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October 06, 2007
Rating Postal Rates
Don Boudreaux
One of my students at George Mason University recently asked about my thoughts on the U.S. Postal Service's government-granted monopoly on the delivery of first-class mail. I told him that I see no justification for that monopoly privilege -- that, if I could, I would eliminate it immediately.
"But postal rates aren't outrageous," he challenged (in good and appropriately skeptical spirit, I add). "Wouldn't a true monopoly charge much higher rates?"
This question recalled to mind the very first letter that I published in the New York Times, back in 1994. (It is co-authored with my good friend, the University of Georgia's George Selgin.)
It has been suggested that, because the nominal price of first-class postage is about where it was in the late 18th century, Americans who complain about the proposal to increase postal rates are merely whining wimps who are lacking in historical perspective.
However, the real price of transportation (a key input in postal service) has plummeted over the last 200 years. In 1799 it took 53 days for an Army courier to travel from Detroit to Pittsburgh.
Today the same trip can conveniently be made in minutes. Likewise, the productive efficiency of the United States is vastly greater now than it was even a few decades ago.
Given the plunge in transportation costs, joined with other technological improvements and a large increase in the scale of postal activity, the price of postage should have fallen dramatically.
Americans do not oppose postal-rate increases because of their ignorance of history.
Rather, opposition to these increases grows from the correct perception that a legally protected monopolist such as the United States Postal Service can keep prices higher, and service inferior, to what these would be under competition.
Regardless of how today's postal rates compare with rates in the past, opening the delivery of first-class mail to competition would lower rates still further while improving service.
DONALD J. BOUDREAUX
G. A. SELGIN
Clemson, S.C., March 24, 1994The writers are, respectively, an associate professor of legal studies at Clemson University and an assistant professor of economics at the University of Georgia, Athens.
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Comments
If you check the PPI for carrier services it has been showing a nearly 8% rate of price increase since the index was first published by the BLS. This is a rate some 2 to 3 times as fast as postal service rates have risen over the same period.
In real terms the price of a postage stamp is also just a fraction of what it was 200 years ago. You are making the claim that other transportation real prices have fallen faster than the real price of postal service. But the data to support that claim is not entered in evidence. You may be right, but you are presenting no evidence to support that claim.
Show me a price index or other evidence that demonstrates that the real price of postal services has risen faster than the real price of other transportation services.
Posted by: spencer | Oct 6, 2007 12:43:06 PM
Having worked with delivery companies, including the USPS, I have heard first-hand all their reasons for maintaining the monopoly conferred by the Express Mail statutes, where their monopoly legally resides. The rational arguments basically come down to this:
- We deliver to everyone for the same price, no matter how far out of the way they live
- We need the monopoly to cross-subsidize the out-of-the way destinations, or we couldn't afford universal service
- Absent the monopoly, our competitors would cherry-pick the most profitable routes, and leave us with all the money losers (they claim that even UPS uses USPS delivery capability to reach some of these people)
- Given the assumption of universal service, the taxpayers would be on the hook for a high-cost service to people who are otherwise not served by mail.
Even assuming that universal snail-mail service remains a goal worth keeping in the Internet age, I think the rest of this is bunk. UPS says they would be able to cost-effectively provide universal service by themselves; FedEx says they could do so with some higher prices to the most remote areas. Even if FedEx and UPS want to cherry-pick first-class, I say let them. I haven't seen the economics in quite a few years, but it's very likely that the raw subsidy for capital that taxpayers shell out could easily cover the incrementally higher costs of first-class to the most remote areas in an otherwise free market for mail delivery. And that doesn't even count the social gains from competition in the urbs and suburbs.
Economically, there is no serious argument against eliminating the postal monopoly. The real argument is political. The postal union is among the largest in the country--about 800,000 voters. They would, pardon the phrase, go postal at any serious privatization or de-monopolization campaign. End of argument.
Posted by: M. Hodak | Oct 6, 2007 12:45:26 PM
...and, of course, having preferential hiring that favors ex-military, their postal-going would be a lot more accurate.
Posted by: shawn | Oct 6, 2007 2:21:49 PM
If a government-granted monopoly was more efficient than market competition, and prices were lower under the former, would that make it okay?
Posted by: Lee Kelly | Oct 6, 2007 2:37:07 PM
How much direct subsidy did the gov't give to the USPS last year?
