This Is How The US Postal Service Loses So Much Money

Authored by Justin Murray via The Mises Institute,

Lately, when he isn’t trying to blame China on America’s competitiveness woes, President Donald Trump has become obsessed with the online retailer Amazon. While there’s speculationthat Trump is using the reins of government to carry out a personal grudge because Jeff Bezos, Amazon CEO, also owns The Washington Post, the more recent obsession is based on his belief that the United States Postal Service is subsidizing Amazon’s activity.

The claim is that, based on a cost-plus method of pricing, Amazon is being subsidized $1.47 per package delivered by the USPS as a last-mile carrier. With an estimated608 million boxes shipped by the online retailer in 2017, Trump is implying that Amazon has shorted the postal service by $893 million.

Considering the USPS lost $2.7 billion, this further implies that Amazon is a key reason why the USPS is struggling financially. Trump goes on to state that Amazon should fork over the entire $2.7 billion to cover the difference.

A key problem here is the assumption that businesses operate on a cost-plus basis. This kind of thinking is a result of how warped government operations are, which frequently engage in cost-plus kinds of contracts. Cost-plus contracts are where the government agrees to cover all the applicable costs of performing the work plus a guaranteed profit. These forms of contracts are relatively unusual in the private business sector, where bidding on price are the primary form of activity. Because of the nature of cost-plus, and how they will frequently go over-budget because there is little incentive to control costs of performance, companies generally don’t engage in them. This means, in the world outside of tax-funded activity, the USPS has to compete with other package carriers like UPS and FedEx and doesn’t have the luxury of guaranteeing itself a profit on every activity.

When it comes to the USPS, the organization has significant fixed costs. In business planning, prices are usually lower-bound by the variable cost of activity. Any revenues that are collected above and beyond the variable costs are able to contribute toward fixed expenses. This is referred to as the contribution margin. Because the fixed component exists whether the product or service is sold or not, companies will be pressured to lower prices until they reach this contribution margin is exhausted. Companies then hope to generate sufficient volume at this margin to cover the fixed expenses. If the choice is between no sale and a sale below an optimal price with some contribution margin, the organization will usually go with the lower than optimal price to at least slow the resource deterioration.

The reason the USPS is in trouble and is struggling to cover its estimated $29 billion in fixed costs is because of its status as a partial legal monopoly. From the own words of the USPS, Congress has granted, with criminal penalty, the USPS total monopoly over the delivery of letters, with some carve-out exceptions (such as urgent or free of charge). Like most monopolies, the USPS had little incentive to keep costs controlled. In 1999, the USPS even went so far as to shrug off the burgeoning Internet, e-mail in particular, as some fad and engaged in sorting facility expansions with the expectation that letter volume would continue to grow. Since peaking in 2001, the number of letters delivered by the USPS has since collapsed to nearly half as much in 2017. The USPS costs, however, continued to increase, from $62 billion in 2000 to $72.3 billion in 2017, despite the collapse of business volume. The USPS was only able to remain solvent by leveraging its monopoly status by driving up the price of stamps from $0.34 for a first class stamp in 1999 to $0.50 later this year. But even this is running into limitations as the decline in mail volume accelerates.

This monopoly, however, doesn’t cover package delivery, putting the USPS in a strange position of having a legal monopoly on only part of its business. This creates the impression that the package business is subsidized by the letter business since the prices on the letter side aren’t limited by a competitive force. This then creates the further impression that the expenses, which were never controlled because of the historical reliance on letter delivery, should be evenly applied to package delivery as well. Thus the assumption there is a subsidy at all when in reality the costs are grossly overinflated due to a lack of market discipline.

When a private business is threatened by decreased volume, they usually have to trim operations to adjust their size to meet the new market demands. The USPS, on the other hand, does not do this. The organization continues to operate on the assumption it must make daily deliveries, six days a week, to every address in the nation. Even the old rural excuse has become weakened as the nation becomes more urban (assuming it was ever justified to tax city residents to provide city amenities to those who elected to live in remote places). Not that rural residents need a monopoly organization to deliver junk mail.

Repeal the Postal Service’s Monopoly

So what’s the answer to the failings of the USPS? Repeal the Private Express Statutes and let the USPS loose to manage its own affairs without Congressional interference in its operations. As Lysander Spooner famously proved back in 1844 with the American Letter Mail Company, the private sector can not only deliver the mail, it can deliver the mail profitably for a fraction of the cost of the postal service. This solves two problems:

  1. The appearance that Amazon is subsidized through the USPS is eliminated
  2. Profitable, stable delivery organizations can come into play

Repealing the private express statutes and getting government out of the mail delivery business may also very well save the USPS as not only can the USPS get out from under populist mandates, such as the overly generous retirement program and maintaining an absurd number of postal service locations; the USPS maintains over twice as many postal stops as McDonald’s has restaurants. It will also open up the market to more competition and competition breeds superior operations for competing members as creative methods of operation are more likely to be identified and can be mimicked, leading to superior operations for all players.

In the end, the “problem” with Amazon is self-inflicted by the government insisting it operates a monopoly letter carrier. Trump can fix the problem with one fell swoop by pressuring Congress not to pass laws imposing higher rates on Amazon delivered packages, which will only accelerate the failure of the USPS since Amazon would just pick an alternate carrier, but to open up unrestricted competition in mail delivery and cut the USPS loose from the government tether. It certainly worked out well in New Zealand.

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About the Author: Tyler Durden