Is the Postal Service is Overcharging You on Stamps So It Can Compete with Package Delivery Services?

In fiscal year 2018, the USPS reported $3.9 billion in losses, up from the $2.7 bilion loss it experienced in 2017. It’s been over a decade since the USPS was last profitable, which is particularly concerning given that the agency was intended to be financially self-sufficient.

Adding to its financial challenges, the USPS rarely meets its quality and customer service goals. In 2017, the agency met just one of its seven targets for high-quality service performance, up from 2016 (when it failed in every category), but still unacceptable to the public.

The USPS also failed to meet two-thirds of its targets related to customer satisfaction. Surveys of post office customers in 2017 revealed that 10 percent of respondents were dissatisfied with their experience, while 17 percent of those receiving mail or packages were dissatisfied. These results are just the latest in a long record of poor delivery and customer service quality indicators.

Meanwhile, the USPS is asking to increase rates on stamps. We’re paying more and getting less. What gives?

To be sure, some of the USPS’ fiscal challenges are not of its own making. Health insurance and pension expenses — which are mandated by Congress — have risen sharply. The internet age has also led to a significant decline in mail volume.

But the USPS’s own business practices may be partly to blame. In addition to fulfilling its core mission of delivering letters, for which Congress has granted it a host of special monopoly privileges (including exclusive access to mailboxes and exemptions from state and local taxes and fees), the USPS offers a range of services where it competes against private firms. The most important of these competitive services is package delivery, where it faces rivalry from UPS, FedEx, and others.

The trouble is that the USPS seems to be using the privileges intended to support its monopoly services to indirectly cross-subisdize the costs of its competitive products. This cross-subsidization — which could exceed $5 billion per year — gives the USPS an unfair advantage in the competitive market by allowing it charge artificially low prices that do not include all the costs attributable to those products.

When the USPS seeks to increase revenue, it faces strong incentivizes to overcharge its monopoly customers — who have no alternative for sending letter mail — and undercharge its competitive customers, which allows it to undercut private firms and gain market share.

In 2006, Congress passed a law intended to curb these cross-subsidies, but it has proven ineffective. The law requires the USPS’s competitive services to cover all of their attributable costs and contribute to the agency’s institutional costs which cannot be causally linked to a particular line of business.

But the USPS attributes barely half of its total costs to either its monopoly or competitive services, meaning that a large portion of the USPS’s costs are considered institutional. The share of institutional costs for which competitive services are responsible remains far too small, despite a recent decision to increase it from 5.5 percent to an estimated 10.8 percent in 2019. Given that competitive services have sharply increased as a share of the USPS’s total revenues (from 22 percent in 2014 to 30 percent in 2018), they should be contributing substantially more to the agency’s institutional costs.

Allowing the USPS’s competitive services to freeload off of its monopoly privileges hurts both consumers and private firms. The agency should keep separate books to ensure that each line of business covers its costs, or it should abandon its competitive operations entirely and refocus on its core mission of providing letter mail services to the American people.

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