Opinion: Will USPS be a Grinch on e-commerce?

Edward Hudgins

Enjoy those gift packages delivered to your door this holiday season, because next year the U.S. Postal Service might become the Grinch and charge much higher delivery fees.

This month, the Trump administration released a task force report titled the “United States Postal Service: A Sustainable Path Forward.” President Trump created the task force out of concern that the Postal Service charges Amazon (and other companies) discount rates to deliver their packages that do not cover USPS costs and contribute to its huge deficit. In fiscal year 2017, the Postal Service lost $2.7 billion despite bringing in revenues of $69.6 billion. This is part of a disturbing decades-long trend as businesses and consumers rely more on electronic communications for needs once served more by traditional first-class and other mail.

Hudgins writes: "USPS revenues from delivering packages for Amazon and other shippers have increased over the past decade."

But the report errs seriously in recommending what amounts to a mechanism that will force the post office to charge higher rates on the companies that use USPS delivery services to satisfy consumer needs. USPS revenues from delivering packages for Amazon and other shippers have increased over the past decade. Package deliveries today contribute $7 billion over and above their costs to the USPS balance sheet.

E-commerce is an American success story. Its share of the retail market grew from about 8 percent in 2011 to 13 percent in 2017, or about $450 billion, and revenues are projected to reach $700 billion by 2022. Amazon and similar companies provide every imaginable good to consumers in a convenient and affordable manner. Consumers in less urbanized areas with fewer retail outlets than in big cities benefit especially from e-commerce. Companies in those areas with access to fewer local customers can sell anywhere in the country.

By law, the prices USPS charges such companies must cover all direct, attributable costs, such as the time a mail carrier spends delivering these packages, as well as a share of USPS overhead or “institutional” costs, such as for facilities and employees who must be paid regardless of the number of packages delivered. By law, package shippers must cover 5.5 percent of USPS institutional costs, but in fiscal year 2017, they covered 23 percent. The Postal Rate Commission certifies that USPS meets these pricing criteria. In May 2018, a U.S. Court of Appeals ruled that USPS was charging according to those criteria.

However, the task force bent over backward to advocate a mechanism that could force USPS to artificially raise rates on companies like Amazon that already are carrying their share of USPS expenses. It suggests providing “full price transparency for all package services in order to reduce market distortion.” As of now, companies like Amazon negotiate confidential discounts based, for example, on the business volume they bring to USPS.

This is not “market distortion.” It is good business practice and a win-win for all parties. The recommendation seems to allow critics to argue “Amazon could be squeezed out of even more money.” Of course, increased shipping costs for Amazon would simply be passed along to Amazon’s millions of customers.

The report also proposes “the USPS and the (Postal Rate Commission) develop a new cost allocation model with fully distributed costs to all products, services and activities.” Additionally, it suggests separating package delivery into a different balance sheet to prevent what it alleges could be cross-subsidies from the money-losing first-class services to the package-delivery services. 

Unfortunately, these are nothing more than thinly veiled attempts to force companies such as Amazon to fork over more money to USPS. Moreover, charging e-commerce companies artificially higher rates in the long term will likely reduce USPS revenues because customers will likely decrease their use of Amazon and because Amazon and others would eventually build their own freestanding delivery system — less connected to USPS.

Yes, USPS has deep fiscal problems. However, USPS officials are working to put the agency back on sound fiscal footing. For example, USPS has implemented work sharing and contracted with more efficient private companies for logistics services such as sorting and transporting mail. The task force did appropriately support continuation and expansion of these activities. Yet, USPS is not out of the dark. It still needs to deal with out-of-control labor and pension costs.

If the USPS tries to bilk e-commerce companies that are making a huge contribution to the USPS balance sheet, it will be consumers and small businesses, especially in the U.S. heartland, that will be most harmed.

Edward Hudgins is the research director of The Heartland Institute. He wrote this for InsideSources.com.