Does Every Penny Really Count?
For many years it made sense to use pennys, but in the current age, pennies accutally slow down the purchasing transaction. So they cost our econamy money, we could maybe ebolish them. These are the questions we may ask ourselves:Why use pennies anyway? I mean how many times do your pennies come to use? Somtimes having pennies is alright. I rember when i was younger my mother use to take to CVS with her, and every time we went to the Pharmacy, I would see this huge jar sitting on the counter. On the jar It said "Please Donate pennies for Pre-mature babies". I remember seeing a picture of a very pretty ladie and pictue of a very small baby. Near this picture it said somthing about how the ladie on the jar was a pre-mature babby herself! I thought to my self "wow, how could such a small, small baby turn into such a wonderful, pretty woman?" Pennies thats how. People donated all the pennies the had to This company. After I read that, I pulled out my dollar that I was saving for somthing else, and put it in the jar. 100 more pennies added to the jar. When you really think about it you really do need pennies. When you buy somthing and you dont have enough money to get it, what do you do? You get the remaining change you have in you wallet of pocket. Here's an article of what somone else thinks about pennies, but remember that the choice is yours. Do the pennies stay, or go?
The Penny Stops Here
By Sebastian Mallaby
Monday, September 25, 2006; A21
Two months ago, in an Olympian act of statesmanship, Rep. Jim Kolbe (R-Ariz.) took aim at
the true menace in our nation. He introduced a bill that would get rid of the penny. In
the first half of this year alone, the U.S. government minted 4.8 billion of these
useless coins, and since it costs 1.4 cents to make each one and maybe two more cents
each to distribute them, that robbed taxpayers of $115 million. The Wall Street Journal's
editorial page denounced Kolbe's capitulation to the sinister forces of inflation, as
though recognizing reality were the same as creating it. But in truth the noble statesman
should go further. He should abolish nickels and dimes.
To see why this is so, start with the time wasted on pennies. In this great country, not
even the most obscure subject escapes scrutiny, so I am able to report that the National
Association of Convenience Stores and the Walgreens drugstore chain have estimated that
handling pennies adds 2 to 2.5 seconds per cash transaction. Assume that the average
citizen makes one such transaction every day, and so wastes (to be conservative) 730
seconds a year. The median worker earns just over $36,000 a year, or about 0.5 cents per
second, so futzing with pennies costs him $3.65 annually.
If pennies were abolished, stores would have to round prices to the nearest nickel, and
penny lovers suggest that consumers would suffer. I'm pleased to report that Robert M.
Whaples of Wake Forest University has analyzed 200,000 transactions across seven states,
and he concluded that consumers would not actually suffer. Purchases at gas stations and
convenience stores are just as likely to come to $7.02 as $6.98, so the rounding up and
rounding down would cancel themselves out. On average, shoppers would lose nothing.
That doesn't quite settle things, however. For although the average shopper would do
fine, each individual shopper would run the risk of losing out from all this rounding.
Hence the last-ditch question from determined penny partisans: Doesn't this risk
undermine the case for abolishing pennies?
Thanks to the Nobel Prize winner William Sharpe, we know how to answer this question. The
Sharpe ratio measures the reward you get for taking a risk divided by the size of that
risk. For example, if you put your money into Vanguard's 500 Index Fund you would have
earned 7.8 percent per year more than the risk-free Treasury bond rate over the past
three years. But the Standard & Poor's 500 index's standard deviation, a measure of
its volatility, was also 7.8 percent; dividing the reward over the risk, you get a Sharpe
ratio of 1.0. If you do the same calculation for the Vanguard Total Bond Market Index ,
you get a Sharpe ratio of 0.3 over this period.
How does abolishing the penny compare to that? For each transaction, the rounding effect
could cost the shopper either two cents or one cent or zero; or it could save the shopper
two cents or one cent. If the shopper carries out 365 transactions per year, the standard
deviation of all the possibilities is 27 cents per year. A benefit of $3.65 divided over
a standard deviation of $0.27 gives you a Sharpe ratio of 13.5. In other words,
abolishing the penny is 13 times better, on a reward-to-risk measure, than putting money
in the S&P 500 over the past three years. It's 45 times more attractive than the bond
index over that period.
Now what about those dimes and nickels? Assume that abolishing the nickel saves an extra
second per transaction and that abolishing the dime would save another one. Each
abolition would save the median worker time worth $1.83 per year, but each would also
increase the risk of losing out from the rounding of prices. Yet on a risk-reward basis,
both abolitions would be attractive. The Sharpe ratio for abolishing nickels after
pennies works out at 2.7. The Sharpe ratio for finishing off the dime is 1.2 -- not quite
so compelling, but still a lot better than stashing your savings in equities or bonds.
