The forever stamp

by on May 4, 2006 at 12:36 pm in Economics | Permalink

The post office is planning a ”forever" stamp for letters, good no matter how many times postal rates increase.  That means people could say goodbye to those annoying 2- or 3-cent stamps that have to be added to letters every time rates go up.  The idea for the special stamps, which would be sold at the same price as other first-class stamps, was included in proposals announced yesterday that would also raise stamp prices 3 cents — to 42 cents — next year.

Here is the story.  Yes this is a hedging device, but it also represents an attempt to peg a real rate of return.  Write down a simple but absurd model.  The initial rate of return on holding the "forever stamp" is k, and is given by the hedging and liquidity value of the stamp asset.  In equilibrium that should be equal to the rates of return on other assets.  Do you want to stimulate the economy?  Just print more stamps and give them away, thereby diminishing their marginal utility and thus lowering their marginal return.  Watch real interest rates fall accordingly (hey, this is an equilibrium model) and watch investment and gdp rise.  As Philip Cagan once asked, who needs "money" for open market operations?  We can control the real variables directly, no?  Small levers can make for big effects.

You have my admiration if you can pinpoint what exactly is wrong with this argument.  Comments are open…

Gary Leff May 4, 2006 at 1:26 pm

We need confidence in the ability and willingness of the provider of the stamp (post office, implicitly US government) to fulfill the promise of the forever stamp. And the more stamps that are printed, the larger the obligation, aren’t holders of the stamps more likely to expect the post office to renege?

It’s also a bet that the post office will (1) be around into the future and will (2) be offering a product that retains its value (it hasn’t been made obsolete by email or the ability to transport matter instantaneously).

The forever stamp is a promise not to inflate. Do we believe it?

nelsonal May 4, 2006 at 2:12 pm

Doesn’t the forever stamp include an implied option? Who would use it to mail a letter and exercise the option rather than just reselling it after the next stamp price increase?

Uncle Lumpy May 4, 2006 at 2:23 pm

I think nelsonal has it right; the problem is liquidity because the market for stamps is relatively small. And isn’t this how Ponzi got his start – selling international postal coupons (or some such) as though they were financial instruments? The collapse comes when people see the limits of the redemption market – like all those Amway products nobody is ever going to clean house with.

-dsr- May 4, 2006 at 2:47 pm

Printing more stamps does *not* decrease their marginal utility, except in the odd and generally ignorable market of philatelists. Printing a stamp is not the same as selling it. If the Post Office prints more stamps, the price per stamp does not go down; the face value is the price paid.

The speculation lies in whether the Post Office will increase the price of a first class stamp faster than the best available interest rate for a tax-free zero-transaction-cost instrument minus inflation. If the Post Office never increases the cost of a stamp past the inflation rate, an investment in Forever Stamps is worthless.

DK May 4, 2006 at 3:21 pm

Ponzi, BTW, did start with postal coupons, but, he was using them to arbitrage exchange rates. The problem was when he started promising unattainable returns to his original investors.

Bruce May 4, 2006 at 4:47 pm

It may be that the Post Office is expecting a major decrease
in the need of first class mail in the near future and they want to
sell you stamps that you may never use. My personal consumption of stamps
has fallen drastically over the last year as I do most of my mailing
electronically. It may reach a point as more people are wired electronically
that first class mail will go the way of the buggy-whip.

Bruce in Rhode Island

Chris Stiles May 4, 2006 at 7:23 pm

The Royal Mail in the UK have effectively sold ‘forever stamps’ – with just 1st or 2nd class on them and no implicit expiry date – for a while now, with few ill effects – other than those experienced by postal services everywhere.

Dave Tufte May 4, 2006 at 8:11 pm

It’s nice to see them doing something about this – I pointed out that cognitive dissonance here about 2 years ago at voluntaryXchange.

Adam May 4, 2006 at 8:35 pm

Following on Chris Stiles’ comment, my recollection is that Canada Post also sells first class stamps, and accepts any first class stamp on a letter, even if the price goes up.

Anthony May 4, 2006 at 10:49 pm

The USPS can easily withdraw “forever” stamps from sale for the period between application for a rate increase and the effective date of the rate increase. That limits quick-profit opportunities to those who bought stamps in advance and got lucky, and those with insider knowledge – the postal employees involved in preparing the application for a rate increase.

Jim Hu May 5, 2006 at 4:59 am

I look at this as it was described by the Postal Service exec interviewed on NPR this afternoon: a source of interest-free loans to the Post Office… would you invest in the Post Office if it was a stock? Shudder.

And wouldn’t any profiteering made from hedging stamps be subject to capital gains taxes?

Harald Korneliussen May 5, 2006 at 6:59 am

Hey, we have such stamps in Norway, and we’ve had them a while as far as I know, so you can let your speculations rest about what would happen. Just call Posten Norge and ask them :-)

Willem Renzema May 5, 2006 at 9:59 am

Stamps aren’t money. They are a product (or rather a voucher for a service). If the USPS simply printed lots of stamps to try to stimulate the economy it would be like any other business simply making a product and giving it away for free.

Would that stimulate the economy? Sure, up until the point the business goes OUT of business, which is what will happen to the USPS if this tactic is tried.

As for the forever stamps themselves, I think the post office may already be covertly handling first class stamps this way. Due to the fact that I live under a rock, I wasn’t even aware that the price of stamps had increased from 37 to 39 cents. I’ve been mailing things for quite a while using those 37 cent stamps that I still have left (13 of them now I believe) and not a single one has been returned for insufficient postage.

Robert Speirs May 5, 2006 at 3:15 pm

Maybe Wal-mart should guarantee people interest equal to gasoline price inflation (which is essentially what the Post Office is doing with stamps) when they put money on those cards that get you 3 cents a gallon off the gas price at their stations. So you would be guaranteed the same price for gas for as long as the money lasted. The problem there might be that the price of gas could (I wish!) come down. What if you put sixty dollars on the card and the price of gas was cut in half? Would you then only be able to buy thirty dollars worth of gas?
The viability of the scheme would appear to depend on the size of the float and the interest the seller could get on the float money.

SD May 6, 2006 at 3:52 am

As a couple of people have sort of alluded to, giving away stamps is effectively a fiscal expansion, not a purely monetary expansion. It will increase consumption, raising equilibrium real interest rates and crowding out investment. Monetary effects (if any — we’re talking equilibrium right?) should be secondary.

Darin London May 10, 2006 at 12:14 pm

Could this stamp seignurage be an offset for the increasingly less profitable penny seignurage that our government
used to enjoy due to increases in metal costs?

Forever Stamps March 31, 2007 at 3:01 pm

Does the USPS see the writing on the wall, and is the Forever Stamp a brilliant PR move on their part to stave off the public outcry when the cost of mailing a first-class letter may begin to rapidly outpace inflation? We will always have a need for first-class mail; you just can’t text a condolence letter. However, the cost of mailing this letter may begin to reflect the true cost of its voyage from your desktop to a mailbox thousands of miles away.

Anonymous October 13, 2008 at 11:08 pm

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