How good is the post office really?

by on August 8, 2009 at 1:18 am in Economics | Permalink

A number of progressive bloggers have been making the point that most Americans approve of the postal service, or that they personally have had good experiences there.  They then seem to be concluding that the quasi-monopoly arrangement in that sector is likely efficient and the example of the post office should not be cited as evidence for government failure.

I do not find these arguments persuasive.

The following argument might work: "With competition in postal delivery, the natural market structure is duopoly (think UPS and FedEx), so price wouldn't fall much, coordination problems across dual networks would occur, and some rural users would be worse off.  So the current quasi-monopoly works about as well as we can hope for."

That is the argument which best defends the current structure of the post office as a privileged quasi-monopoly.

The real costs of the quasi-monopoly are the innovations and cost reductions we might have had but didn't, whether those are large or small (or negative possibly).  I doubt that the public is estimating that path when expressing their approval of the post office.

For obvious reasons, an inefficient quasi-monopolist might run high costs and overinvest in public relations.  Some of the world's worst post offices have pretty stamps and the guy behind the counter really does smile like grandpa.

From the comments: "After you consider the miracle of 40-50 cent Kiwi, does $.44 for first class mail sound like a bargain?"  The Kiwi fruit, of course, probably comes from Italy or New Zealand and it has to be grown and protected from bruising and shipped a long way.  It's a tricky comparison, however, read the comments here.

V August 8, 2009 at 1:36 am

This blog post postal service ‘efficiency’ in perspective quite well …

http://perfectsubstitute.blogspot.com/2009/08/is-post-office-so-bad-yes-and-try.html

Josh August 8, 2009 at 1:49 am

Oh, and I hadn’t seen that CATO link, but skimming it, it looks like some classic brute-statistic-wielding free-market stuff. Is it still true that FedEx and UPS have restrictions on the prices they can charge? (under the section “Composition of the Mail”) I just always vaguely assumed USPS could charge lower prices for things because “we” were partially paying for it…

someone August 8, 2009 at 1:59 am

A package was sent to me on June 29 (9102 7850 9140 1084 5869 67), but can’t be found in any relevant USPS location. I called and emailed to ask (politely) what to do next to try to locate it and got this response: “I apologize, if they were unable to find the package than there really are no further steps.”
As one reviewer wrote, Bell, CA USPS (google rating: 1 star, 8 reviews) is a black hole: http://maps.google.com/maps?f=q&source=s_q&view=text&gl=us&q=usps+bell,ca&ie=UTF8&hl=en&sll=33.985964,-118.178177&sspn=0.020780,0.034757&latlng=3654646196271651968&ei=YhN9SoCkMaaKtgOh2onRAw&sig2=iQZ-UIP_sUrrkMIbsvnspw&cd=2&usq=usps&geocode=FX63BgIdEff0-A

Michael Foody August 8, 2009 at 2:23 am

I think the postal service does a great job at a foolish task. Delivering garbage advertisements, mostly unsolicited to people’s doors all over the country every weekday is a waste of resources.

I understand that there is some benefit to certain activities of the post office that are likely money losers for the service, and that some of the negative things the post office does like junk mail delivery are likely revenue positive. That said I think the ratio is out of whack.

BK August 8, 2009 at 3:33 am

the post office is very good at what it does: deliver mail everywhere in the country for an even and reasonable price.

if the usps was privatized we would see the same thing as healthcare: many would get it cheap (think cities and relatively close proximity), many would get it more expensively (think rural, smaller cities, farther away) and some would not get it at all (think even more rural). i personally would have no problem with this as i prefer to live in large cities and rarely mail anything. however, i suspect those “independent” conservatives would throw a hissy fit that they can no longer get mail at all or at a reasonable price in the rural parts of fly over land.

the same thing would/does hold true with electricity, water, internet access. why would a private company, at their expense, lay 50 or 100 miles of pipe/wire/whatever for the benefit of a few people?

