Treasury Department set to phase out the penny

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149. Well then you should like Georgetown economist Robert Shapiro's study finding that eliminating the penny hurts the poor.

From his research paper, using economics and mathematics:

VI. The Costs to Consumers of Rounding Cash Transactions to the Nearest Nickel

When Congressman Jim Kolbe proposed the “Currency Overhaul for an Industrious Nation (COIN) Act” in 2006, it directed not only that the Mint stop producing new pennies, but also that all cash transactions would be rounded up or down to the nearest nickel. This approach was also adopted in the program enacted in Canada in 2012. Under The Canadian Economic Action Plan, the Royal Canadian Mint stopped the production and distribution of new pennies on February 4, 2013. While the Canadian penny remained legal tender, merchants were encouraged to round all final cash transactions up or down to the nearest $0.05. This approach was based on the view that Canada could reduce its coin production costs by eliminating new pennies and, since the penny would remain a pricing unit, there would be no negative effects on consumers or the economy. In practice, this approach entails significant, unintended costs.

Congressman Kolbe and the authors of Canada’s program were correct in one respect: retaining the penny for pricing purposes while eliminating it from circulation involves largescale rounding up or rounding down to the nearest nickel on billions of cash transactions. Economists have analyzed the likely distribution of such rounding adjustments, between those rounded up and those rounded down. The leading study examined pricing by a major convenience store chain in 1999 and 2000. Using actual prices, the researcher simulated 1,000, 5,000 and 10,000 different transactions involving purchases of one, two or three items, and found that between 60 percent and 93 percent of those transactions would involve rounding up to the next nickel. As a result, the author concluded that the rounding up and rounding down of all cash transactions to the nearest nickel would create additional costs for U.S. consumers totaling $318 million to $818 million in 2000, or in 2015 dollars, consumer losses of $438 million to $1.13 billion. Even the low estimate of $438 million is more than three times the total cost of producing all new pennies in 2015 ($130.1 million) and more than four times the theoretical production savings from eliminating the penny and shifting the equivalent total face value to dimes.

Moreover, this analysis almost certainly understates the additional costs to American consumers from eliminating the penny, because many firms would engage in strategic pricing to increase their revenues by ensuring that more transactions would be rounded up. Economic theory and evidence establish that firms set prices to maximize their profits, and we should expect that merchants dealing with large volumes of cash transactions would approach the elimination of the penny as an opportunity to do that, especially in high-volume, low-margin industries. For example, gasoline stations often price their products in denominations of fractions of one cent and round up the final charge; one study estimated that gasoline providers earn an additional $200 million to $400 million per year from this process.

These consumer costs from rounding up to the nearest nickel would also fall disproportionately on lower-income households. When Canada eliminated its penny, electronic payments with credit cards, debit cards and checks continued to be denominated in pennies, without rounding to the nearest nickel. A study from the Federal Reserve Bank of San Francisco found that 55 percent of people living in households with annual incomes of less than $25,000 prefer cash to other forms of payment, compared to 10 percent of those living in households with annual incomes of more than $200,000. The study further found that lower-income people use cash for about 57 percent of their purchases, compared to 33 percent of transactions by highincome people. The cost of rounding up is at most $0.02 per transaction, but those costs would accumulate much faster among lower-income people least able to afford it.

This dynamic would also disproportionately affect younger people, as they are more likely to use cash for their purchases as well. The San Francisco Federal Reserve Bank study found that 40 percent of people ages 18 to 24 prefer using cash to other payment methods, compared to 25 percent of those ages 55 to 64 and 65 and older. Furthermore, people ages 18 to 24 use cash for about 48 percent of their purchases, compared to 40 percent of the purchases made by people ages 55 to 64 and 36 percent of purchases made by people ages 65 and older.

Given these dynamics, it is also likely that some merchants would restrict electronic payments, especially in high-volume, low-margin businesses. Under current law and regulation, merchants can set a $10 minimum for credit card transactions, but minimums are not permitted for debit card transactions. In practice, many merchants do apply minimums to debit card purchases: a survey by the Federal Reserve Bank of Richmond of 420 merchants across 26 different sectors found that 29 percent of them used debit card minimums. Since eliminating the penny would increase the potential profits from cash transactions, it also would likely increase merchants’ use of restrictions on electronic payments to avoid cash, and thereby reduce the economic benefits associated with such payments.

https://pennies.org/wp-content/uploads/2018/12/Economics-of-Eliminating-the-US-Penny-August-2017-docx-c.pdf



Dr. Shapiro is a Senior Policy Fellow of the Georgetown University McDonough School of Business. He also served as the principal economic advisor to Bill Clinton in his 1991-1992 presidential campaign and as an economic advisor to the campaigns of Al Gore, Jr., John Kerry and Barack Obama. Dr. Shapiro has been a Fellow of Harvard University, the Brookings Institution, and the National Bureau of Economic Research. He holds a Ph.D. and M.A. from Harvard University, an A.B. from the University of Chicago and a M.Sc. from the London School of Economics and Political Science.