The WSJ has allied itself with Kevin Federline in the battle over the fate of the penny. Today their editorial board likened giving up the penny to waving a, “white flag before the forces of inflation.”
Now, I am all about keeping inflation low, but inflation should be just that: low. In fact, one of the worst things that could happen to an economy is deflation (just look what happened to Japan in the ’90s). So I don’t see what the big deal is with the government acknowledging that we have a perfectly healthy economy with extremely low levels of annual inflation, which, over decades, has made the penny insignificant, annoying, and extremely costly.
They end the editorial with this rhetorical question:
What kind of signal does it send if Congress announces that its currency is not even as good as zinc and copper?
Well, to me, and everyone else who hates the penny (and a number of very prominent economists like Alan Blinder and Greg Mankiw) it sends the signal that Congress is a responsible and rational body.
Of course, I understand that the WSJ is worried about the trust people place in our currency. Paper money is a weird thing. The trust people place in it is crucial to the modern economy and that trust isn’t something governments should mess with. The WSJ alludes to countries that have messed with this trust and paid the price. But, I don’t think anyone is going to start selling off their US dollars because of any policy concerning the penny.
Furthermore, the WSJ fails to acknowledge the tradeoff associated with keeping the penny. Sure, there is an epsilon of a chance that getting rid of the penny will lead to a South American style financial crisis, but to avoid that we are paying millions in production costs and efficiency losses in order keep the penny (which is worth less than the materials used to make it).
I just don’t see where the WSJ is coming with this. Maybe they just had some extra space left over from their first inflation rant and thought they would write something cute and contrarian about the penny. Needless to say, it’s a sad day when the only half-economically literate newspaper in America goes so wrong on an economic issue.
Update: By the way, the Federline link deserves a hat-tip to Steven Levitt at the Freakonomics blog. You should check it out too, it might be the first time a John Bates Clark Medalist says “dissin’.” Of course when this guy wins it in ’07, “dissin'” will be nothing, but that is why he has been the best professor I’ve yet to have.