John Dewey August 8, 2009 at 4:32 am

brett: “I remember when I worked for a company that mailed products after over-the-phone and online merchandise orders to customers (all over the US and internationally). Although our default provider for delivery was FedEx, there were a number of times where we had to use the Post Office to make a delivery because it was to an address that FedEx just wouldn’t touch (because it’d be too unprofitable to do so).”

Pardon me for being skeptical about this. I was a FedEx field engineer 20 years ago when the company figured out how to deliver packages to all geographic zip codes in the 48 states.

FedEx claims to offer FedEx Express service to every address in the United States. No doubt some locations are much more expensive than others.

FedEx does not offer delivery to P.O. boxes, and many zip codes represent such boxes and not physical addresses. If one of your customers gave you a zip code which represented P.O. boxes, you would have been forced to use USPS. But that’s not because delivering to P.O. boxes is unprofitable, Rather, it’s because such delivery is part of the USPS monopoly right.

It is also possible that your software restricted your delivery choices to zip codes for which pricing was unprofitable to you – not to FedEx.

Finally, it is possible you were unwilling to pay for FedEx Express service. I don’t think FedEx offers discounted 2 day and Ground service to all U.S. addresses.

If you are certain that there is an “address which FedEx just wouldn’t touch” please provide details. I would like to check that address out with my former coworkers still employed at FedEx.

Mike Huben August 8, 2009 at 6:44 am

Of course if libertarians were making arguments about Microsoft’s monopoly (blessed by the free market and intellectual property rights), then all the arguments would be reversed. It costs perhaps 2 cents to stamp out another CD with the latest Microsoft bloatware which they charge $100 for, etc., etc.

The basic problem with these discussions is that the position is predetermined, so that the task is to find arguments that support it. No matter how tenuous, no matter how stupid.

C August 8, 2009 at 7:04 am

@ Mike Huben

In the late 80s and early 90s, prices fell by an average of 15% in the software categories in which Microsoft had a presence. Prices fell by 65% in the categories where Microsoft did have a presence (Liebowitz and Margolis). Awesome, huh? It probably helped that Microsoft didn’t have a legislated monopoly position, ala USPS.

w August 8, 2009 at 10:24 am

There is a big discrete jump in ground shipping rates starting at 70 lbs. Incidentally, this is where the USPS stops, so apparently two competitors is not enough.

The Chieftain of Seir August 8, 2009 at 11:09 am

I think there are good reasons for the big price jump around 70 lbs. For one thing most big employers forbid one employee to lift that amount by themselves. So in some case you are doubling the labor costs.

For another thing, I would guess that most package handling machines are optimized to handle the majority of packages sent. I would guess that this means they can not handle 70 lbs very effectively.

And lastly, when you are shipping things at the 70 lbs + range, you are getting into freight territory. If any thing, there is more competition in the freight market then there is in the parcel market.

athEIst August 8, 2009 at 12:00 pm

I notice Brett hasn’t responded to John Dewey. How about it Brett?

Doc Merlin August 8, 2009 at 3:00 pm

“public schools systems operate under the constraint of being required to take any kid living in their area”

no they don’t. They can expel kids for bad behavior. What they can’t do is keep kids out for low performance.

Lord August 8, 2009 at 4:34 pm

I think the post office is about as efficient as its requirements dictate. Covering every address six days a week is enormous and having multiple companies doing the same would only be less so. Companies would innovate in the requirements to reduce costs, such as not covering everywhere, delivering only on sufficient volume or importance, calling for pickup, or other techniques. These could increase efficiency of the operation while reducing it for the customers. Since most of its requirements are for legal reasons, these changes are difficult to make. You have to careful what you optimize for. It can’t go out of business and can’t stop functioning, something companies do all the time.

Punditus Maximus August 8, 2009 at 7:12 pm

I really think the big cost of the Post Office is how it prevented competing technologies from emerging, like fax machines and email.

Oh, wait.

John Dewey August 8, 2009 at 10:34 pm

brett: “It was FedEx Ground, I think. Of course, this was 1-2 years ago, so I might be wrong on that. “

No, you are probably correct, Brett. As I noted earlier, FedEx Express will deliver to every address in the U.S., but some addresses are probably more expensive than others. FedEx Ground is a less expensive alternate service. I doubt the company offers the cheaper services to all locations.

