E-commerce has revolutionized the economy, giving consumers access to every imaginable product, at the best prices, without leaving their homes. However, some claim the U.S. Postal Service (USPS) loses money on packages it delivers for Amazon and other large online retailers, and, as a result, they are calling for rate hikes targeted against the internet giant. Despite the serious problems facing USPS, trying to squeeze more money out of Amazon or other e-commerce retailers would only tax Amazon’s customers and plunge USPS into even deeper debt.
Unlike most government entities, USPS is a hybrid operation. By law, it has a monopoly on first-class and third-class mail. The government’s universal service mandate requires USPS to deliver to every address. It also enjoys special privileges, most notably its tax-exempt status.
USPS competes with private carriers such as the United Parcel Service and Federal Express that provide express mail and package delivery services. It would be unfair for the USPS to underprice its competitors due to its special government-mandated advantages. Therefore, under current law, USPS must charge its customers such as Amazon for the actual costs of delivery services.
Let’s put the current postal situation in context: USPS has been bleeding money for decades. In fiscal year 2017, it lost $2.7 billion despite bringing in $69.6 billion in total revenues, down from $71.5 billion in 2016. Further, its revenue from bill paying has been drying up as many people have switched to paying their bills online rather than by putting checks in the mail.
The one thing the USPS still does with some efficiency is deliver mail and packages the “last mile” to your door. Because of this part of its operation, package delivery has been the lone bright spot for USPS, thanks to the growth of e-commerce businesses like Amazon. In 2017, USPS revenue from packages was $19.5 billion, up from $17.5 billion in 2016. Package deliveries now account for 28 percent of USPS revenue.
Is USPS undercharging package shipping companies like Amazon, thus unfairly competing with other delivery companies? Not really. By law, USPS’ prices for delivering packages must cover all its direct, or “attributable,” costs. For example, the time mail carriers spend delivering packages for companies like Amazon must be a consideration when setting prices. USPS must also charge enough to customers such as Amazon to cover an appropriate share of USPS’ overhead costs, including the share of facilities and employees it must pay for regardless of the number of packages it delivers. It is required to cover 5.5 percent of those USPS costs for its package deliveries, but it actually covers much more, about 23 percent.
Contrary to what some have suggested, although USPS does give volume discount rates to Amazon to deliver its packages, such discounts are available to other shippers as well.
Further, the Postal Service benefits substantially from Amazon’s success for a couple of important reasons. First, the incremental cost of mail carriers bringing a package from an online retailer like Amazon to your door is small, since your home is on their routes anyway, but the incremental revenue gains for the USPS are high. Second, Amazon does much of the pre-sorting work normally required of the USPS, reducing the burden on the USPS. It is a win-win situation for both businesses.
If policymakers force USPS to raise its rates for package deliveries, it will be Amazon customers who will pay for those higher costs. Furthermore, many small businesses, especially in America’s heartland, will, no doubt, experience higher shipping costs, because USPS will lose package business because of its higher prices, go into even greater debt, and, as a result, foist higher rates on small businesses to make up the difference.
There are serious questions concerning the future of USPS, but forcing the Postal Service to pummel its best customers such as Amazon with higher rates would do nothing more than harm millions of consumers and small businesses, not create more market fairness.
[Originally Published at the Detroit News]