Archive for November, 2011

The Hidden Cost of Saving Pennies

Nov 25 2011 Published by under Executive,Monetary Policy

Do you remember the last time you were handed pennies as [part] of a handful of coins when breaking a bill?  Do you remember what you did with them?  They may have ended up at the bottom of your purse, or in your pants pocket, or perhaps stuffed in the seat cushions of your car.  Or like many pennies, they find their way to a large coin jar collecting more dust than interest.

No one would blame you.  Pennies are the most worthless coin ever minted in the US.  Over the years, the persistent gnawing of inflation has erodes the value of currency.  They are not even worth the metal they are made of.  In fact, since it costs about two cents for a penny to be made, the seignorage (the “profit” made from selling currency at face value) is a negative one cent for each penny.  In other words, while the US Mint usually makes money on selling currency, it lost $28 million to produce four trillion pennies in 2010.   So why does the US Mint keep making more of them?

One reason is that people don’t use them.  That is, once a penny is received as change, it tends to disappear from the money supply (and perhaps reappear rattling around a clothes dryer or vacuum cleaner).  With so many pennies sitting unused in jars, boxes, or drawers, the US Mint must produce more so that stores can continue giving change denominated to the nearest 100th of a dollar.

So do your duty and either use the pennies you have, use a credit card, or tell your cashier to keep the change.

Update: For fiscal year 2012, the government spent nearly half a billion dollars to produce pennies and nickles (which cost about ten cents to mint and distribute).  Please, think of the future of this country and refuse change.

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What’s the Matter with the Supercommittee?

Nov 21 2011 Published by under Congress

That’s Right, I’m Calling You a Chicken.

With only three days left before the November 23rd midnight deadline, it looks increasingly likely that the Supercomittee will fail to put forth a proposal for the whole of Congress to vote on.  Some eyes are looking for an end-game miracle “Hail Mary” (or should that “Hail Murray”?), but most of the dialog seems to have degenerated into posturing for the expected game-day loss.  (Forgive the football metaphor, it’s Sunday.)

With real skin in the game for both Democrats and Republicans in the form of automatic cuts to beloved medicare and defense spending (respectively), why are the chances so slim for the Supercommitee to produce a deal?

The initial idea was that Congress as a whole would not bring themselves to do the dirty work of targeted spending cuts and revenue increases.  No Member wanted to risk being the subject of a campaign commercial accusing him of being the reason that Grandma can’t afford her medicine or why troops aren’t getting the equipment they need.  So the theory went that a smaller, bi-partisan committee, with a gun to their head, would be able to share the “blame” and make the hard choices that Congress as a whole could not.  The deal would then get an up or down vote in each chamber of Congress with no amendments and no filibuster (that’s the “super” part, by the way).  It seems like this approach would have a reasonable chance of producing a result, right?  So what happened?

Chicken.  That’s right, Chicken happened.  Recall that the supercommittee is a direct result of the debt ceiling crisis where both parties were playing a game of Chicken.  Chicken, as seen in “Rebel Without a Cause”, is a game where two players drive their cars at high speeds towards the edge of a cliff.  The first player to stop or bail out of the car is “chicken” and the other player wins the game and the respect of all of his teenage friends.  Needless to say, going over the cliff is the ultimate loss.  So Congress played Chicken with the debt ceiling in an effort to gain the respect of their metaphorical teenage friends and as a result, they created another game of Chicken in the form of the Supercommittee.

So how do you win a game of Chicken?  Easy: you have to convince the other player that you’re going to drive off the cliff no matter what.  And by what means to you accomplish this ruse?  Simple: act as crazy as possible.

During the debt ceiling crisis, the Republicans had everyone convinced, whether a ruse or not, that they would put the petal to the metal until they hit the bottom of the canyon.  Credit the tea party freshman with adding significantly to their credibility.  But before either player reached the cliff edge, they both agreed that they could save face by postponing the game to a later date with a few concessions handed out to the GOP (such as the floor debate and vote on the Balanced Budget Amendment).  This postponment agreement became the Supercommittee.

And so the game was recreated, except instead of US default, automatic spending cuts were substituted as the cliff.  At first the rhetoric did not indicate that Chicken was being played,  in that no Member of the committee was talking about the process.  But once each party released their initial plans, it was clear what was to become of the effort: Chicken.  This time, though, the Democrats would be the crazy ones: an initial plan to cut $5 trillion instead of the required $1.2 trillion, Obama and Democratic Members promising to hold Congress to the automatic cuts as agreed to, and the Democrats even leading on that the cuts to their beloved programs wouldn’t even be that bad (i.e. “My car has airbags”).  All this while Republicans are already talking about stopping the triggered cuts and submitting to possible revenue raisers (i.e. “I have flammable materials in my trunk”) .

The problem with Chicken is that there is no collaborative solution.  The equilibrium of the game is in fact a mixed strategy where you sometimes drive off the cliff, and sometimes bail.  But of course, with the stakes so high, and both players sharing the same car, you only get to drive off the cliff once.

So how do you really win a game of Chicken?  Don’t play, change the game.


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Why Can’t We Wait?

Nov 01 2011 Published by under Congress,Executive

This week, President Obama changed his mantra from “pass this bill” to “we can’t wait”.  He pushed through new rules to help both underwater homeowners and students burdened by debt in an effort to make something happen.  Now these new rules will likely only make a very small difference (only Fannie/Freddie mortgages will qualify and there was already a 15% discretionary income cap available to most student debt), but this change in mantra signals a huge shift in how the Executive branch intends to operate.

Obama’s Presidency has so far been characterized as “leading from behind”, in effect prodding at Congress to do what it ought.  But “pass this bill” seems to have been the last friendly prod.  “We can’t wait” coupled with the new rules is the opening shot in what may become an Executive power grab.

Historically there has been a power struggle between all three branches of government, with Congress generally holding most of the power.  Through most of the 19th century, a person had more power and influence as a senator rather than a president.  But in times of national crisis, the Executive has seized considerable power, most notably Lincoln during the Civil War and FDR during the Great Depression and WWII.  Since FDR, there has been a very palpable power struggle between the Executive and Congress with power flowing much more freely than it had prior.  Does the current Great Recession require greater intervention from the Executive, and if so, what are Mr. Obama’s intentions for gathering the power necessary?

It seems he’s testing the waters.  While some argued that Mr. Obama should have seized power during the debt ceiling crisis (including former President Clinton), he did not yet seem ready or willing to do so.  But Congress has still been unresponsive in any substantial measure  and the brinksmanship still remains on the forefront.  So keep an eye out for the Executive Order power play and populist appeals.  Will Mr. Obama consolidate enough power from Congress to enact his strategy for combating the Great Recession or will Congress fire back and fend off the incursion?

For now, it will be like watching two great defensive sports teams: lots of parrying and dodging, but if a strike should occur, it could be game changing.  I, for one, can’t wait.


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