Unfair Postal Competition

January 11, 2016

With the rise of electronic communications, the volume of snail mail has fallen precipitously, and the U.S. Postal Service (USPS) has been losing billions of dollars. The 600,000-worker USPS is an unjustified legal monopoly that is heavily subsidized. It is a bureaucratic dinosaur that Congress should put on the way to extinction.

In April, I highlighted an excellent study by Robert J. Shapiro that described USPS subsidies in detail. The subsidies include: exemption from taxes, low-cost government borrowing, monopoly protections, and other special benefits.    

Shapiro completed another study in October, which is a great addition to the postal debate. He details how government-conferred advantages have translated into cross-subsidies from USPS monopoly products to products sold in competitive markets. The USPS uses its monopoly over letters and bulk mail to unfairly compete with FedEx, UPS, and others on express mail and packages.

Shapiro finds that USPS raises prices on its monopoly products, and uses those extra revenues to artificially push down prices on its competitive products. For USPS, this makes sense because consumers are less price sensitive for the monopoly products than for the competitive products. Shapiro concludes, “USPS has strong incentives to cross-subsidize its competitive products with revenues from its monopoly operations,” and it does so by $3 billion or more a year.

For Fed Ex, UPS, and other private firms, this is completely unfair because they have to pay taxes, borrow at market rates, and abide by all the normal business laws and regulations. Fed Ex, for example, had an effective income tax rate in 2015 of 35 percent, per the company’s 10-K. That tax load is money that it could not use for reinvestment to meet the subsidized USPS challenge. Shapiro thinks that “without its subsidies, [the USPS] could probably not compete at all” with its more nimble private competitors.

As Shapiro discusses, Congress and the USPS regulatory agency are familiar with the cross-subsidy problem, but their solutions have been weak. Part of the problem—as we also see with other government businesses like Amtrak—is that USPS is secretive about its accounting, and so the cross-subsidies are hidden.

The solution to all this is privatization and open entry. That would end cross subsidies, increase efficiency, improve transparency, and provide new opportunities for America’s entrepreneurs. Retaining special protections for a centuries-old paper delivery system when215 billion emails blast around the planet every day is getting pretty silly.

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