01 January 2009

The Economics of the USPS

The US Postal Service is my favorite example of a monopoly. Unlike IBM, Microsoft, Google, and other companies that have market power for awhile and then lose it, the USPS gets its monopoly power (it's illegal for others to put mail in your mailbox) from the government and has since 1775.

Now, I am not going to debate the value of the USPS over time, but I will say that the USPS is leaning harder on its power in recent years. Why? As the USPS has lost HUGE market share to private delivery (UPS, FedEx), fax, and email services, its revenue has not grown as fast as its costs. In 2007, the USPS lost $5 billion.

So why am I writing about the USPS on a water blog? Because postage rates are going up today. Why are they going up? Because when the USPS loses money, it can raise prices and avoid cutting costs.

Aside: The USPS employs 785,000 people, which is only 1.7% less than 20 years ago. The only US company with more workers is WalMart (2.1 million worldwide), which has five times USPS revenue. That works out to nearly double USPS revenue/worker.

So, besides that parallel with water utilities (monopolies that can raise rates instead of cutting costs), there's another interesting parallel between mail service and water service: "postage stamp pricing" (the name is used in both industries).

PSP means that customers pay the same rate for delivery, no matter where they live. Put differently, PSP means that everyone pays the average cost of delivery everywhere -- not the actual cost of delivery to them. In postal terms, that means that urban customers are subsidizing rural customers. In water terms, that means that people in city centers are subsidizing people in the suburbs.

[Note how "equity" is flipped. With postal service, city people subsidize rural people, which is similar to rich people subsidizing poor people. With water service, people in the inner city (until recent trends, poorer people) are subsidizing rich people in the suburbs.]

But that's not the worst part -- PSP subsidizes sprawl because new connections only pay the average -- not the marginal -- cost of water. (I know of one exception where I live. People who live in the hills pay a "pumping surcharge" for their water.)

So that's the water angle. Now here are my suggestions on how the USPS can reform itself:
  • Cut employment by delivering on alternating days.
  • Sell a new service -- "no junk" -- that stops delivery of unwanted junk mail. I'd pay $20/year to stop junk. The US has 100 million households, and the USPS has $75 billion in revenue, so this is not a big number, but it would lower the USPS footprint by reducing weight, printing costs, waste, etc.
I'd love to see these implemented, but I am expecting that postage rates will just rise again.

Bottom Line: Monopolies don't have to be efficient -- they just take your money.

8 comments:

Anonymous said...

Paying a fee to block junk mail might hurt, not help, USPS revenues.

A large chunk of revenues is from bulk mail deliveries.


Help out the USPS by returning a nice note saying that you wish to be removed from solicitation... in the pre-paid addressed envelope provided by the solicitor. Make them pay more.

Damian said...

Alternate days are good--half the mail carriers are now gone. Also, remove the restriction on using mailboxes--let other companies use the boxes, ending part of the monopoly.

I thought I saw something recently about the postal service cutting 60000 jobs over the next few years and telling us that most people won't notice a difference in service. Seems odd to me that, if true, they hadn't done this already.

Anonymous said...

I could be wrong, but I believe you can request to NOT receive junk mail. I did this a while back with my PO Box as it was getting filled too quickly.

David Zetland said...

@ Anon -- I once asked a USPS rep (head office) if they would stop the "junk mail". She was appalled: "Our bulk business PAY for delivery to your box, and we can't fail them..."

[hand to forehead...]

Art Carden said...

Excellent post, and one that I'll try to incorporate into my monopoly lectures.

I introduce monopoly by showing an old SNL skit with Lily Tomlin in a commercial for The Phone Company, which was made (I think) while AT&T was still a protected monopolist. The skit ends with their motto, which summarizes the problem with protected monopolists: "We're the Phone Company. We Don't Care. We Don't Have To."

Josh said...

Interesting, but I'm not in complete agreement. You are right about monopoly and rate increases.

However, what a comparison, between Walmart and USPS. If Walmart were forced to pay for its employees health and retirement with a pension, instead of making US pay for it through Soc. Sec., Medicare/medicade/emergency room visits by its employees, PLUS they had to pay them a wage they could live on, instead of making US pay the excess through food stamps and health plans for their poor kids, THEN I'd think the USPS was atrocious.

However, the USPS still gets us our mail, moves billions of pieces right every day (even when they get some wrong, it is still quite a feat), and provides for its employees. Walmart doesn't come close, and the tax subsidies and welfare that Walmart gets appalls me even further.

Josh said...

And one other comment: During the time that the USPS cut its workforce by 1.7%, its clientele increased by about 40 million.

testname said...

While I recognize the monopoly the USPS has on the mail, it is because of the U.S. Constitution that it does. The USPS has leveraged technology to reduce headcount throughout the decades. They are hindered, however, by legislative requirements. Until 2006, they couldn't generate a profit. That explains the 1 cent increases every other year. They also have powerful unions and a requirement to prepay retirement benefits, which--due to their size--are burdensome. Do the bulk mailers send a lot of paper through? Yes, that's because we cannot trust electronic advertisements many times. Should the Postal Service get into the business of certified e-mail, whereby they certify who the sender is, that the message doesn't contain a virus, and hasn't been tampered with? Write your local Congress representative with your ideas.