The U.S. Postal Service and the Dangers of Monopoly Power

When purchasing a 49-cent postage stamp to send a greeting card or pay a bill, most of us probably think that we’re getting a good deal — covering the costs of our friendly neighborhood letter carriers and the infrastructure required to run a national postal network. And the Postal Service’s announcement last month expanding its New York metropolitan area grocery delivery service through Amazon.com and adding same-day package delivery in Washington, D.C., and San Francisco likely sounded like good news to many people in those places too.

But pricing matters — a lot — and getting it wrong can turn any good deal into a debacle. A close look at the numbers strongly suggests that the U.S. Postal Service has systematically abused the legal terms of its first-class government mail monopoly, requiring mail customers to subsidize products like Priority Mail, its signature package delivery service. Federal law explicitly prohibits such subsidies, charging a federal regulator with preventing them.

At the heart of the problem is the fact that the Postal Service leaves nearly half of its total operating costs assigned to “institutional overhead,” not attributed to any specific product offerings. No successful business does that. The peril in this system for monopoly consumers comes when the rates they pay are increasingly required to cover much higher shares of these institutional expenses than competitive products.

This allows the Postal Service to strategically lower prices to gain business in the growing online shopping market, a strategy its executives believe can save the agency. But with the likelihood that it is losing money on its growing package business, the results could multiply losses disastrously.

The Postal Service’s Inspector General and Postal Regulatory Commission have each published calls to start fresh with a new accounting system better equipped to improve transparency for costs.

The peril for taxpayers comes when the whole operation is tens of billions of dollars in the red. The Postal Service continues to struggle with a broken business model, and has run a total net deficit of more than $50 billion since 2007. Now the growing possibility of it requiring a massive bailout by taxpayers raises the urgency around its culture of financial secrecy and lack of public transparency.

First-class letters, but not competitive package delivery, have been subjected to disproportionate cuts in service quality and longer delivery times. Packages and letters require different infrastructure and sorting equipment. Most recently, Postal Service management vehemently rejected a proposal by Rep. Chaka Fattah, D-Pa., to restore letter delivery service times to what they were before the latest round of service cuts.

In other regulated American enterprises, this kind of cross subsidization between monopoly and non-monopoly lines of business would be considered anti-competitive and addressed. In some cases, structural separations between monopoly and competitive divisions have been embraced by the courts to prevent unfair practices. When only accounting separation is possible, the system needs to be effective and transparent.

There are new signs that the nation’s postal regulator is stepping up its protection for monopoly consumers. This spring, for the first time in its history, its acting chairman, Robert Taub, rejected a deal the Postal Service had offered to a major corporate mailer, Discover Financial Services, on the grounds that it would be a money-loser for the agency.

The Postal Service, which has operated nearly entirely from earned revenue and not from taxpayer appropriations, benefits from other subsidies, such as access to highly subsidized interest rates and exemptions from state and local taxes, at an amount now estimated at approximately $14 billion per year.

Americans appreciate the U.S. Postal Service and the friendly letter carriers who bring them mail and packages. But they don’t appreciate when the government uses its monopoly power to create unfair competition against private businesses