Posted by: Sam Grove | Oct 6, 2007 3:20:27 PM
Does anyone remember the USPS radio spots from the early 90s about how "it's not junk mail"? I remember the second or third time I heard that radio spot being the "aha!" moment that pegged my BS detector and pushed me in the libertarian direction. Economically, the USPS makes no sense. But culturally, it's a gold mine... We wouldn't have the term "going postal" without the Post Office. We would be drawing comparisons of socialized medicine's inevitable doctors office lines to the new submarine ride at Disneyland. And Pitney Bowes stock would be worth less than the stamp their machine prints for me.
Posted by: Brad | Oct 6, 2007 3:29:42 PM
Sam,
The USPS has no "operating" subsidy. That is, it's revenues are expected to cover their operating costs, and they generally do. However, the USPS is one of the most capital intensive operations in the world. They have processing centers for snail-mail and bulk mail. Within these processing centers are advanced sorting, labeling, packaging, etc. technologies that cost billions. All of these are funded by general bonds, over $13 billion as of the end of 2005. They don't have to pay the interest on these loans.
Furthermore, they have offices in every community in the U.S., nearly all of which are government-owned. While there is no current capital cost associated with these vast properties, there is a huge opportunity cost--all that fair-market rent they don't have to record on their income statement--that the taxpayers are bearing as well.
So, although they say they have no "operating subsidy," there is a significant capital subsidy--I estimate on the order of $3-4 billion per year (the entire profit of UPS in a good year).
Posted by: M. Hodak | Oct 6, 2007 6:06:23 PM
If we need a government monopoly to deliver mail to out of the way places, why don't we need a government monopoly to deliver food to such places?
Posted by: Simon Clark | Oct 6, 2007 6:16:47 PM
That's a great argument, never thought about it this way. I'll try to dig up the numbers for France and use that someday.
I would have answered that economist should always think at the margin, and that in the absence of any other service to compare it to, there's no way to tell whether it is outrageous or not.
Posted by: Mathieu Bédard | Oct 6, 2007 7:18:01 PM
A left-leaning non-profit that I'm affiliated with has a quarterly magazine. In the last issue they were complaining about the new postal rates & how they favor the eeevil big corporations at the expense of the little do-gooders like them. Their solution was to petition Congress to correct this injustice. This is the note I sent them:
"I have never had to worry whether UPS, Fed Ex, or DHL was overcharging me due to political favoritism. When **** petitions Congress concerning the postal rate changes, I would hope you would ask for the right to send the magazines via the private carrier of your choice, thereby eliminating the problem of making a political battle out of the rather mundane task of mailing the magazine."
It really utterly depresses me when people insist on having the government deliver services, then when the inevitable problems with the program crop up, instead of questioning the wisdom of using the politically derived police powers of the government to manage the service, they just divide into factions to fight over whose special interests should win the political battle. And the process of fighting the battle, against those eeevil corporations just reinforces the leftist belief system that corporations, and therefore markets, are bad. I find it very frustrating.
Posted by: kebko | Oct 6, 2007 9:06:55 PM
If out-of-the-way areas would get higher mail delivery rates on the free market, that is a feature, not a bug. The government should not be in the business of distorting the natural market for where people want to live. For a more serious problem caused by government subsidization of geographical areas, look at what has happened in Siberia. For decades, the USSR used special subsidies and payments to encourage relocation to Siberia, a place where few people would choose to live otherwise. Now there are many towns with high unemployment and poor living conditions: most people are too poor to move, but without government intervention, there are no jobs, and the towns are slowly dying.
The U.S. situation is less serious, but between the post office, air service, and bridges to nowhere, many people continue to live in places they should have long since left.
Posted by: Nathan Benedict | Oct 6, 2007 10:38:34 PM
UTNE. I used to be a lefty, too, but I grew up.
Posted by: Russell Nelson | Oct 7, 2007 2:35:24 AM
If a government-granted monopoly was more efficient than market competition, and prices were lower under the former, would that make it okay?If the monopoly can deliver better service with government protection, then it can deliver better service without government protection.
Posted by: G | Oct 7, 2007 6:01:30 AM
M. Hodak: "UPS says they would be able to cost-effectively provide universal service by themselves; FedEx says they could do so with some higher prices to the most remote areas."
I'm just being curious when I ask this, Mr. Hodak: Do you have a source for the FedEx claim that they could deliver standard mail to remote places for less? They probably could, but I would be surprised if they've investigated the idea.
