FTC Report: U.S. Postal Service Needs More Freedom and Less Protection

Published June 1, 2008

The U.S. Postal Service (USPS) enjoys subsidies that distort the private package delivery market and suffers legal restrictions that hinder its performance, according to a Federal Trade Commission (FTC) report that concludes USPS should lose the subsidies and the restrictions.

“Accounting for Laws that Apply Differently to the United States Postal Service and its Private Competitors,” which FTC issued early this year, is now under review by the Postal Regulatory Commission (PRC). PRC has a year-end deadline to issue recommendations regarding USPS operations. The FTC report likely will play a big part in those recommendations, said James Cooper, director of policy planning at FTC.

“The PRC has standards the Post Office must follow when it sets prices,” Cooper said. “Our report feeds into that process by identifying implicit subsidies the Post Office may enjoy. It’s up to the PRC how they handle the information.”

FTC analysts noted USPS subsidies include exemptions from certain state and local taxes and licensing requirements for its competitive products operations. These subsidies are worth between $39 million and $117 million a year, according to FTC.

Market Distortions

Michael Schuyler, a senior economist at the Institute for Research on the Economics of Taxation who has spent years studying USPS, said the FTC report provides a “good economic analysis.” He says the report could have gone farther.

“Although the FTC spent a lot of time talking about the mailbox monopoly, the report did not put a dollar estimate on the value of that monopoly,” Schuyler said. “That’s a very big subsidy. Just on that one item I’m sure they did lowball the Postal Service’s subsidy benefits.”

But on the whole the FTC report “is superb,” Schuyler said. “I just note that the FTC was emphasizing burdens that have economic costs to the Postal Service and subsidy benefits that are market distortionary. The dollar estimates, I think, were of secondary importance. As the FTC acknowledged, their estimates were selective.”

United Parcel Service spokesman Malcolm Berkley declined to comment on the FTC report. Representatives at Federal Express and DHL did not return calls for comment.

Benefits of Competition

Schuyler said the FTC report’s chief strength is its analysis of competition.

“When they talked about benefits and burdens the FTC was on its home turf of looking at competition,” Schuyler said. “They did burden and benefit estimates, but I don’t think they were giving those numbers as much weight as their analysis about competition. The FTC concluded the USPS has numerous advantages and disadvantages and both are problems.”

Monopoly Protections

Schuyler said USPS enjoys two monopolies: the exclusive rights to deliver first- and third-class mail and to put mail in private mailboxes.

“The private express monopoly can be traced to colonial days,” Schuyler said. “The mailbox monopoly was created in 1934 because utilities were delivering bills directly to consumers, and the Postal Service wanted to stop them. This clearly was a revenue grab. We are the only country with a mailbox monopoly.”

Regulatory Drawbacks

While pointing out these and other advantages–such as monopoly protections that it did not quantify–the FTC report also noted serious drawbacks for USPS.

For instance, FTC concluded government regulations hinder USPS’s ability to manage its labor force and configure its network, increasing costs by as much as $782 million a year.

Federal constraints imposed on USPS also make it less nimble than private package delivery competitors, according to FTC, forcing the Postal Service to spend more time and money to develop its products. But these higher costs are partially masked by USPS’s legal protections in other areas, creating incentives for consumers to buy more mail products from USPS than they otherwise would.

“People who are steeped in this topic are aware of the distortions,” Cooper said. “Our report, for the first time, has put all this information in one place and put rough estimates on the dollar figures.”

Schuyler cautions the estimates are very rough, in part because FTC often relied on USPS figures that it sometimes found dubious.

“In virtually every case, the FTC took Postal Service numbers and asked, ‘Do we feel comfortable with this?’ If yes, we’ll use it. If no, we won’t use it,” Schuyler said. “As far as original research regarding burdens, I don’t think the FTC did that or claimed to do it.”

Even Footing

Schuyler said he was pleased FTC rejected the Postal Service’s argument that it should “have a free pass” on subsidies because of the legal restrictions it faces.

“The FTC said it’s too bad the Postal Service has these disadvantages, but if they try to cover them up with government resources, we get a misallocation of resources,” Schuyler said.

Ideally the federal government would remove both the unnecessary burdens and the implicit subsidies, Schuyler said. FTC agrees and says if burdens and subsidies cannot both be removed, then one or the other should be removed.

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.

For more information …

“Accounting for Laws That Apply Differently to the United States Postal Service and its Private Competitors: An FTC Report”: http://www.heartland.org/article.cfm/artId=23167