The great thing about America is that we have smart people to analyze every conceivable
problem, so we know what we should do. But the less great thing about America is that
politicians don't always care what's smartest, because they face other pressures. Kolbe
is up against something called Americans for Common Cents, a pro-penny lobby funded
partly by the zinc industry. The zinc guys have already secured a quiet victory. In 2009,
the bicentennial of Abraham Lincoln's birth, the U.S. Mint will issue four commemorative
zinc-filled pennies.
The Penny Stops Here
By Sebastian Mallaby
Monday, September 25, 2006; A21
Two months ago, in an Olympian act of statesmanship, Rep. Jim Kolbe (R-Ariz.) took aim at
the true menace in our nation. He introduced a bill that would get rid of the penny. In
the first half of this year alone, the U.S. government minted 4.8 billion of these
useless coins, and since it costs 1.4 cents to make each one and maybe two more cents
each to distribute them, that robbed taxpayers of $115 million. The Wall Street Journal's
editorial page denounced Kolbe's capitulation to the sinister forces of inflation, as
though recognizing reality were the same as creating it. But in truth the noble statesman
should go further. He should abolish nickels and dimes.
To see why this is so, start with the time wasted on pennies. In this great country, not
even the most obscure subject escapes scrutiny, so I am able to report that the National
Association of Convenience Stores and the Walgreens drugstore chain have estimated that
handling pennies adds 2 to 2.5 seconds per cash transaction. Assume that the average
citizen makes one such transaction every day, and so wastes (to be conservative) 730
seconds a year. The median worker earns just over $36,000 a year, or about 0.5 cents per
second, so futzing with pennies costs him $3.65 annually.
If pennies were abolished, stores would have to round prices to the nearest nickel, and
penny lovers suggest that consumers would suffer. I'm pleased to report that Robert M.
Whaples of Wake Forest University has analyzed 200,000 transactions across seven states,
and he concluded that consumers would not actually suffer. Purchases at gas stations and
convenience stores are just as likely to come to $7.02 as $6.98, so the rounding up and
rounding down would cancel themselves out. On average, shoppers would lose nothing.
That doesn't quite settle things, however. For although the average shopper would do
fine, each individual shopper would run the risk of losing out from all this rounding.
Hence the last-ditch question from determined penny partisans: Doesn't this risk
undermine the case for abolishing pennies?
Thanks to the Nobel Prize winner William Sharpe, we know how to answer this question. The
Sharpe ratio measures the reward you get for taking a risk divided by the size of that
risk. For example, if you put your money into Vanguard's 500 Index Fund you would have
earned 7.8 percent per year more than the risk-free Treasury bond rate over the past
three years. But the Standard & Poor's 500 index's standard deviation, a measure of
its volatility, was also 7.8 percent; dividing the reward over the risk, you get a Sharpe
ratio of 1.0. If you do the same calculation for the Vanguard Total Bond Market Index ,
you get a Sharpe ratio of 0.3 over this period.
How does abolishing the penny compare to that? For each transaction, the rounding effect
could cost the shopper either two cents or one cent or zero; or it could save the shopper
two cents or one cent. If the shopper carries out 365 transactions per year, the standard
deviation of all the possibilities is 27 cents per year. A benefit of $3.65 divided over
a standard deviation of $0.27 gives you a Sharpe ratio of 13.5. In other words,
abolishing the penny is 13 times better, on a reward-to-risk measure, than putting money
in the S&P 500 over the past three years. It's 45 times more attractive than the bond
index over that period.
Now what about those dimes and nickels? Assume that abolishing the nickel saves an extra
second per transaction and that abolishing the dime would save another one. Each
abolition would save the median worker time worth $1.83 per year, but each would also
increase the risk of losing out from the rounding of prices. Yet on a risk-reward basis,
both abolitions would be attractive. The Sharpe ratio for abolishing nickels after
pennies works out at 2.7. The Sharpe ratio for finishing off the dime is 1.2 -- not quite
so compelling, but still a lot better than stashing your savings in equities or bonds.
The great thing about America is that we have smart people to analyze every conceivable
problem, so we know what we should do. But the less great thing about America is that
politicians don't always care what's smartest, because they face other pressures. Kolbe
is up against something called Americans for Common Cents, a pro-penny lobby funded
partly by the zinc industry. The zinc guys have already secured a quiet victory. In 2009,
the bicentennial of Abraham Lincoln's birth, the U.S. Mint will issue four commemorative
zinc-filled pennies.
posted by Ojay @ 1:19 PM
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