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.

Comments

Hal n back Lost in translation Mon, 04/16/2018 - 00:05 Permalink

Amazon, E Bay, Walmart, and just about all other on lne businesses use US Post office. I think Amazon , however, gets the best pricing, and that price is likley less than prime or variable cost to USPS.

I am certain amazon knows when its cheaper to send via USPS, UPS,  or independent driver.

That cheaper, however, means that amazon is cutting it amazon prime losses.

Amazon cannot continue for too many years more with  current pricing and profitability structure. If it binks anre raises prices--what if Walmart et all do not raise prices and go for the  jugular on amazon. or what if amazon raises prices and so do the others--inflation city here we come.

In reply to by Lost in translation

Harry Lightning Hal n back Mon, 04/16/2018 - 09:50 Permalink

Amazon will be fucked sooner than that. Think about how much their inventory financing goes up every time the Federal Reserve raises interest rates. The days of zero interest rates are over, and that was the regime under which Amazon was able to profit. But their profitability is a mile wide and an inch thick, and it all goes away when their interest costs eat up their slim profitability. AMZN will someday go down in history as the company that cost investors the most capital ever. The company will be in business for ages to come, and they will continue to do a great job of getting you things you need quickly. The problem will be that quickly will become extended by a week as they no longer will be able to carry the breadth of inventory and will be more of a classic middle man taking orders before sending orders to suppliers, and then waiting for their orders to be filled before they can fill their customer orders. At the margins, this delay will cause people to get back in their cars and head for Walmart. It will not be a huge portion of the customer base, but when your profit is paper thin in a low margin business, a small demographic swing will give you headaches. 

In reply to by Hal n back

techpriest Harry Lightning Mon, 04/16/2018 - 11:29 Permalink

I think there will be a new equilibrium, but not for this reason.

Amazon is a platform company, that connects the supplier direct to the customer. I have stuff I make at my house, I open my store on Amazon, and when you buy from Amazon, I send it to them, they send it to you, and the logistics have been worked out such that this can all be done very quickly.

Now, the question is, at what price? Right now it can be done very cheaply, but with the financing removed, maybe the same service will add 15% to a typical order. If so, then someone earning $30k per year isn't going to buy deodorant from Amazon. However, hard-to-get items and people who can afford the extra shipping are still going to do business there.

In reply to by Harry Lightning

Antifaschistische techpriest Mon, 04/16/2018 - 11:42 Permalink

why does USPS deliver mail every day (to personal residences)?  Would anyone really be upset if they only had to retrieve their mail once a week?  So what if daily mail means you would get your Visa bill on Friday rather than Wednesday?  Who cares?  What else comes in the mail that is of any relevance?

- Take residential mail to once a week

- Implement revenue neutral package delivery services

- double the price on all first class postal services

....see if USPS approaches a break even point, and adjust accordingly.

In reply to by techpriest

techpriest Antifaschistische Mon, 04/16/2018 - 12:42 Permalink

My thought also. Except for local government taxes and mandated services, I don't pay any bills over the mail, and I throw away 99% of what is termed junk mail. I do open the letters from the Mises Institute and donate about 1 out of 3 times.

IMO, the debate is not about the USPS, but the tendency of Congress to use agencies and services as fronts for all sorts of other activity. For example, many agencies are required to participate in the SBIR/STTR program, which forces them to be regulatory bodies and angel investors at the same time. If you receive that cash its nice, but making a regulatory body into an angel investor should tell you right away how the program could lead to trouble (Solyndra, anyone?).

Part of the runaround game is to try to turn the debate into one about the Post office and more specifically about postal workers, but IMO the real matter is a legislative body trying to use agencies to fund or enact their pet projects and social experiments. You get organizations that are distorted in their mission and purpose, and predictably can't do anything well.

In reply to by Antifaschistische

JustPastPeacefield Antifaschistische Mon, 04/16/2018 - 14:13 Permalink

On an operational basis, USPS already is profitable. Losses can be attributed to excessive requirements for pension and healthcare obligations that Congress imposed - for whatever self-serving reasons. 

And by self-serving, I mean some crony capitalist wants a piece of the USPS profitable delivery service and wants to leave the unprofitable shit for the taxpayers to handle. 

 

In reply to by Antifaschistische

canisdirus techpriest Mon, 04/16/2018 - 18:01 Permalink

This is only one side of the extremely complex business model they operate.

It's more complex than the most complex organism, as far as I can tell. It's so complex that they can purchase a product for a price from a vendor and sell it for less than their cost while still making considerable profit.

