What Forever Stamps Can Teach Us About Economics and Pulling Forward Demand

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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.

Forever StampsHow are These Forever Stamps Pulling forward Demand?

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

Comments

  1. Cedric says

    Good article Craig,

    I appreciate your explanation of the “pulling forward demand” concept. Does the forever stamp dampen the effect of future stamp rate increases? Should we be concerned that we might see larger future stamp rate increases to offset the number of forever stamps purchased at lower rates? Yeah, I too am concerned that the USPS has too many fixed costs to be competitive in an electronic information transfer society.

    I wonder is there a small benefit derived by people no longer having to wonder about which stamps will work etc. Are some people (who would not have bought stamps) now provided enough incentive to purchase forever stamps?

    Lots of questions. Any thoughts?

    Cedric

    • says

      Hello Cedric!

      Actually, Craig allowed me to share my thoughts in this article, so hopefully I can address your questions.

      I believe that if the USPS sees a huge surge in the sale of forever stamps, they will propose to increase the price either more rapidly, or with larger increases. However, as you stated, it won’t matter much to the consumers who purchase forever stamps ahead of the price increase!

      I think that the people who haven’t purchased forever stamps in the past, but instead only purchase stamps when they need them, may now have enough incentive to buy them now. However, many people who haven’t purchased forever stamps, probably have no need for stamps at all.

      In looking at the larger picture, I see this country moving away from mailing letters, statements, checks, greeting cards, etc. Many people now communicate electronically, and that will only increase – the USPS needs to focus on trying to innovate in that market, or shut down many of its services.

      • Cedric says

        Thanks Kaleef for your thoughts. I aplogize for not recognizing you as the author. I agree wholeheartedly with your comments and I look forward to sharing thoughts with you in the future. Good article.

        Cedric

        • says

          No problem. I just didn’t want you to look forward to hearing great incites from Craig, and be let down by my response instead! ;-)

          I’m glad you enjoyed the article. I still get nervous when writing for other sites, so your kind words are much appreciated!

    • says

      Cedric,
      I’m glad Khaleef jumped in with a good explanation because (quoting Joe Phlemon) I’m one who doesn’t read nearly enough on economics.

  2. says

    Khaleef,
    Great explanation of “pulling forward demand”. As one who doesn’t read nearly enough on economics, these types of posts stir my gray matter in a good way. Thanks.

    • says

      Thanks Joe! I love talking/thinking about economics. I actually plan to write a series on my site about how understanding economics can help us with personal finance early next year.

  3. says

    The postal service has the same problem many companies go through, they need to change. Fedex and UPS are dominating the market. If they don’t change, mail delivery will become all solicitations, and advertising. All low cost bulk mail. For me, 2011 is all paperless bills. I have been paying my bills online for several years.

    • says

      I agree completely. The only thing that has stopped them from going under is the fact that they have a monopoly on mail delivery. Their reputation as far as package delivery is concerned is below both FedEx and UPS, and there is too much waste. Many people are moving to paperless bills/statements and paying vendors online (or via PayPal).

  4. says

    Great article, Khaleef! Really enjoyed it. I realize that the postal service is not as closely tied to the government as it once was, but it still operates as a pseudo gov’t monopoly. We need to open basic mail delivery up to all takers and force the USPS to really compete. Only then will its troubles start to subside.

    All the best,

    Len
    Len Penzo dot Com

    • says

      Thanks Len!

      I think that is a great idea! If they weren’t allowed to have a monopoly on regular mail delivery, then they probably couldn’t survive for a year! Of course, that would mean that the government has to allow them to fail!

      • says

        Great article Khaleef!

        The government postal service IS a monopoly for standard mail and should be dissolved (in my opinion). We’d have much better service as businesses competed for our mail business.

        The ultimate problem (which you outlined very well) is the short term thinking of the USPS (and gov’t for that matter).

        Great post!

        • says

          I think their monopoly should be dissolved as well. Then we would see some real innovation in the market!

          Unfortunately, that short-term thinking is there even when we are talking about trillions of dollars!

  5. says

    I agree that the Forever stamps are a short-sighted gimic. How, then, would you propose that the USPS cut its costs or beef up it’s business? Personally, I kind of dread going to the post office because it always takes so long to get in and out.

    • says

      That is a great question. Since I am not familiar with the USPS budget, I can only answer with general ideas. They should look for areas of waste and unnecessary overhead – such as a glut of middle management, duplication of services in adjacent areas, and products that are extremely close in size and function.

      They should also look to increase their dependence on technology, and try to find ways to sell their services without forcing people to go to their local post office.

      Once they do this, then they can decide what locations can be shut down, or at least modified. Recently the Motor Vehicle Commission in New Jersey decided to close all offices on Mondays – maybe USPS can do something similar. I know they were talking about closing the offices on Tuesdays – they can revisit that idea and add more days. They would probably have to stagger it so there will always be at least one office open in a given area.

      I think that since they aren’t really forced to bring in a profit, they have become slow to change and have fallen behind in areas where they have competition.

      I’m with you…I never look forward to trips to the post office. Let’s hope they are intelligent and motivated enough to make some serious changes!

      Thanks for the comment!

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