Lombra Testimony Before the Senate Banking Committee

TESTIMONY
Statement of
Raymond E. Lombra
Professor of Economics
Pennsylvania State University
Americans for Common Cents
 
Before the
Senate Banking Committee
June 20, 1990
1:30 P.M.

Mr. Chairman and Members of the Committee:

I am pleased to be here today on behalf of the Americans for Common Cents to discuss some aspects of proposed legislation, such as S. 814, which would significantly change the U.S. coinage system. In particular, I would like to review those aspects of an April 1990 Gallup survey that bear on the questions before you today and summarize a study I have completed on the economic effects of eliminating the penny and instituting a price rounding scheme for cash transactions.

The conclusions drawn from this review are easily summarized:

    There is little public demand for or interest in a new dollar coin.

    Eliminating the penny would impose a significant and regressive rounding "tax" on the American public. The public appears to recognize this possibility and strongly opposes elimination of the penny.

    The effect of the rounding "tax" on prices would in turn increase government outlays indexed (formally or informally) to prices by at least $1.5 billion over a five year period.

Public Attitudes Toward the Creation of a New One Dollar Coin

The Americans for Common Cents does not have a formal position on the possible introduction of a dollar coin. However, in response to a request by the staff of the Senate Banking Committee, questions about the dollar coin were included in the April 1990 Gallup survey designed to measure public attitudes towards various reforms of the coinage system. The survey found that only about one-third of the adult public would favor legislation that would call for the creation of a new one dollar coin and less than half of those respondents favoring the new coin would approve of abolishing the dollar bill. Taken together, and expressed as a portion of the entire group surveyed, these figures mean that only 15% would favor both the creation of a new dollar coin and abolishing the one dollar bill.

No Logical Linkage Between Penny and Dollar Coin

In the various pieces of legislation that have been produced to date, it is assumed, at least implicitly, that there is some type of linkage between the possible introduction of a dollar coin and the elimination of the penny. Simply put, we see no logical connection between these two initiatives and believe the costs and benefits of each proposal should be evaluated separately. This contention is strongly supported by the recent Canadian experience wherein a dollar coin was introduced in 1987 and, at the same time, a conscious decision was made to keep the Canadian penny.

The linkage we would like to emphasize is that which appears to exist between various aspects of the cash transaction process and the need for one cent coins. Along these lines, let me summarize the results of a study I have completed of the economic effects associated with eliminating the penny and introducing a price rounding scheme for cash transactions.

The Major Economic Effects Associated with Eliminating the Penny

    A careful statistical analysis based on the information available on the distribution of prices in the United States strongly suggests that, on balance, prices will be rounded up.

    This rounding "tax" will have a significant adverse effect on consumers. A conservative estimate places the tax in the $600 million per year range.

    Federal Reserve surveys show that those with incomes under $10,000, non-whites and Hispanics, and those adults with less than 12 years of education pay for more than half of their total purchases in cash. Since only cash transactions will be subject to rounding, it follows that the rounding "tax" will be regressive, affecting the poor and other disadvantaged groups disproportionately.

    Although the direct inflationary impact of eliminating the penny and rounding prices is likely to be small, the effect in dollar terms on Federal government outlays linked to the Consumer Price Index (such as Social Security benefits, government pensions, etc.) could cumulate to a considerable sum. Utilizing the conservative price rounding estimate mentioned above and Congressional Budget Office projections, it appears that elimination of the penny could raise Federal government outlays by about $1.5 billion by 1995.

    The major alleged benefit associated with eliminating the penny- namely recovering the productivity lost when retail clerks make change- is an illusion. Simply put, cash register clerks would not suddenly be free to stock shelves of clean stores if the penny were no longer in circulation. Moreover, rounding creates additional complexity at the cash register- that is, the cash or charge and round or not round character of each transaction - that will, if anything, increase the time associated with settling transactions, thereby aggravating any productivity loss rather than reducing it.

    The Government's profit from penny production- that is seigniorage- will continue for the foreseeable future. More specifically, the cost of producing pennies has ranged from 0.6 - 0.7 of a cent in recent years and these costs have increased by far less than the overall inflation rate. These facts, along with the desire of the President and the Federal Reserve to lower the inflation rate over the decade of the 1990s, suggests it is unlikely that the production costs of the penny will exceed one cent anytime soon.

Gallup Results Show Public Concern
    More than 60% of those adults surveyed said they would oppose legislation that would call for discontinuation of the penny and price rounding.

    About three-quarters of those surveyed were concerned that merchants would increase their prices.

