Sunday, July 23, 2006

Efficient Rent Seeking?

There is legislation in Congress that would kill the penny. It costs more than a penny to make one, with rising metal costs (and inflation making it worth less, although the article omits this). Representative Jim Kolbe from Arizona introduced the bill. I thought that someone in Congress actually wanted to do something to stop wasting money besides Ron Paul or Jeff Flake, but then I got to a later paragraph:
Kolbe's home state of Arizona is the largest copper producing state in the nation. Copper is the main material of the nickel which would benefit by becoming the lowest denomination of currency in circulation.

Even though Kolbe is trying to boast his own state’s revenue, I think this is efficient for society as a whole. Which got me to thinking, what are other examples of efficient rent seeking?


Anonymous said...

What did article say about the nickel? It too costs more to make than what it's worth. If we're going to get rid of the penny on the grounds that it looses money, then shouldn't the same be true for the nickel?

I'm bringing this up because I think it would be better overall to either keep both coins or shift to a tenths (instead of percent) money system. We would stop using pennies, nickels, and quarters and shift to dimes, 50 cent pieces, and dollar coins. Prices would be like $1.5 instead of $1.50. A large change now is better than slowly making changes as time goes on.

Also what would the effect of things like bank interest, buying things per weight/volume, buying things via credit card, and so on? I'm most curious about the effects of credit cards on this debate because no coins are involved period. With very few exceptions, I don't need much cash period. Most of those times when I do need hard currency, pennies are involved. Would the final cost of a puchase made with a credit/debit card have to be rounded?


jeremy h. said...

Although I have not yet read it, Tullock and some other dude edited a volume entitled Efficient Rent-Seeking. You may already know this, and you may want to read it.

Warren said...

I hadn't heard of Tullock's volume, I'll try to take a look at it (though not till after mid- August).

The article didn’t say anything about the nickel, but I think we could get rid of it too. A perhaps more important question could be the neo-Keynsian ramifications of it. Something like the following could be a good question to look at.

Suppose the government eliminated both the penny and nickel, and all transactions were in decimal form (no quarters). From a neo-Keynsian perspective, what would happen to the macro-economy. Compare to an economy that eliminated all coins but the quarter.

Now suppose the above happens for cash purchases, but electronic purchases will now all be measured in thousandths of a dollar (like gas, but only bank accounts would count the fractions of pennies). How would this affect the economy compared to the current state of affairs and the above two scenarios?

ryan said...

A couple random questions: Back when the penny cost less than a penny to make, where did the extra value come from? Is that not inflation? If it was inflation, does that mean that the penny now constitutes a reduction of the money supply and therefore a deflationary measure? Is that necessarily a bad thing (as seems to be assumed)?

Do note: just because you don't have a piece of currency equivalent to an amount doesn't mean you still can't use those amounts as prices. Stocks are priced in tenths of a penny -- why would that have to change? (And if it did change, wouldn't that be a bad thing?)

Jacob said...

I'll tell you what I'm doing: investing in pennies. If you can already "purchase" them for less than they are worth, perhaps the scrap value of the metal will soon be able to turn me a tidy profit...

David said...

Great post, Warren. I'll say that if we are to get rid of an agency or program, this is the way to do it. Politicians won't disband them of their own free will.

I wonder what Illinois' response to this bill will be.

SmoothB said...

Isn't this a weird way of looking at the value of the penny? Sure, from the government's perspective the value of a penny is 1 cent -- when the state could buy it for less than a cent, it got some seignorage and so got away with a small hidden tax. Revenue with no political fallout -- win-win. But from society's perspective, the value of the penny isn't 1 cent -- it's the amount of use we get out of it as a unit of exchange, if you follow me. That is, one shouldn't view currency as wealth itself; it's simply a way of reducing transaction costs.

So it might be true that society is better off without a penny even if a penny costs less than 1 cent to produce. It might also be true that society would be better off with the penny even if the penny cost more than a cent. The value to society and the value to the government are two different things. Surely this site wouldn't want to confuse them?

mthomas said...

Isn't there copper in the penny?

also, most of the cost of the penny is lost in rolling them and otherwise handling them, something to think about before we get rid of all the nickles as well. The penny is long overdue for termination, maybe we could put lincoln on the dollar coin to appease Illinois. Noone knows who Sacagawa is anyhow.