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The forever stamp
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...
Posted by Tyler Cowen on May 4, 2006 at 12:36 PM in Economics | Permalink
Comments
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?
Posted by: Gary Leff at May 4, 2006 1:26:33 PM
The costs of storing the forever stamp is not zero. On the
contrary, when you compare it to the rate of return, storage
costactually gets to be quite large.
To accumulate and store any significant capital this way, you
would need all the accounting apparatus of a bond issue (and
then some, I suspect, because counting many sheets of stamps
is a tedious process). Plus you'd need a climate-controlled
environment, an appropriate set of albums or other non-
damaging storage devices, and so forth. Stamp collectors
spend a great deal on such things, and, while their purchases
may appreciate owing to collectors' interest, they do NOT
appreciate in postal utility value. The same would be true
of the forever stamp, and if everyone is collecting these
things as they would collect government bonds, you can be
sure that their collectors' value will be nil.
In today's stamp collecting world, it is often possible, for
instance, to buy sheets of old definitive (ie, regular issue)
stamps at a net discount from their face value. Why?
Because of their high storage costs, zero collectors' value,
and limited marginal utility.
Note that this happens even with an abundance of additional
stamp denominations to make up the difference between the old
rate and the new. I can only assume the same would be true
of the forever stamp.
Posted by: Jason Kuznicki at May 4, 2006 1:47:49 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?
Posted by: nelsonal at May 4, 2006 2:12:20 PM
The storage costs would, I believe, become negligible since, if these stamps were used as a common investment method, "stamp banks" would quickly be created to take advantage of economies of scale in stamp storage and we would then see a "stamp certificate" traded as a note for stamps held under such conditions.
Since services like Fedex and email are rapidly replacing the postal service and since "forever" as defined by government is not necessarily the same as it's common definition, I think the stamps value would be expected to decrease in the long term and therefore would not be seen as a viable investment method.
Posted by: Yehuda Porath at May 4, 2006 2:20:49 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.
Posted by: Uncle Lumpy at May 4, 2006 2:23:24 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?"
Only if the rate of return were to exceed the cost of holding the cash (stamps) rather than investing it.
Tyler, wouldn't the nominal interest rate be affected in your argument, not the real rate?
Bill
Posted by: Bill Griffiths at May 4, 2006 2:29:37 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.
Posted by: -dsr- at May 4, 2006 2:47:11 PM
Why give away stamps? Why not just give away gold deposit certificates?
The stamps are just an inflation-protected form of money, similar to dollars backed by gold. When printed and given away, they promote inflation, lead to confidence crises in the government's ability to back them, and are subject to a lot of macro debates about whether or not they really matter or can really stimulate lasting investment.
Posted by: DK at May 4, 2006 2:55:46 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.
Posted by: DK at May 4, 2006 3:21:26 PM
Printing stamps should drive up the real interest rate. You are essentially giving away an alternative to capital. Suppose I want to mail a letter in five years (yes this scale is silly but Tyler started it.) I have two options, I can buy a forever stamp or I can save my money.
Now supposedly the Postal Service is saving the money it gets selling forever stamps so the two have equivalent effects on the capital stock. Now instead the Postal Service gives away forever stamps. Now I can save my money or take a free stamp.
Being smart I take a free stamp and increase my consumption. Since, there is wealth effect from getting the stamp presumably I will smooth the $0.42 over my lifetime. However, since in the previous case all of that $0.42 was going to be saved today, there must be an increase in consumption today.
An increase in current consumption decreases savings and therefore increases the real interest rate.
The same thing should happen if you gave away bonds.
If instead you gave away actual capital the real interest rate would fall because the marginal productivity of capital would fall. However, investment would fall as well. That is, the net increase in the capital stock would actually be less than the quantity of capital you gave away. The economy would grow but solely because this capital you magically acquired delivers a real return.
Posted by: Karl Smith at May 4, 2006 3:50:03 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
Posted by: Bruce at May 4, 2006 4:47:39 PM
Wow, what a great idea from the postal service! It will make life a lot easier than doing all that extra postage and stamp switching.