    Perhaps reflecting the expected regressive effect of the rounding "tax," opposition to the legislation was proportionately larger among those adults surveyed with annual incomes under $30,000.

Concluding Thoughts I cannot identify any net economic benefits associated with the proposed legislation regarding the penny. Moreover, the Government's experience with the metric system, the nine digit zip code, the bicentennial $2 bill and the Anthony dollar coin, along with the recent Gallup survey results, suggests to me that the public must be convinced that there is a pressing need to change anything that has become embroidered into the fabric of society. Simply put, the case for eliminating the penny is very weak. We concur with the General Accounting Office recommendation that the cent be retained. We are pleased to submit the economic study and the poll for the record.  

The Penny's Economic Importance

Consumers benefit with a low denomination coin. Moreover, faith in the strength of the economy and the nation is tied to perceptions about the currency system, and public acceptance is an important criterion for evaluating currency and coinage changes.

Proposals to eliminate the penny and move to the nickel as the lowest denomination coin create public anxiety about higher prices and inflation. Over three-quarters of Americans (77%) are concerned merchants would raise prices without the penny. And they're probably right. Raymond Lombra, Ph.D., Professor of Economics at Penn State University, told a Congressional committee that rounding cash sales up or down to the nearest nickel would cost consumers over $600 million annually.

Some proponents of penny elimination may say the coin's demise would not even be noticed.  But removal of the cent is a concern, if only as a symbol of inflation.  If prices rise, the Consumer Price Index (CPI) rises which, in turn, triggers further rises in many public and private sector costs which are tied formally or informally to the CPI. The Wall Street Journal has said eliminating the penny would "wave a symbolic white flag before the forces of inflation." They likened taking the penny out of circulation to actions taking by third world countries to degrade their currencies and create hyper inflation.

Approximately six in ten Americans (59%) think eliminating the penny would cause confusion when purchasing items.  A system of rounding would be regressive and hurt those least able to afford it because they make more small cash purchases.  And the current coinage mix should be maintained as long as it meets individual consumer preferences.

Other items of interest:

Effects of Price Rounding on the Economy

Merchants would have an incentive to set prices that ensure rounding up on single item cash purchases. Consumer inflation hits low income and fixed income groups the hardest.

The effect in dollar terms on the government and private sector could be significant, perhaps totalling over $2 billion after five years. (This is the most conservative estimate possible based on purchases by adults 18 years of age and older. It does not include transactions by the population below 18 -- a group that makes even a larger proportion of expenditures in cash.)

Although rounding might only have a minimal effect on the Consumer Price Index (CPI), in dollar terms even a seemingly small effect could mount over time to a considerable sum given that virtually all government outlays (i.e., social security and welfare benefits) and many private sector costs (i.e., wages) are indexed to the CPI.

Increased prices due to rounding ultimately would fall disproportionately on those least able to afford it, the poor and the elderly, because they make more small cash purchases.

Rounding will have a large economic toll requiring public education programs, retraining of employees, and reprogramming computer cash registers and other automated equipment.

Penny Profitability: What Does it Really Cost to Make a Penny?

Recent reports about penny costs have led some to ask if the government would save money by eliminating production of the penny. So, are we better off financially without the penny? The answer is "no" according to a recent report by Navigant Consulting, Inc. Click here to see the full report

Navigant found 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.  Navigant estimates this fixed component at $13 million in FY 2011. Plus, there is $17.7 million in Mint overhead allocated to the penny that 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. In response to a 2006 question from the Subcommittee, the Mint put forward a scenario where nickel production doubled without the penny. It's hard to see how you save money by making more nickels that are losing more money. The data bears this out. Applied to FY 2011 cost and shipment data, the Mint would have incurred an additional net cost of $40.4 million without the penny last year.

Navigant concludes that with existing fixed costs, and the nickel substitution scenario outlined by the Mint, eliminating the penny would likely result in increased net costs to the Mint of $10.9 million, relative to the current state.

SUMMARY POINT

Penny elimination would not eliminate government losses, and will actually increase the overall loss to the Mint due to increased production of the nickel and ongoing Mint overhead costs. Moreover, consumers would be hit with a "rounding tax", the last thing Congress should consider with our current fragile economic climate.

More than Two-Thirds of Americans Still Favor Keeping the Penny

Recent Poll Shows Increasing Penny Support and Concern About Price Increases If Penny Is Eliminated

WASHINGTON--(BUSINESS WIRE)--A poll released today by Americans for Common Cents (ACC) continues to show overwhelming and increasing support for the penny by the American public. 68% of those surveyed favor keeping the penny in circulation, representing a slight increase since the last poll in 2012.

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