The company is probably the single most powerful deflationary forces humanity has ever seen, powered by the second most powerful deflationary force humanity has ever developed. The fact prices have risen even at the anemic rate we've seen has been driven by hyperinflation. It's not based on credit directly provided to Amazon, but to credit extended to millions of suppliers and FBA sellers.

In reply to by techpriest

UndertheDRADIS Harry Lightning Mon, 04/16/2018 - 11:41 Permalink

Back in the Dark Ages I did a paper on the valuation between Amazon and Barnes & Noble. My conclusion was that "Jeff Bezos can't sell me a latté." At the time, Amazon had narrow inventory and lower costs. If book buying is an experience, then the bricks and mortar retailers have an advantage and Amazon can't make an economic (real) profit.

Based on what you said, this is still his problem.

In reply to by Harry Lightning

rf80412 UndertheDRADIS Mon, 04/16/2018 - 13:19 Permalink

Customer service above and beyond vending is what Amazon can't do.

The next big leap in e-commerce is going to be connecting three or more parties to make a transaction possible when buyer and seller alone don't have enough to offer each other.   Some kind of service where regular people can connect to a wheeler-dealer, pose him a problem like "I want to buy X for Y amount of money", and pay for a few hours of his time to use the same data better.

In reply to by UndertheDRADIS

swmnguy Hal n back Mon, 04/16/2018 - 09:55 Permalink

Hal n back:  Federal Express and UPS use the US Postal Service.  Federal Express and UPS don't serve every address in the United States.  USPS has to.  Where I grew up, FedEx and UPS don't deliver.  They'd go broke, sending a driver and a vehicle 25 miles round trip over gravel roads to deliver one package to one individual.  Nope, they get it to the largest town in the area, and USPS takes it from there.

Correct, if Amazon couldn't leverage USPS's rates, Amazon would be donesville due to shipping costs, as Pets.com was when people figured out they could buy a 50# bag of dog food and have somebody bring it to their door for free to the customer; but at a higher cost to the seller than the margin on dog food.

The thing is, the US Postal Service is a public Service.  It's not a business.  It isn't intended to make a profit.  It would be nice, but it's far from necessary, for the Postal Service to even cover its costs.  Because it's a service we pay for in taxes and usage fees; not a business.  Which means the Mises people can't understand it at all. 

 If a sole individual isn't stuffing their pockets, it doesn't exist to the Mises types.  They have apparently never chipped in $5 with 3 other buddies to by a case of beer.  Apparently a Mises guy buys the case of beer and charges his buddies $2 a Coors Light, and if they complain he says it's $4/ea. in the cheapest bar so they should shut up.  Which might explain why people don't invite Mises people over to the house to watch sports.

In reply to by Hal n back

Midas swmnguy Mon, 04/16/2018 - 11:02 Permalink

The USPS was never granted any type of monopoly.  All they were given was exclusive access to the mail boxes as they are considered property of the Postal Service.  This was done to increase security of the mail.  There is no law to prevent you from putting up another box and giving full access to anyone.  What law prevents you from putting a box on your porch and having someone put a letter in it?

In reply to by swmnguy

techpriest Midas Mon, 04/16/2018 - 11:39 Permalink

If you want to be educated on the topic, here's a full explanation of the case law and legislative law:

http://mars.gmu.edu/bitstream/handle/1920/3477/Appendix%20C.pdf?sequenc…

One relevant section:

In this study, the term postal monopoly statutes refers to a set of statutes—i.e., acts of Congress—that now appear as thirteen sections of the United States Code. These statutes do not use the word "monopoly," but they grant the Postal Service an effective monopoly by prohibiting all persons except the Postal Service from providing certain types of collection and delivery services. Prohibitions against providing, using, or assisting would-be competitors of the Postal Service are found in sections 1693 through 1699 of the criminal code, i.e., Title 18 of the United States Code. In addition, the scope of the postal monopoly is modified by exceptions set out in the section 601 of the postal code, i.e., Title 39 of the United States Code. Sections 602 through 606 of Title 39 pertain primarily to the authority of postal inspectors to search for and seize letters carried in violation of the postal monopoly. The Postal Service, like the Post Office Department before it, refers to these criminal and civil statutes collectively as the "private express statutes." This study will instead use the phrase "postal monopoly statutes" to refer to these laws collectively because, technically, the statutory prohibitions against operations by private express companies, enacted in 1845, comprise only a subset of a broader set of statutes prohibiting private carriage of letters and packets.

