The Problem with the United States Postal Service

Amazon Allegations: President Trump has been very critical of Amazon. He believes that companies like Amazon are benefitting off of taxpayer’s money. This is why Donald Trump has specifically mentioned that Amazon is misusing the cheap postal service being provided by United States post. Since this service is meant for common people and not mega-corporations like Amazon, this amounts to a subsidy whereby the government is paying a part of the costs that Amazon incurs in due course of its business.

The market does not really believe what President Trump has to say. They are of the opinion that President Trump attacks Amazon because their newspaper the Washington Post if often critical of Trump. Also, there have been studies conducted in the past that have stated that the United States Post is much better off with the Amazon contract that without it.

In this article, we will have a closer look at why the United States Postal Service (USPS) is running into losses.

The Allegations Made By Trump

The United States Postal Service (USPS) is not really a complete monopoly. It is a unique case wherein it has a monopoly only over half of its business. This is because USPS has a complete monopoly over delivering letters all across the United States. However, it has not been given a monopoly over the package transporting business. This is where it faces competition from other companies such as FedEx and UPS.

The allegations made by Donald Trump are as follows:

• The United States Postal Service (USPS) has raised the prices of stamps being sold in order to ship letters across the United States. Since the company has monopoly power over the sale of letters, it is able to raise these rates and still not go out of business.
• On the other hand, the United States Postal Service (USPS) is giving dirt cheap deals to Amazon for its parcel delivery services. Hence, the company is effectively losing money on its parcel delivery services. On the other hand, it is subsidizing the loss by raising prices on the delivery of letters. Therefore, in effect, public money is being diverted to Amazon’s coffers.

The USPS Cost Structure

The United States Postal Service (USPS) has a cost-plus structure. This means that it just adds up all the costs that it incurs and then adds a markup to arrive at a profit. The problem with this kind of structure is that the customers have to pay for the inefficiency. Hence, companies do not try to rationalize or bring down their costs. This is exactly what has happened with United States Postal Service (USPS). The company tries to push down the costs to the consumers.

In case of postage, since the company has no competition, it is available to get away with this. However, when it comes to package delivery, people and companies have better options regarding UPS and FedEx. Hence, United States Postal Service (USPS) is not able to enforce its cost plus structure here.

In this market, the United States Postal Service (USPS) is a price taker and not a price maker. It is not Amazon which is scamming postal services for their money. The post service is inefficient and has a very high fixed cost which is why they are losing money.

However, since United States Postal Service (USPS) earns more revenue from Amazon than the variable cost that they spend on providing services to Amazon, Amazon is still a customer that adds value.

Hence, it can’t really be said that Amazon is scamming money out of United States Postal Service (USPS). Instead, Jeff Bezos is an astute businessman who is making the best use of resources to lower the costs at Amazon that enable him to capture larger market share.

Fall In Business Volume

The inefficiency at United States Postal Service (USPS) can be gauged from the fact that they thought that e-mail was a fad. As a result, the company took up a historic expansion of its storage facilities at a time when they should have been ramping down business.

The business of the company peaked in the year 2001 i.e. before this expansion. After the expansion took place, the capacity was doubled. However, the volume of business has more than halved in 17 years.

The future looks even more dismal as millennials are known to avoid the snail mail and rely on electronic means of communication.

Increasing Costs

When private businesses experience falling sales, they tend to cut costs in order to stay afloat. However, United States Postal Service (USPS) did not take any such measures. The expansion plan mentioned above was undertaken with a lot of debt funding. There is a substantial interest burden because of expansion plans that have not added any value. Also, the company has one of the highest pensions to be paid to its workers. The unfunded liabilities are threatening to bring down a powerful public corporation.

The Solution: Repeal the Monopoly

The root cause of the problem is not Amazon. President Trump needs to realize that United States Postal Service (USPS) would be even worse off without Amazon as a significant amount of their facilities would simply be lying idle.

The solution to the problem can only be reached when the root cause is carefully understood. In this case, the root cause is a monopoly that has been conferred by the fiat power of the government. Hence, the real solution is to repeal this monopoly and to make the business more competitive.