Why Privatized Postal Delivery is Crazy Talk

by JT McGee

First of all, I wanted to give a shout to Frank at Bad Money Advice. His site was always one of my favorites in personal finance, and it’s good to see that he’s back with a new post on the Postal Service.

Those of you who have your own complaints about the methods and illogical madness of personal finance will enjoy Frank’s in-depth analysis of typical personal finance matters.

But Back to Postal Delivery…

As we all know, the USPS is in a world of hurt. Negative operating income plus serious deficits in the pension program make it a massive money drain. The USPS requires perpetual bailouts from the public trust to continue operations.

Some would say that the USPS should be privatized. Often we hear that UPS and Fedex could pick up the slack should the USPS go the way of the dinosaur. Just think of what the private firms have in common with the public USPS:

  1. Networks – UPS and Fedex have thousands of locations and drop-off spots across the country.
  2. Infrastructure – Both private firms have the capacity to sort billions of packages annually.
  3. Labor – UPS and Fedex likely already have drivers delivering packages to your neighborhood.

Suffice it to say that if the USPS were to disappear, UPS and Fedex should be able to pick up the public postal office’s demand, right? The transition should be perfect!

Hold that Thought

The problem with the USPS is that it is required by law to ship letters even if it costs the organization money. Neither UPS or Fedex have that problem. It’s the major issue at play here – USPS cannot be purely driven by profit.

For whatever reason, this tends to be overlooked. The US Postal Service has to lose money on some deliveries because it has to deliver every letter or package customers want shipped.

If I receive 1 letter per day, the USPS still has to bring it to my mailbox. I would assume that the USPS would lose money if I only received 1 letter each day. If I were to receive 100 letters each day, I would be a wildly profitable customer. There are many households where the USPS shows up to drop off a stamped envelope only to lose money on the transaction. You would have a very, very hard time convincing Fedex and UPS to do that. You would have an even harder time convincing people to pay even more to mail a letter.

The Logic is in the Model

The Post Office has a partnership with Fedex to deliver “SmartPost” packages. Fedex agrees to ship the packages by air or ground to a shipment center. The USPS takes it from the warehouse or destination point to the end customer.

Why?

Because the USPS has to deliver mail anyway! Your postman already stops at the mail box of the average household once per day, so adding another package to the shoulder bag of a mail carrier makes way more sense than sending Fedex truck and worker out to make final delivery for a single package.

If it doesn’t make sense for Fedex to send a truck out when the USPS is making a stop at every household already, why does anyone think that it will be cheaper for Fedex and UPS to split the load?

Fedex is a marginal cost consumer of the USPS’s work. Marginal cost consumption comes up everywhere! We’re marginal cost consumers of gasoline when we purchase goods or services online rather than in brick and mortar retail stores.

The Boston Consulting Group expects that daily mail volumes will decline from 3.8 pieces per delivery point in 2009 to 2.8 pieces by 2020. Thus, by 2020, postal workers will make the same number of stops for 26.3% less mail. The decline is very real, very costly, yet very much unavoidable. Stamps are not going up in price because of gas, wages, or pensions – it’s all about mail volumes. Pretty soon, the USPS’s route is going to be full of unprofitable 1 letter per day deliveries. (I’m assuming it already is.)

So, given that declining mail volumes are the real problem, how would Fedex and UPS have immunity from declining revenues per mail box? If they both deliver to the same houses every day, the price to mail anything will go up. Look at it this way: if 3.8 pieces of mail are delivered by USPS today, why would 1.9 pieces of mail delivered by Fedex and 1.9 delivered by UPS be cheaper? It’s insanity.

The USPS isn’t going anywhere

I will be dead before the USPS says its final goodbye, and I expect to spend another eight decades on this planet. Will it go to a delivery schedule with five days instead of six? Probably. It might eventually go to three days a week. Who knows?

But what we can know is, for as long as people enjoy living in the middle of nowhere, the USPS is not going to disappear. Some letters cost $2 each to deliver because of rigidity and low-volumes relative to high fixed costs. Some cost $.10 because of high volumes and proportionally smaller fixed costs.

The USPS is a very effective way to subsidize and normalize the cost to send a letter. Given that its infrastructure is key to keeping the delivery of mail as cheap as it can be, it won’t go away any time soon. Granny won’t tolerate a $5 charge to send a birthday card to her grandkid in BFE, Iowa. Credit card companies won’t tolerate higher mailing prices to spread Bernanke’s low rates to my mail box, either.

And for that reason, and that reason alone, the USPS isn’t going anywhere. It’s merely a budgetary boondoggle, given that the USPS ended the fiscal year with a $5.1 operating loss, an amount equal to about .13% of the 2011 Federal budget. Besides, the real culprits here are online statements and bill pay.

{ 4 comments… read them below or add one }

PK May 14, 2012 at 10:47

I definitely see service cuts, however… plus the pony express doesn’t exist any more. There’s no need for the Post Office to be open 6 days a week in some small towns, especially if they can partner with local stores to sell stamps and do day to day business – it just makes more sense. We’ll see what happens post-bailout!

Reply

uclalien May 19, 2012 at 15:16

A number of things worth pointing out:

1) All of your arguments in favor of the USPS assume that letters even need to be sent. The vast majority of anything my family mails is what I would consider “luxury mail.” In other words, there are at least 2 alternatives. But we choose to send physical mail because it’s “fun.” And given the rapid decrease in mail usage (despite a growing population), most people have already consciously or unconsciously come to the realization that physically mailing something is an unnecessary expense. This trend will not reverse.

2) “Look at it this way: if 3.8 pieces of mail are delivered by USPS today, why would 1.9 pieces of mail delivered by Fedex and 1.9 delivered by UPS be cheaper?”

You’re missing the point. It wouldn’t be 1.9; it would probably be < 0.5. As it stands, USPS is effectively a way for taxpayers to subsidize their own efforts to pay more to send communications. Without the subsidy, most people would no longer feel the need to waste money mailing certain things. Put another way, they would find alternatives.

Yes, some people may pay more to send communications, but the vast majority will not. As a whole, the population would spend far less.

3) If you look at USPS's financial statements, you will see that it has been receiving roughly $3,000,000,000 ($3 billion) per year from the federal government for as far back as I could find records. In other words, USPS is, and has been, heavily subsidized even in good years.

4) USPS is a social welfare program, plain and simple. As this blog post states, people who CHOOSE to live in the middle of nowhere are being heavily subsidized by people who do not make this choice. Why should a certain segment of the population carry the burden of someone else's choice? Alternatively, it could be argued that the people who live in the middle of nowhere (presumably with lower housing costs) should subsidize the higher housing costs of a person who chooses to live in a city center. Doesn’t make much sense does it?

Reply

JT McGee May 22, 2012 at 15:14

No, it doesn’t make much sense, but I see no reason why it will ever go away. Not that I don’t agree with your view that the USPS is a waste of funds, but it’s not going away…ever. There will be far too many people who receive zero mail service because the price would be far too high. And that’s just too big of a political burden to take on.

Reply

uclalien May 22, 2012 at 16:33

I would hesitate to use a word like “never.” Thing change. I think your last statement says it all though. It has become almost entirely a political issue, rather than a service or financial issue.

Honestly, if I never received another piece of physical mail, aside from that which I was willing to pay UPS or FedEx to deliver, I wouldn’t be any worse for the wear. It’s actually a bit shocking (and annoying) in this day and age when any business doesn’t have a web platform that can effectively deliver the same results.

Reply

Leave a Comment

*

Previous post:

Next post: