Donald Trump startled corporate America this week by unleashing a broadside against Amazon.com for, of all things, victimizing the Postal Service. As he put it on Twitter:
I have stated my concerns with Amazon long before the Election. Unlike others, they pay little or no taxes to state & local governments, use our Postal System as their Delivery Boy (causing tremendous loss to the U.S.), and are putting many thousands of retailers out of business!
— Donald J. Trump (@realDonaldTrump) March 29, 2018
This tweet is a follow-up to a harangue he launched three months ago:
Why is the United States Post Office, which is losing many billions of dollars a year, while charging Amazon and others so little to deliver their packages, making Amazon richer and the Post Office dumber and poorer? Should be charging MUCH MORE!
— Donald J. Trump (@realDonaldTrump) December 29, 2017
Why Trump imagines the Post Office is giving away the store to Jeff Bezos is anything but clear. News outlets immediately jumped in to explain that he was wrong: Package delivery, they pointed out, actually makes money for the post office. Amazon “really delivers” for the Postal Service, wrote the Wall Street Journal, and others chimed in.
It’s undeniable that Trump has taken something very complex and made a hot mess of it. But it’s far from clear whether he’s wholly wrong. In fact, nobody—aside from the Postal Service—really knows whether the agency is profiting on its deliveries for Amazon.com or not. The reason for the confusion lies deep in its history, with a decision made a century ago by Congress, and today it’s triggered an argument about whether the USPS should even be in the package business at all.
In 1912, Congress passed a law that expanded the Post Office Department’s authority to deliver packages. Hitherto, the agency’s duty mostly had been to carry letters and periodicals. That is what it had been set up to do—serve as the growing nation first system of communication and information highway. Parcels, meanwhile, mostly were carried by private delivery companies that sprouted up like daisies across the nation.
The new package legislation was spurred partly by the demands of rural lawmakers. Half the nation lived far and yon, and they wanted access to the same goods available to urban denizens. Progressives also wanted the Post Office to go deeper into the parcel business to correct a market failure. Private delivery companies, they complained, did not offer high-quality service nationwide. Shipping monopolies and duopolies existed in some areas, and charged exorbitant rates. The answer, as the reformers saw it, was to make the Post Office compete in the parcel business, which would force private shippers to up their game.
It worked. America saw its first mail-order boom, as business took off for Montgomery Ward, Sears Roebuck, and other catalog companies, the Amazon.com, Walmart, and Target of their day. The Post Office’s mail volume went up by a quarter between 1910 and 1913.
Despite its various government advantages, such as not having to pay taxes, the Post Office did not take over the parcel market. Private couriers met the challenge head-on and expanded their service and increased its quality. They came up with innovative services, like overnight delivery, and developed tracking systems that permitted the sender and receiver of a box to follow its delivery path, and be warned of delays due to blizzards or floods.
In one sense, competition was working. The original market failure had been ameliorated, and package service for Americans was better than it had ever been. But it caused a problem for the Post Office, which was no longer only a government agency providing the unique public good of universal mail service, but was also in competition with private-sector enterprises. Congress made this into a ticking time bomb of a problem by choosing not to ever back the agency out of the parcel business, or target its involvement to problematic areas.
This bomb went off in the past decade when e-commerce exploded and the USPS’s volume of traditional mail plunged. With paper mail volume down more than 25 percent since 2007, the deficit-stricken USPS saw salvation in delivering more parcels. The Postal Service reported delivering fewer than 900 million packages in 2008, which amounted to $1.8 billion in revenue. That was a pittance for the agency, which raked in $75 billion that year. Come 2017, USPS reported more than 5.7 billion parcels which reaped $19.5 billion, about 28 percent of USPS’ $65 billion in annual revenue.
Private shipping companies complain they’re being undercut by their own government, decrying the USPS’s immense growth in parcels as indicative that the agency is underpricing its parcel shipping costs. Last summer, an investor in FedEx claimed in the pages of the Wall Street Journal that USPS was under-pricing parcels an average of $1.46 per box. (The author’s evidence for this was a Citigroup analysis that has not been made available to the public.) Postal unions also have carped at the agency’s deals, alleging they are underpriced, and the agency’s inspector general also has flagged pricing and labor cost problems with parcel shipping deals. Robert Shapiro, a consultant and former Clinton administration official, wrote a 2015 report that went further. It claimed the agency’s hybrid business model was inherently problematic. “Since USPS’s monopoly and competitive operations use much of the same facilities, equipment and labor, USPS has been able to leverage its monopoly privileges to support its private sector business.”
The Postal Service and its defenders, for their part, will tell you that the agency cannot possibly be engaged in predatory pricing. As proof, USPS reports the agency makes a healthy profit on on parcels—which it could not do were it underpricing its parcels. John Potter, who ran the Postal Service from 2001-2010, unequivocally declared the agency “makes money” on parcels.
But when it comes to its profit on deliveries for any individual company, such as Amazon, we have no idea whether it makes money. It inks separate deals with big shippers, and though the deals are reviewed by an internal regulator, they aren’t disclosed. The regulator – the Postal Regulatory Commission – issues an annual compliance determination that assesses USPS’s pricing of its various postage rates for their compliance with the law. But it doesn’t publish the rates for these deals. The agency’s deals with mailers and shippers aren’t even subject to public exposure under the Freedom of Information Act. One cannot go online and see the postage any retailer pays, let alone an analysis determining whether the USPS’s costs were lower than the postage charged. In that sense, the Postal Service is more like a private company protecting its pricing and expensing data than a public service offering the same-priced service to everyone.
While Trump is blasting out half-baked tweets about individual companies, there really is a battle over the Postal Service’s role in parcels, but it’s playing out among logistics geeks, lawyers, and economists at the PRC. As part of a broader review of USPS’s postage pricing, the regulator recently issued a rulemaking order to rework the methodology USPS must use to calculate parcel shipping cost. It is an exceptionally complicated matter shot through with terms like “reliably identifiable causal relationships” and “Lerner index.” The nut of the matter is that the PRC is coming up with a new way to calculate the amount of overhead that USPS will have to include in its parcel postage rates. The effects could be huge if the resultant regulation forces USPS to charge shippers more.
The PRC’s decision, however, will not settle the Trump-Amazon.com hullabaloo. It will not answer the question: is Amazon, or any other retailer for that matter, getting a sweetheart deal on shipping? Nor will the PRC ruling determine once and for all whether the Postal Service has engaged in predatory pricing to grab marketshare at the expense of private shippers.
Only the USPS likely knows whether it really is turning a profit on parcels, and the USPS is telling us everything is fine. Probably the only way to get to the bottom of the issue is for Congress to step in. It could force some trusted source—the Inspector General, PRC, or Government Accountability Office—to auditing the contracts of the shippers and calculate the profitability according to proven models accepted by the private sector. Until that happens, we’ll still be living in an information vaccuum filled by politics, Trumpian tweets, and the inevitable arguments over one part of the bigger issue.
Image credit: Michael Candelori