Consider this correction to your earlier statement:

“there were a number of times where we had to use the Post Office to make a delivery because it was to an address that FedEx Ground Division of FedEx just wouldn’t touch, and we could not afford the more expensive FedEx Express service

I hope you do not mind that I made a big deal out of this minor issue. It’s just that I spent many, many hours 18 years ago working on this problem – engineering truck and delivery routes so our FedEx couriers could profitably provide overnight service to every geographic zip codes in the U.S.

Tony August 9, 2009 at 10:54 pm

This argument reminds me of a letter Don Boudreaux wrote years ago:

It has been suggested that, because the nominal price of first-class postage is about where it was in the late 18th century, Americans who complain about the proposal to increase postal rates are merely whining wimps who are lacking in historical perspective.

However, the real price of transportation (a key input in postal service) has plummeted over the last 200 years. In 1799 it took 53 days for an Army courier to travel from Detroit to Pittsburgh.

Today the same trip can conveniently be made in minutes. Likewise, the productive efficiency of the United States is vastly greater now than it was even a few decades ago.

Given the plunge in transportation costs, joined with other technological improvements and a large increase in the scale of postal activity, the price of postage should have fallen dramatically.

Americans do not oppose postal-rate increases because of their ignorance of history.

Rather, opposition to these increases grows from the correct perception that a legally protected monopolist such as the United States Postal Service can keep prices higher, and service inferior, to what these would be under competition.

Regardless of how today’s postal rates compare with rates in the past, opening the delivery of first-class mail to competition would lower rates still further while improving service.

DONALD J. BOUDREAUX
G. A. SELGIN
Clemson, S.C., March 24, 1994
http://cafehayek.com/2007/10/rating-postal-r.htm

Floccina August 10, 2009 at 11:34 am

I can only speak for the post offices that I have been to but the service has almost always been awful. Being a postal worker seems to ruin some folks personality the become zombie like and do not smile. The workers move in slow motion in the post offices that I have been to. You get the sense that you are bothering them when you come in.

The post office is an anachronism they are like the old grocery stores where the merchandise was in the back and grocers had to get what you wanted.

And the worst part is that the wages are so far above market that the PO attracts and hires employs that could be very productive in some other line of work.

SLE August 11, 2009 at 1:31 pm

My dad happens to be a manager at one of the larger USPS processing plants in the country, and I can tell you that the real problem when it comes to costs is the union that most of the postal employees are part of. As a result, they get paid far too much money for doing what amounts to unskilled labor, and to top it off it’s nearly impossible to fire them.

There’s only so much that the USPS can do given their congressional mandate to provide service to everyone in the country (delivering to remote areas of Alaska that are only accessible by airplane isn’t cheap). They’ve invested billions of dollars into automating letter and package sorting. And it wasn’t until recently that congress allowed them to actually be competitive by letting them give better rates to larger customers (i.e. Amazon or Netflix). On top of that, they’ve teamed with FedEx to help cut equipment (i.e. airplanes) costs for air delivery. They’re shutting down hundreds of post offices around the country and consolidating them into bigger, more efficient hubs.

It was only a few years ago that they had the largest mail volume in their history, but since then volume has nose-dived. Given the huge amount of infrastructure that was built up over the past decades in order to accommodate those larger volumes, they’re doing an admirable job of recreating themselves as a leaner, meaner, more competitive entity.

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Kevin March 1, 2011 at 4:40 pm

Some people heavily criticize the post office while others hate it. I wouldn’t bet my life on it but I think that the post office business is here to stay for a while. Of course you have other services which are maybe faster (but cost more). There are quality services which are not available to the general public. Have you ever heard of executive coaching ? Do a search on Google for executive coaching Tucson and you will see what I’m talking about. There are great services waiting for people to find them out. Right now they are focusing more on niches but one day things will stay different.

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