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U.S. Postal Service: Money Losing Monopoly

Saturday November 21st, 2015   •   Posted by Craig Eyermann at 5:20pm PST   •  

1186001_S Everyone knows that monopolies in business are bad. Writing at CBS News, economist Mark Thoma explained why they’re so bad for consumers:

When firms have such power, they charge prices that are higher than can be justified based upon the costs of production, prices that are higher than they would be if the market was more competitive. With higher prices, consumers will demand less quantity, and hence the quantity produced and consumed will be lower than it would be under a more competitive market structure.

The bottom line is that when companies have a monopoly, prices are too high and production is too low. There’s an inefficient allocation of resources.

In addition, the tactics used to establish monopoly power, such as driving competitors out of business or thwarting potential entrants, can also cause considerable harm to households who own the businesses that are forced to close their doors.

For instance, a firm with deep pockets can set prices below costs and absorb losses until competitors can no longer survive. Then, once the competition is eliminated, the surviving firm can raise prices high enough to more than cover the losses it took while establishing its now-dominant market position (under antitrust regulation, such tactics are prohibited).

Americans hate monopolies. So much so that the antitrust laws and regulations that Thoma cites are specifically designed to keep businesses from being able to abuse the kind of power they might otherwise obtain.

But there are monopolies in the United States. Monopolies that the U.S. government backs with its own power against the interests of regular Americans.

The best example of that is the U.S. Postal Service, which has a government-granted monopoly over the delivery of first class mail in the United States, which comes complete with all the downsides that Thoma identifies for U.S. consumers and businesses: prices that are too high and production that is too low.

That’s a big reason why both American consumers and businesses began turning away from the U.S. Postal Service as soon as less expensive alternatives to its monopoly have become available. In response, the U.S. Postal Service, backed by the U.S. government, has repeatedly doubled down on its monopoly power over the years, jacking up its prices and cutting back its service.

And each time it does, more Americans come to hate it and turn away from it. So much so that at this point of time, even with its monopoly power, it can’t even break even. RStreet‘s Kevin Kosar explains:

The U.S. Postal Service lost nearly $5 billion this past year, according to its just-released year-end financial results. As in recent years, the agency did not make the legally required $5.7 billion payment to its Retiree Health Benefits Fund. The agency is $15 billion in debt and legally prohibited from borrowing additional funds. The unfunded portion of its retiree-health-benefits obligation is $54 billion.

Revenues increased slightly but mail volume slid by 1.4 billion pieces from last year to 154 billion. The agency has $6.6 billion of cash on hand, which is better than in recent years and means USPS is in no immediate danger of having to shut off the lights due to lack of cash. The agency’s financial results benefited from a temporary emergency price increase and a lower-than-expected employee compensation charge.

All told, the results confirm what’s been obvious for some time: the USPS faces not just a financial crisis, but an existential one. The agency’s business model was predicating on the assumption that granting it a monopoly over first-class mail delivery would enable it to reap high margins that would subsidize the agency’s service nationwide. Thanks to electronic bill-paying services, among other factors, first-class mail volume has plunged. Worse still, total mail volume is down more than 25 percent since 2007.

To be fair, the cost of the benefits for the U.S. Postal Service’s retirees represents a pretty big chunk of money, that if it didn’t pay, would make its financial performance seem better – just like the city of Chicago and its chronic underfunding of public employee benefits.

But just like Chicago, the hole that the U.S. Postal Service is in is so deep that skipping out on its legal obligations to fully fund its employee benefits programs would not be enough to put it in the black. Kosar comments:

Economist Michael Schuyler has shown that if you remove this cost, USPS nevertheless lost $10 billion over the past seven years, and the situation would have been worse still were it not for the temporary emergency-rate increase, which forces mailers to pay the government monopoly more. These same proponents of the status quo tacitly admit the USPS’ existential problem when they advocate for it to enter new lines of business, like banking.

Because an organization that:

  1. Americans increasingly hate, and that
  2. is losing lots of money, even though it enjoys a government-sanctioned monopoly,

is one that some U.S. politicians believe that Americans will trust with the management of their own money, if only it could become a bank too.

But that’s the way they think in Washington D.C. What could possibly go wrong?…

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November 2015