Monday, March 03, 2008

Pennies from Paulson 

Over the last six months, the cost of producing a penny and the material costs of the metal contained therein (97.6% zinc, the rest is the copper coating) has risen to a total cost of $.014, including production and record-high metal costs but not transportation. It's worth remembering that in 1943 the U.S. Mint, facing a shortage of copper and zinc from munitions demand, switched to a zinc-covered steel penny. People hated them -- they corrode when exposed to enough moisture -- but you still find collectors of them. If prices on zinc and copper continue to climb, you can expect some change in the composition of the penny.
That's me, in April 2006. Remember that the important price for the penny is zinc, not copper. Zinc was just in the beginning of the sharp upturn in the 5-year graph to your right. While it has come off its highs, it is still in the area around that point where I stated the above.

Thus it should come as no surprise to most readers to find out that Treasury Secretary Hank Paulson wants to run the penny out of town, but can't.

�The penny is worth less than any other currency,� Paulson said in response to a question in a Chicago radio station interview Friday morning. �But there�s great sentiment� and �I don�t think it�s politically doable to eliminate the penny.�

...Paulson described eliminating the penny as a back-burner issue for now as the housing crisis and slumping economy dominate his attention. �I got enough challenges to take on,� he said in today�s understatement of the day.
It would be nice to make arguments about the penny and price granularity, but the explanation for the penny's existence is not moved by these concerns. We are used to seeing prices with $.01 as the smallest grain; we don't process below that very well (as Nick Szabo argues) and we're not inclined either to deal with rounding up as Speed Gibson offers for a way to eliminate the penny. There's a feeling to the consumer that he or she has been had by this, that it's a scam, and I don't think any amount of explanation is worth the benefit of getting pennies out of the till.

The reason the penny will disappear is that the costs of production rise high enough to eliminate the seigniorage revenue pennies produce. That Paulson is talking about eliminating the penny indicates the government is losing money. Now you have to battle the psychic costs; anyone remember our experiment with the metric system?