Those are expensive pennies from heaven

Remember that penny someone once gave you for your thoughts? These days it is worth 2.4 cents —…

Remember that penny someone once gave you for your thoughts? These days it is worth 2.4 cents — the cost to the government of manufacturing that coin. So if someone offers you their 2 cents, they are really giving you 4.8 cents’ worth of advice.

In 2005, the cost to the U.S. Mint to produce a penny was about 0.97 cents. By 2006, pennies each cost about 1.23 cents to manufacture.

A rise in metal prices, particularly zinc, pushed the per-unit cost up to 1.67 cents in 2008.

If you think that is crazy, let’s look at the nickel. Every five-cent piece now costs 11.2 cents to manufacture, up from 9.5 cents in 2008.

Given that the U.S. Mint produced 4.3 billion pennies and 914 million nickels last year alone, it is safe to say that it costs a mint to manufacture those coins.

For the 2011 fiscal year, the two denominations were produced at a loss of $116.7 million. That is nearly triple the $42.6 million loss from manufacturing the two coins in 2010.

The fact that the U.S. Mint takes such a big hit in producing those coins is a head scratcher when you consider how much turmoil goes on in Congress each year as it wrestles with ways to reduce the deficit.

If American coin making were a publicly traded company, shareholders would be checking to see whether the executives running the business were out of their minds. After all, how could a business remain viable if its production costs were nearly double the retail value of the items being manufactured?

Granted, the raw-material cost of the metals used to produce pennies and nickels are at an all-time high because zinc, nickel and copper are used for everything from manufacturing batteries to making suntan lotion, and prices are unlikely to decline.

However, it makes no sense for American taxpayers to keep subsidizing the business of making coins. There is no real market solution to the problem, because it is against the law to melt down coins and sell the metal.

One solution would be to change the mix of metals that went into pennies and nickels, and the Obama administration recently asked Congress for permission to do just that. The expensive recipe has remained unchanged for more than 30 years.

Although the Treasury Department has been studying new metal combinations since 2010, it has yet to come up with a cheaper, workable mix. Therefore, there is no information yet as to what metals should be used or how much could be saved.

So for now, the U.S. Mint is stuck with a problem that economists might call “reverse seigniorage” or a loss — rather than the usual profit — from the government’s monopoly on producing coins.

Because the waste of taxpayer money is so obvious, the Treasury Department should be held accountable for exploring other options to bring down the cost of producing these coins — and quickly. After all, 2.4 cents saved here or 11.2 cents saved there soon adds up to a lot of money.

And if there is no way that the government can make a cheaper penny, we should stop making the costly one-cent coin altogether. But hey, that is just my 4.8 cents.

Jim Pavia is the editor of InvestmentNews.