Debunking the Forever Stamp Meme

In a recent commentary, Newt Gingrich repeated a mistaken understanding of the Postal Service's business and the impact that the forever stamp will have on Postal Service finances.   According to the latest polls, Newt Gingrich is one of the top four contenders for the Republican nomination for President so his comments on the Postal Service need to be taken seriously as they will influence the debate among Republicans about the future of the Postal Service.
Unfortunately for postal stakeholders, Newt Gingrich's comments are problematic in three ways:

• First, they suggest a significant misunderstanding of the business of the Postal Service and in particular the financial impact of the forever stamp.   
• Second, his reference to his comments on the Postal Service that are contained in his book, "To Save America," reflect a dated critique of Postal management that do little more than bash postal employees and their unions without an understanding that his solution would not be sufficient to solve the long-term financial problems of the Postal Service.  
• Third, his comments reflect an understanding of the Postal Service workforce management strategy that has been placed in the waste bin by the new Postmaster General Pat Donohue.

This post will provide some comments on the forever stamps that I hope Mr. Gingrich and others that look to him for guidance for conservative public policy thinking read in order to allow them to begin talking about the Postal Service and its problems in a manner that seriously works to ensure that core delivery component of an industry that employs more than 8 million people and generates sales of well over one trillion in revenue in the private sector.

The Facts on the Forever Stamps

Congressman Gingrich argued that "Congress should block the Post Office from implementing this genuinely dumb move" [making all First Class stamps, forever stamps.]   What Mr. Gingrich misses is that the forever stamp is popular with the Postal Service Customers, reduces the Postal Service revenue minimally and saves significant costs by eliminating transactions for the purchase of 1 and 2 cent stamps when rates change.

The following bullets provide a rough estimate of the lost revenue of the forever stamp.

• The Postal Service in FY 2010 sold $8.8 billion in stamps, most of which were forever stamps.  
• Based upon the calculations reported in the United States Postal Service - Inspector General Report on postage in the hands of public, 69% of the postage sold but not yet used is in the form of unused stamps.   
• At the end of FY 2010 the Postal Service had $2.584 billion in deferred postage revenue.   Therefore, the value of unused stamps is $1.782 billion.
• Unused stamps represent the equivalent of 2.4 months spending on stamps.  This suggests that most "old" forever stamps will be used within three months of purchase.   
• If all unused postage is one-ounce letter stamps, then the $1.782 billion in postage represents 4.05 billion stamps outstanding.
• A rate increase of one cent would "cost" the Postal Service $40.5 million from those not purchasing make-up stamps.

Now, how much would it cost to sell those $40.5 million in 1 cent stamps?   The answer depends on how many people buy at a time.   Assuming that individuals buy ten make-ups stamps at a time, selling make up stamps will involve around 405.2 million retail transactions.    At one minute per transaction, and a clerk's cost of $24 per hour, selling those makeup stamps would cost the Postal Service $163 million.   (405.2 million transactions x $24 per hour/60 minutes per hour)

So getting the $40 million in lost revenue of offering forever stamps would cost the Postal Service $163 million.  The shift was clearly a good business decision for an enterprise looking to cut costs where ever possible. 

Mr. Gingrich needs to reverse his comments on the forever stamp and praise the Postal Service for making this move rather than calling for Congress to overturn it.

Ending Denominated Stamps

USA Today reported on December 28, 2010 that all First Class stamps in 2011 will be forever stamps.  Currently, forever stamps are only available in a limited number of generic designs. The switch puts commemorative stamps on a equal competitive plain as more generic stamps sold in booklets and sheets.

The shift reflects a final blow to the traditionalists and penny counters at the Postal Service that held onto denominated stamp concept far beyond the point that it made business sense for either First Class mail or for the Postal Service's commemorative program.  For those with some memory of the regulatory process, the forever stamp was pushed for many years by the Postal Regulatory Commission's Consumer advocate and approved in 2007 after long opposition from the Postal Service.  

The elimination of denominated First Class stamps should provide a limited boost to the Postal Service in three ways.

• Eliminating the purchase of 1 and 2 cent stamps when there is a rate change saves the Postal Service money.   If one assumes that it would take 1 minute of a postal clerk's time to sell stamps, it would cost the Postal Service on average 13 cents if the clerk was paid the federal minimum wage and received no benefits.   So in order for a purchase of low denomination stamps to be profitable, a minimum of 14 cents worth of stamps would have to be sold at a time.   Given that postal clerks are paid well above the minimum wage and have benefits, the break-even point for selling stamps (assuming the cost of the service was already paid for in the existing postage purchased) would be at least 40 cents.  So unless a person needs to purchase forty 1 cent stamps, the Postal Service would be losing money on each purchase at a retail counter.
• Eliminating the purchase of 1 and 2 cent stamps improves customer satisfaction and the quality of retail services.  By eliminating the need to buy these stamps, the Postal Service makes First Class mail easier to buy.   Consumers can buy stamps once and not have to worry about when the stamps will be used.  Also eliminating the need to buy low value stamps, improves the Postal Service's ability to quickly serve retail customers needing to buy all other services including higher priced parcel services.
• Eliminating denominations on commemorative stamps should increase their acceptance.   Consumers now can buy commemorative or generic stamps with an equal assurance that the stamps will be good for First Class mail for as long as they will need them.   This should have the effect of increasing sales of commemorative stamps and ensuring that the entire print run of commemorative sell-out.

Forever stamps represent one element in the Postal Service's program to simplify the purchase of its services.   Flat rate boxes, pre-stamped greeting cards, and pre-paid postage shipping cartons are other illustrations of this trend.    These steps all reflect an expansion of the convenience factor which is critical when vying for the business of time-strapped consumers