I left FedEx 10 years ago, but before then I was closely involved with many service proposals and decisions for the company. As an industrial engineer, I planned the expansion of FedEx service to all zip codes in the Southwest and mountain states. As a strategic planner, I evaluated proposals for new product offerings, including FedEx Standard Overnight and a few delivery joint ventures.
I would be surprised if FedEx truly wanted to take over standard mail delivery. IMO, FedEx can offer several classes of higher value delivery simply because USPS is so inefficient. They would lose a key marketing advantage of they were competing with themselves rather than with a government-controlled monopoly.
The USPS goose has laid an additional golden egg for FedEx, a treasure my vice-president and I first proposed to Fred Smith 14 years ago. FedEx receives a billion dollars annually for moving USPS mail bags around the country through the existing FedEx network. So USPS is both a competitor and a valuable partner.
Posted by: John Dewey | Oct 7, 2007 11:04:03 AM
John,
I didn't say they could do it for less. I said they could probably do it for more, particularly to remote areas.
My source was discussions with FedEx, UPS, and USPS managers many years ago when I was working in the intermodal business moving, among other things, mail and packages in ground transportation. I'm pretty sure that the FedEx manager I spoke to was not speaking from any business plan to take over snail mail, but from a basic sense of FedEx's capabilities for universal coverage.
Posted by: M. Hodak | Oct 7, 2007 1:37:04 PM
It is no wonder that the USPS is often used as an example of what a "nationalized" health care system would inevitably turn out to become.
Clearly the individual choices made by people dictates the expnse of receiving the service; in other words where I choose to live affects the ability of the mail courier to deliver my mail to my doorstep.
If I choose a remote isolated home site, then delivering my mail to me becomes a cost that may off-set any profit made by any particualr branch Post Office, or it would likely drag the balance to the negative side at the very minimum and make the branch Post Office operate at a loss that has to be made up somewhere else.
Individual choices in lifestyle affect our medical health in the same way.
The obvious, to me at least, answer is to convert the mail delivery system to a private for profit company so that individual choices would reflected in how much we value the service and how much we would be willing to pay for what level of service.
The American people were once served by a USPS that operated somewhat on a cost/benefit basis. The USPS delivered mail to the little remote town on a reasonable schedule, and the rancher or farmer then rode his horse, or drove his wagon in, and picked up the mail at the branch Post Office. The USPS did not, except in rare case, institute a rural delivery in those areas of vast distances between homesteads and ranches.
Daily delivery to your door, at a loss, subsidized even by the working illeterate, is a concept that could only come from the socialist mindset.
Posted by: vidyohs | Oct 8, 2007 10:32:56 AM
Ah yeah, I remember carrying stacks of letters and bills to the drop box. Then this Internet thing came along.
Nowadays, I'm down to about 2 letters a month away from not caring at all how much a stamp costs.
Posted by: Kevin | Oct 9, 2007 8:37:48 AM
....and the U.S. Postal Service pays NO taxes.
That's at least an instant 30% financial advantage over any private competitor.
Just imagine the savings in fuel costs alone, without taxes... in such a transport-intensive business.
It's a wonder FEDEX & UPS can compete at all with the huge tax advantages enjoyed by the USPS -- but it's indicative of how inefficient the USPS really is.
Posted by: hanlon | Oct 9, 2007 11:28:56 AM
hanblon: "It's a wonder FEDEX & UPS can compete at all with the huge tax advantages enjoyed by the USPS -- but it's indicative of how inefficient the USPS really is."
Good point about the tax advantage USPS enjoys. Of course, UPS and FedEx only compete with USPS in package delivery and priority mail. Only USPS delivers standard mail.
FedEx is now a USPS supplier, moving official USPS mailbags around the country. But before they won that contract, FedEx executives complained often to Congressmen about the USPS cross-subsidization of package and priority mail delivery. USPS was accused of using standard mail monopoly profits to subsidize its non-monopoly products in order to offer lower rates. I'm no longer privy to FedEx executives' tactics, so I can't confirm that they still complain. My guess is that FedEx's $1 billion share of those monopoly profits has reduced the concern of FedEx execcutives..