In reply to by Midas

Generic Property swmnguy Mon, 04/16/2018 - 11:44 Permalink

swmnguy: 

Why is it a good thing we subsidize through taxes the delivery to places that are harder to reach? 

If we would let the market take care, the solution would be much more simple and fairer.

The cost of delivery to a remote location would increase, delivery business would start charging variable prices on a postal code basis.

This means it becomes more expensive to send and receive when a person is in a remote location. 

This would be just another cost of living to the person in the remote location, and it becomes part of the choices made by the person.

When you love to shop online and send letters to your pen-pals, it may not be a good idea to go live in a highly priced postal code.

While on the other hand, when you got all kinds of debtors after you and you want some rest, you might go live in a place it costs $100 dollars to send you something.

 

In reply to by swmnguy

techpriest swmnguy Mon, 04/16/2018 - 11:50 Permalink

Hal n back: Federal Express and UPS use the US Postal Service. Federal Express and UPS don't serve every address in the United States.

Actually, they do, but you just explained why they choose to use the Post Office instead.

If the actual cost to get a package to a remote location is $50, but the USPS is mandated to deliver it for $20, what would you do as UPS? Basically Congress is making USPS walk around with a sign on its back that says "screw me," and somehow its surprising that companies would do that.

In the same way, a friend of mine had me distribute books that he was selling, and I saw that it was usually $6-8 to ship UPS, and USPS Media Mail is $3. Again, that's a great big sign that reads "screw me," but this is a limited edition book, so to keep the price under $40 a book we picked the cheap option, regardless of whatever else is going on behind the scenes to make it happen.

If they took that sign off and let the USPS operate effectively, you would probably be pissed off because you would have to pay what it really costs to get goods delivered.

In reply to by swmnguy

Yogizuna Lost in translation Mon, 04/16/2018 - 01:39 Permalink

No, you don't get it! Most letter carriers work their butts off through all kinds of rough conditions, terrible heat waves, subzero temperatures, storms, dangerous neighborhoods, etc. One of my friend's knees are shot now, another carrier's back is permanently injured, and two others fell on the ice a few weeks ago and have serious injuries. The vast majority of them earn their pay.  

In reply to by Lost in translation

gdpetti Déjà view Mon, 04/16/2018 - 09:44 Permalink

Yes, as in, instead of having the local offices delivery local mail, after the 9-11 farce, it all had to be shipped into the cities for 'inspection' first, then returned for delivery... think that cost anything? Does anyone else do this? Add this to the pension BS the USPS has to deal with.... all of which returns to the source of the problem... govt interference... same with Amtrak... forcing them to keep local stations... controlled by politicians that don't know squat about much of anything, which is why they are in Congress, and spending most of their time calling for donations from the corporations that want to skim all the easy money away from the USPS, Amtrak etc. There is a reason the USA doesn't have high speed rail... for the most part... too much corruption... but it's also this 'corruption' that got most of our national systems going... it's always been a rigged game... from the canals, to railroads, airports, interstate highways... etc. Make the tax money pay for the infrastructual buildup, and then let all the private companies milk it.... same with the bailouts, etc... same BS every time... and same throughout history.

In reply to by Déjà view

swmnguy A Nanny Moose Mon, 04/16/2018 - 09:46 Permalink

Are there people out there demanding to deliver junk mail to every address in the USA, for almost no money, as demanded by advertising industry lobbyists?  Really?  UPS and Federal Express want that part of the US Postal Service's Constitutional Mandate?  And it costs the Federal Government money to prevent UPS and Federal Express from delivering the coupons for Goodyear Tire Service and Bob's Floor Buffing at a loss?

Really?

The Mises people, as usual, are lying.  The USPS has a monopoly on the parts of the business UPS and Federal Express refuse to take up.  UPS and Federal Express refuse to serve every address in the USA, handling every piece of mail submitted, because they would lose money doing so.  They know it, and the liars at the Mises Institute know it too.  UPS and Federal Express don't have to handle those tasks because they are private corporations, set to run a profit. 

 The US Postal Service is mandated in the Constitution, and is a public service, to which profit or loss is irrelevant because it's not a business.  The idiots from Mises can't even conceive of a situation not bound by profit and loss as the only measure or worthwhileness, so they think the Post Office is absurd.  But they would refuse to force UPS or Federal Express to serve every single household in America. 

So, again as usual, they try to have it both ways by ignoring the totality of the task assigned to the US Postal Service by the Founding Fathers.

