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Things of value - The penny and OTD parade

“A penny for your thoughts….” Have you ever been “outside” a conversation, just waiting to put in your two-cents worth? Well, you may not have known this, but your participation in the discussion actually costs the U.S. government four cents. That’s because Uncle Sam now pays two cents to manufacture every penny coin.

Imagine yourself as a manufacturer. If it cost you a dollar to produce a doohickie, and you could sell the doohickie for only 50 cents, how long would you stay in business? My hunch is that as soon as your accountant brought you the figures, you’d either shut down or try to find a cheaper way to make doohickies. For example, Ford recently announced that the company is moving the manufacture of its smaller cars to Mexico, where the cost of labor is low. Likewise, in February, Carrier informed its employees in Indiana that it would relocate its manufacturing facilities to Monterrey, Mexico. But, neither company is in the unenviable position of the U.S. government; that is, actually losing money on each product that it makes.

Moreover, the U.S. government cannot really be expected to stamp its coins or print its paper money in a foreign country. So, it needed some other type of solution. In 1982, it replaced more-expensive copper with less-expensive zinc in our pennies. This was a windfall for Jarden Zinc Products, which operates a 350,000-square-foot plant near Greeneville, Tenn.

By 1990, the penny was “making money” for the government through its seigniorage. Seigniorage is the difference between the face value of currency and its production cost. At that time, the production cost for each penny was 0.6 cents, resulting in a 0.4 cent “profit” for the government. But, over the years, zinc prices have risen, negating the earlier cost savings, and now exceeding the value of the coin. Eliminating the cent “Penny wise; pound foolish.”

Like the U.S., other countries have found that it’s not economically feasible to manufacture pennies. Because of high production costs and the increasing use of debit, credit, and mobile payments, Canada ended its reliance on the penny in 2013. This caused some people in the U.S. to question the continued manufacture of our pennies. Reaction was immediate from Americans for Common Cents, a pro-penny lobbying group that is primarily funded by Jarden.

A researcher, Penn State University’s economist Raymond Lombra, did a study based on 10,000 retail transactions during the 1990s. His analysis found that — without the use of the penny — prices tended to be rounded up because many of the prices ended in a 9. He concluded that the elimination of the penny would produce a “rounding tax” on consumers that could total as much as $1.5 billion over a five-year period.

Lombra’s study has been challenged by other economists, like Wake Forest University’s Robert Whaples. In 2006, Whaples studied 200,000 convenience-store transactions and found that customers did not pay more when prices were rounded to the nearest nickel. On the contrary, according to his study, getting rid of the penny could save $730 million per year by eliminating the time customers and cashiers deal with the coin in cash transactions. The nickel dilemma “In for a penny, in for a pound.”

Rounding to the nearest nickel presents even greater problems. In 2011, it cost 11.18 cents to manufacture the five-cent coin, a loss of 6.18 cents to seigniorage. However, by 2013, the price of the metals used to make the nickel declined slightly. Still, the cost to create the coin was 9.4 cents. The U.S. Treasury reported that for the eighth year in a row, the cost of making pennies and nickels exceeded their face value. The expense to taxpayers was $105 million per year.

To look at it a different way, the government spent nearly $2 for every dollar in nickels and pennies it put into circulation, but putting the same amount of dimes and quarters on the market cost less than 50 cents. Congress has been studying this problem since 2010 when it passed the Coin Modernization, Oversight, and Continuity Act (CMOCA). Its last report stated there are no metal compositions that reduce the manufacturing unit cost of the cent below its face value. Tests are continuing for substitute metals for the nickel.

On the other hand, larger denomination coins have positive seigniorage, meaning that their face value exceeds the costs of materials, production, and distribution. The most recent CMOCA report indicates that the total cost for dimes is $0.049 (less than half the face value); for quarters, it’s $0.113; and for half-dollars, $0.211.

While there is organized opposition to the elimination of the penny, imagine what public reaction would be if the government were to suggest getting rid of nickels, as well, and rounding to the nearest dime. That’s the only solution that makes economic sense. However, it may also be true that one cannot put a value on American tradition. Pennies and nickels are part of our cultural heritage, and many Americans are likely to fight to keep the coins in circulation, regardless of costs. Not a cent “A penny saved is a penny earned.” This morning, it won’t even cost a penny for you to attend the 2016 Old Timers Day Parade, presented by the Kiwanis Club of Madera in cooperation with South High’s Key Club and the Madera Downtown Association. The event starts at 10 a.m., and begins on East Yosemite Avenue, at Flume Street, near the armory.

Floats and other entries proceed west across the railroad tracks and along the north side of Courthouse Memorial Park. The parade will be led by the Madera Police Department, Madera County Sheriff’s Department, and California Highway Patrol, symbolic — perhaps — of the interagency cooperation that resulted in the quick capture of last weekend’s terrorist bomber in New York.

Former Madera County Sheriff, John Anderson, will serve as this year’s grand marshal. The parade will feature bands, horses, and classic cars. As always, entertainment, vendor, and food booths — including the Breakfast Lions’ traditional barbecue — will be set up in Courthouse Memorial Park and can be visited at the conclusion of the parade.

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