Whenever the postal service is a little tight for cash, they only have to announce that they are considering a price increase and stamp sales should go up immediately.
The postal service could be like the airlines- with all those billions of unused frequent flier miles off the balance sheet. It will be interesting to see how they change their accounting policies to deal with forever stamps.
Posted by: Tom Kelly at May 4, 2006 6:27:33 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.
Posted by: Chris Stiles at May 4, 2006 7:23:04 PM
You could check out my site to see what I posted on the Postal service. It seems to me that the so called, bulk mailing charge is a huge subsidy to business, (corporate welfare?) Just think how much paper and time, and money we would be saving without junk mail.
Posted by: kyle n at May 4, 2006 7:41:54 PM
It's nice to see them doing something about this - I pointed out that cognitive dissonance here about 2 years ago at voluntaryXchange.
Posted by: Dave Tufte at May 4, 2006 8:11:34 PM
One of the ways Ponzi's scheme was discovered is becuase it was noted that there was not enough international coiupons ever printed to make the amout of money he was making. Would the govenment print an unlimited number of these?
Posted by: Vincent at May 4, 2006 8:28:55 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.
Posted by: Adam at May 4, 2006 8:35:55 PM
Everyone so far seems to be thinking long-term, which is not where I see the primary arbitrage opportunity in this strategy. Why not buy up stamps in bulk immediately before a rate increase, then resell, netting the 2-3% profit over days or weeks instead of long-term?
I think that will be the biggest challenge the USPS faces if they introduce these. If the secondary market gets big enough, the only thing the USPS has done is create a parasite industry depriving it of a few percent of its revenue.
Posted by: vcmc at May 4, 2006 9:02:12 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.
Posted by: Anthony at May 4, 2006 10:49:01 PM
The problem is stamps are not currency, and are only useful for purchasing one service - mailing stamps. Certainly, you could argue that an individual could hoard stamps and sell them at a substantial profit in the future, but this would not have a large effect on the economy.
As the number of people who employ this strategy grows, the supply of future stamps grows, and there is a risk that the stamps would not be able to sell at face-value. This increased risk would deter people from buying these hedge stamps.
Thus, the impact of this stamp hedging would be limited to the size of the postage market.
Posted by: altoids at May 4, 2006 11:17:14 PM
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?
Posted by: Jim Hu at May 5, 2006 4:59:40 AM
The other thing that seems wrong to me in Tyler's argument is that if you give away stamps, you are essentially paying an infinite interest rate on them. If the US sold treasury bonds at 50 cents on the dollar, the interest rates it paid would be going up, not down, and treasury rates in the secondary market would likewise rise. (This was tested in practice in the Clinton administration -- they cut supply of treasuries, and interest rates lowered in response). I work in finance, not economics, so perhaps I am missing something about equilibrium, but, IMHO, diminishing marginal utility should decrease price, not returns.
Some other thoughts:
-- I would expect forever stamps to quickly crowd out sales of regular stamps
-- The post office will need to either raise prices in smaller increments more frequently, or to announce price increases on the same day they go into effect to prevent hoarding
-- I fear a post office embezzlement scandal and government bailout more now than i did before.
-- Buying stamps is NOT investing in the post office. If you fill your garage with extra gasoline in the little red tanks, are you investing in Exxon?
Posted by: DK at May 5, 2006 5:46:50 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 :-)
Posted by: Harald Korneliussen at May 5, 2006 6:59:33 AM
If you buy the forever stamp for 40 cents today and the postal service will increase the price of a letter next year to 45 cents, your real return to holding the forever stamp for 1 year is 12.5 percent. If the postal service gives you another stamp for free, it is worth less to you, say 35 cents. But the price of a letter will still go up by 5 cents. So the rate of return is now higher, because your initial valuation of the stamp is lower (around 14.2 percent).
Posted by: Brian at May 5, 2006 9:42:50 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.
Posted by: Willem Renzema at May 5, 2006 9:59:35 AM
