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Thursday, May 04, 2006

The Forever Stamp

The Postal Service has proposed the "forever stamp" as a means of hedging against future price increases:

Post Office Hopes Idea Of 'Forever Stamp' Sticks, by Christopher Lee, Washington Post: ...After increasing rates 13 times in 32 years, the U.S. Postal Service proposed a way yesterday for consumers to lock in the price of a first-class stamp, which officials want to raise by 3 cents, to 42 cents, next year.

Postal officials pitched the idea of creating a "forever stamp" that would be good for sending first-class mail no matter how much -- or how often -- the cost of a postage stamp goes up. ... The forever stamp, which would cost the same as a first-class stamp, would provide a hedge against future postal rate increases and end the search for 2- or 3-cent stamps that usually follows a price increase. The stamps could pose unusual challenges for the Postal Service, however, and officials say many details still have to be worked out. ...

Consumers could squirrel away forever stamps for months or years; they essentially would gain value every time rates increase. ... "If you buy it, it can be used forever on single-piece first-class letters," said Stephen Kearney, vice president for pricing at the Postal Service. "A lot of other shipping companies raise their prices every year, and we are actually committed to moving to a one-year rate-change cycle," he said. "That's part of what motivates the idea of the forever stamp -- to make that impact not affect consumers as much."...

The idea is popular, even among the Postal Service's critics. "A lot of people will be placing their bets on these stamps," said Pete Sepp, a spokesman for the National Taxpayers Union... "Given the prospect of endless Postal Service . . . rate increases down the road, I imagine they will run out of forever stamps. They won't be able to print those stamps fast enough." ...

Forever stamps may pose a few challenges to the Postal Service. For one thing, strong early sales of the stamps could lead to sagging revenue down the road, especially if consumers buy the stamps in large numbers to avoid higher postal rates in later years. And then there is the question of why anyone would ever buy a regular first-class stamp again if it costs the same as a forever stamp but its value could never grow.

"Until we flesh out the details, it's an open question," Kearney said in an interview. "We don't have the detailed proposal ready. Today we are committing to the concept and the principle of doing it. There will be more specifics about when and how the stamps will be made available."

It's not obvious that a consumer should buy the stamps as a hedge against future rate increases. Suppose, to make it easy, a stamp costs $1.00. Let the risk free interest rate be 5% and suppose you expect postal rates to increase by 3%. If you are going to need 1,000 stamps a year from now and buy them now for $1,000, you will get a return of 3% because the stamps would have cost $1,030 a year later.

But you could have invested the money at 5%, received $1,050 at the end of the year, purchased $1,030 in stamps, and ended up $20 ahead. So the decision depends upon a comparison between the market interest rate and the expected rate of appreciation in stamp prices. On this point, see the expert, Tom Bozzo, who notes the real price of stamps has been relatively flat so that the long-run real return to such an investment would have been low.

It's also not obvious that "strong early sales of the stamps could lead to sagging revenue down the road." Suppose the interest rate and the rate of increase in stamp prices are both 5%. If I buy 1,000 stamps today at $1.00, the Postal Service can invest the $1,000 at 5% and cash it out a year later for $1,050 just as I use the stamps. Thus, this is identical to my waiting a year and buying the stamps after the price has gone up by 5%. More generally the Postal Service could make or lose money, but only to the extent of the difference between the rate of return earned on the $1,000 and the rate of increase in stamp prices.

There are other aspects to consider, e.g. if you purchase a sheet of stamps but don't use them all before the next rate increase, then there are costs of acquiring small denomination stamps to make up the difference and forever stamps avoid that risk and thus lower expected costs. For me that benefit is relatively large, but this can be built into the rate of return from holding stamps. The point remains that whether to purchase the stamps or not as a hedge against future price increases depends upon a comparison of the market rate of return with the return on holding the stamps, all things considered.

    Posted by on Thursday, May 4, 2006 at 12:33 AM in Economics | Permalink  Comments (33)

          


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