According to a story on CNNMoney, the United States Postal Service has decided that all new first-class stamps will be issued as “Forever Stamps“, beginning in January 2011. This is being pushed as good news for those who still use “snail mail”, and in many ways it is. You won’t have to worry about finding two-cent stamps (I have so many stamps that don’t add up to the current postage) or thinking about what the current rate is.
The Problem at the USPS
The move to classifying all new first-class stamps as forever stamps is part of an effort by the Postal Service to climb out of a serious deficit. The Postal Service reported a net loss of $8.5 billion in fiscal year 2010; that after a loss of $3.8 billion in FY 2009!
Also, earlier this year the Postal Service proposed a to raise the price of a first-class stamp by 2-cent, bringing the cost to $0.46/stamp.
With this move, the Postal Service hopes to get customers to buy large amounts of forever stamps in order to protect themselves against future price increases.
The problem with this strategy, is that it doesn’t address the real problem. These types of gimmicks lead to a phenomenon known to economists as “pulling forward demand”. This is where you convince people to buy a year’s worth (for example) of your product in one day, but they don’t buy any more throughout the rest of the year.
What will happen in this case is that people who normally buy 100 first-class stamps throughout the year, will now buy 100 forever stamps on the first day of the year, and they will not purchase any additional stamps for the remainder of the year. So essentially, this will do nothing to increase revenue.
The same thing happened with the “cash for clunkers” program that the government sponsored to help boost the economy. As can be seen from this chart, demand for new cars spiked as the deadline on the cash for clunkers program approached, and then plummeted to below average numbers as soon as the scheme program was over.
What happened in that case, is that the government provided an incentive (or “pulled“) to people who planned to buy (or “demanded“) a car in the Fall, to purchase one in the Summer. Thus, pulling their demand forward to an earlier time period.
Why Pulling Forward Demand Doesn’t Work
The major problem in both of these cases is that no new demand was created. They just altered the purchase dates of the people who already demanded the products (or will do so in the future in the case of the Postal Service with the Forever Stamps).
Unfortunately, these programs are viewed as successful (except by economists) because people are focused on the short-term increase in income, rather than the long term affects. It will look great in 2011 if everyone buys 2 years’ worth of forever stamps, and the Postal Service is able to dramatically decrease their loss – or even turn a profit. However, what will happen in 2012 when no one buys stamps because they bought double the year before?
The only way a business or government can stop losing money is to cut expenses and/or increase income! This is true even when considering the net worth of your household. Pulling forward demand doesn’t work because it fails to address either issue. After the brief swell of demand is over, the Postal Service will be faced with an even larger fiscal year deficit! At that time, they will be forced to cut expenses (read: layoffs) and try to increase revenue by raising prices.
Unfortunately, all of the competition for letters happens to be faster and more efficient, so unless they can introduce new, innovative products that offer real value, they will not be around in their current form for much longer. I guess we have to consider the problem of pulling forward demand when considering cities that install red light cameras as a source of revenue (of course it’s not demand in this case, but the same logic mechanics are in place).
In the near future, we will see that the same was/is true for the recent homebuyer tax credit and the housing market.
photo by tehalynn