Posted by: John Dewey | Oct 9, 2007 3:14:21 PM
For those interested, the NPR/PRI program "Justice Talking" recently broadcast a segment about the USPS, focusing particularly on privatization issues. Keeping in mind the typically progressive leanings of Justice Talking (it is, after all, broadcast on public radio), there was fair perspective given by pro-privatization voices. Among the guest commentators was Robert Schrum from the Lexington Institute, who made competent, well-reasoned arguments for abolishing the first-class monopoly of the USPS. It’s a worth a listen. You find Justice Talking on iTunes podcast directory or if you visit http://www.justicetalking.org.
Posted by: Erik | Oct 10, 2007 11:59:17 PM
Erik,
My hearing disability prevents me from listening to the podcast. Can you help me? I'm curious about whether Mr. Schrum had a suggestion for ensuring remote mail delivery. If the USPS monopoly is ended, then USPS can no longer be required to service all zip codes. Other delivery companies would certainly jump in and provide Boston to New York mail service. Who would want to handle the Deer Lodge, MT, to Six Mile, SC, letters?
Posted by: John Dewey | Oct 11, 2007 8:59:03 AM
"Other delivery companies would certainly jump in and provide Boston to New York mail service. Who would want to handle the Deer Lodge, MT, to Six Mile, SC, letters?"
You know, this occurred to me, too. And I got to thinking about remote towns in Alaska. Food, shelter, sundries, etc. - everything else is brought to them by markets - usually at high expense, but all of life's necessities are available there. It seems funny to me that mail, which doesn't really rank as a necessity on the level of food & shelter, would be given this special status as the one thing that gets provided at a standard rate.
"Look, with food, drink, shelter, medicine, you're on your own. But, the MAIL - that is something we just have to get to you at no extra cost." It's kind of absurd when you think about it.
Posted by: kebko | Oct 11, 2007 11:03:23 PM
John,
Within the debate portion of this podcast, Schrum refutes the idea that rural routes, such as Deer Lodge to Six Mile, are necessarily subsidized by urban routes. Although not citing any specific studies, he argues that rural routes hold their own, so to speak. His opponent, Christopher Shaw, argued otherwise, explaining that it depended on which studies one chooses to highlight.
However, even if there is cross-subsidization of rural routes by urban consumers, I'm not convinced that the former would be worse off if the USPS monopoly were relaxed. For one, the process of price discrimination may not be cost effective. To impose such a scheme on consumers would require a way to charge for service based on origin and destination that would generate savings above and beyond charging everyone a simple, flat rate. Clearly, for large parcels, price discrimination makes sense. But for small, lightweight, often bulk-processed post???
Also, Schrum points out that other nations without a first class monopoly (he cites Britain specifically) have continued to offer universal service. Hence, I disagree with your assertion that a relaxed monopoly on first class mail would necessitate relaxed service to rural areas of the country.
Finally, assuming for the moment that cross-subsidization is a reality, I should ask the perhaps politically incorrect question of whether it is fair that urban consumers should have to pay a surcharge for postal service. Put another way, should the bulk of our population (urban, by definition) forgo improvements to their postal service so that rural customers can reap equal benefits (despite unequal costs). Your thoughts???
Posted by: Erik | Oct 12, 2007 12:08:37 AM
I agree that subsidization of rural mail delivery is not fair, but neither is subsuduzation of rural highways.
IMO, what gives rural residents so much clout in the U.S. is their disproportionate representation in the U.S. Senate. Wyoming and Montana and Vermont have exactly the same number of senators as California and Florida and New York.
I haven't looked at international mail service, so I don't know which nations offer private mail service. If Great Britain does, it is not surprising that such a geographically small nation might be able to offer flat rate delivery pricing.
FedEx delivers priority mail to every zip code - at least every one in the continental U.S. Not positive about their current service, but I was once responsible for planning the expansion into remote zip codes. They accomplished this by offerring different levels of service to remote areas. Overnight delivery with early morning service was not available.
I have to concede that competition is what motivated tghe FedEx expansion. However, for the first 15 years, FedEx did not serve all zip codes. Only when UPS advertised coast to coast service did FedEx puch out to the boondocks.
The difference between priority mail revenues and standard mail revenues is huge. FedEx found a way to expand the delivery area of a $10 standard overnight letter. I don't see why they would do so for a 35 or 40 cent piece of standard mail.
I think ending the USPS monopoly would be followed by either price or service discrimination. The clout of small state senators may be enough to prevent that from happening.
Posted by: John Dewey | Oct 12, 2007 6:53:57 AM
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