Leukemia & Lymphoma Society celebrated the 15 billionth ($150 million) penny collected by school students across the country for their "Pennies for Patients" program.
#3 Myth: Penny elimination won't hurt consumers
Reality: In practice, price rounding cannot be fairly done.
Consumers will be hit with a "rounding tax" without the penny. The claim that rounding will have no appreciable effect on the consumer is predicated on the notion that there is an equal 10% probability of purchase prices ending in a particular digit. In fact, evidence suggests that the equal probability assumption is false.
Economists agree on one principle: businesses are guided by a desire to maximize profits. There is no obvious incentive for businesses to set prices in a way that will lead to rounding down.
#4 Myth: So few people use cash these days that the impact of eliminating the penny will be negligible.
Reality: Rounding hurts consumers and will disproportionately affect those who can least afford it.
Millions of transactions are conducted each day in the U.S. economy, and with 26% of Americans either not having savings or checking accounts or relying on payday lending services, the amount of cash transactions each day is simply not dismissible.
Federal Reserve studies have shown that people with relatively low incomes (particularly the young, elderly, and minorities) use cash more frequently than individuals with higher incomes.
Since only cash transactions will be subject to rounding, any move to eliminate the penny would be regressive and hurt "unbanked" Americans who have no other option and lack the means to make non-cash transactions.
#5 Myth: The demise of the cent will have no negative impact on government spending.
Reality: Eliminating the penny will have an impact on inflation, both real and perceived.
Even a small increase in inflation mounts to considerable sums since all government outlays (e.g., Social Security, welfare, pensions, paying interest on the national debt) and many private sector costs (wages) are tied to the Consumer Price Index.
#6 Myth: If the penny were eliminated, it will save time at the cash register and improve worker productivity.
Reality: The charge of lost worker "productivity" with the penny is absurd.
Retail workers are not paid according to their productivity. It takes leaps of logic to link time "wasted" with pennies to a dollar equivalent productivity loss and then intuitively suggest time wasted could have been used to clean, restock, shelves, or serve consumers.
The more troubling problem arises with the assumption that removing the penny from circulation will eliminate the productivity loss. Such conjecture is illusory. In fact there are many reasons to believe the net time associated with consummating transactions will, if anything, increase not decrease without the penny.