In reply to by A Nanny Moose

El Oregonian Lost in translation Mon, 04/16/2018 - 09:32 Permalink

What kills the USPS is that by law they are mandated to zero balance at the beginning of the fiscal year. The years that they operated at a profit where scooped up and placed into the general fund, where congress would absorb it into their coffers.

So every year, that profit could not be invested, or even accumulate to better protect against negative revenue years (as we see today). There are many reasons why the Postal Service is losing money, this is a big part of that.

In reply to by Lost in translation

JRobby Yogizuna Mon, 04/16/2018 - 06:41 Permalink

Right, whenever a rogue carrier is caught doing something, it's a nationwide propaganda piece because there are many entities that would like it privatized to get in in it.

Like privatized corrections: "well Bill you are up for parole and you should get it with your good behavior but the cucks in accounting say we need the head count......."

In reply to by Yogizuna

SoDamnMad JRobby Mon, 04/16/2018 - 06:53 Permalink

Correcto. Which is why I love to see the homeowner videos of the UPS driver hurling the package over the fence.

In the cases where we see these thieves follow the delivery trucks and steal packages, I would pay to see a few more baseball bats take out some legs.  We need to boast Louisville Slugger's sales.  "Package Thief" model has a sort of ring to it.

In reply to by JRobby

Yogizuna JRobby Tue, 04/17/2018 - 00:39 Permalink

Exactly, the USPS is like the military or police forces across the country, in that of course there will be bad apples around messing things up for the hard workers and those who want to do their jobs right. To expect every postal worker to be perfect is laughable, and the way the special interests take advantage to push their pro-privatization propaganda is shameful. 

In reply to by JRobby

Kidbuck Yogizuna Mon, 04/16/2018 - 09:49 Permalink

Yes, eliminate the Postal monopoly. My friends are all smart enough to use e-mail. 

You will never know if Postal workers are earning their money honestly until they have to compete honestly. My mail is delivered just fine, best service I've ever had, by a minimum wage contract guy, probably retired from another job, he's well old enough. 

Quit delivering that junk mail to my house. It wastes my time and energy just to sort through it and shit can it. If I don't have a personal relationship with you, I don't want your fucking spam or your junk mail or your robo-phone calls. Wiki-leaks could do us all a great service and publish the names and addresses of all the assholes who send junk mail, spam, and robo-calls. 

In reply to by Yogizuna

techpriest Kidbuck Mon, 04/16/2018 - 11:22 Permalink

I know some of the folks who do this, and the reason is very simple:

Each one of those letters is ~$1.20 to send. So, 1,000 junk letters = ~$1,200.

Out of those 1,000 letters, if they are shipped right (you do good demographics and build a good list), roughly 25 will convert to a sale. If the average product sold is $100, then you are looking at spending $1200 to make $2500. If you run a lawn care company, 10k letters in a town with 100k households would mean you score $25k in new business this month, and if you do a good job you keep repeat business, so your up-front $12k may pay itself back 10x or more.

That is why this model stays in business.

In reply to by Kidbuck

Yogizuna shovelhead Tue, 04/17/2018 - 01:19 Permalink

Usually they try to place the carrier on "light duty" while they are injured and or recovering, but sometimes there is not enough other work available, so eventually they try to help the carrier get another job they can still perform. And to receive proper benefits, the carrier has to prove their injury is the result of their job and or happened on the clock. There have been stories of some bad apples getting hurt walking their dogs or riding their motorcycles, etc, and then claiming it happened on the clock.

In reply to by shovelhead

FoggyWorld Yogizuna Mon, 04/16/2018 - 15:16 Permalink

The ONLY federal employee that gave a damn about our very damaged area after Sandy was our mail man.  He watched over the area and made his rounds daily though people were not there because their houses were unlivable.

The second day after the storm I who could stay was outside picking up trash for all daylight hours.  That mailman asked me when I last had a proper meal and I thought back and said it was two days ago.   Around 6 pm on his own time and with his own money he brought a huge sub sandwich that was the best meal I ever had.

Those guys do much more than deliver mail and get to know the people and areas they work in.  They watch out for us in ways you cannot imagine.

In reply to by Yogizuna

Yogizuna FoggyWorld Tue, 04/17/2018 - 01:56 Permalink

Yes, it is amazing all the other things a lot of them do besides delivering the mail. The annual food drive, helping out with muscular dystrophy, saving people's homes and pets in fires, saving lives when elderly people fall and no one else discovers them, and more. There is definitely an advantage having someone reliable passing by almost every single day.

In reply to by FoggyWorld