The case against killing the penny
It’s hard to think of a recent Canadian policy that’s drawn as much praise as our Northern neighbor’s decision last week to eliminate the penny.
“Canada wins race to eliminate the terrible penny,” the Atlantic Wire proclaimed. The Washington Examiner declared the policy “a worthwhile Canadian initiative,” referencing Jonathan Chait’s much-beloved boring headline writing contest.
The economics, after-all, seemed pretty clear cut: It makes no sense to keep circulating an one-cent coin that costs 1.5-cents to produce. But over at The New Republic, Eric Wen flags some research suggesting that there could be an economic downside to eliminating the penny, as it could have a disproportionately negative impact on the poor who tend to be more reliant on cash transactions.
A 2001 economic analysis by Penn State’s Raymond Lombra found that a post-penny economy—in which we round to the nearest nickel—would probably hurt the poor disproportionately. In theory, rounding would balance itself out over time—with some transactions rounding up and others rounding down. Lombra’s simulations, however, which were based on the price book of a major retail chain, found that between 60 and 93 percent of transactions would round up, costing consumers nearly $600 million a year. Because the poor tend to use cash more often [and only cash transactions would be subject to rounding], they would shoulder most of that burden.
A worthwhile Canadian initiative is, perhaps, yet to be found.