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Why the Postal Service Is Not Subsidizing Package Delivery

June 18, 2018

Despite assertions by President Trump that the U.S. Postal Service (USPS) is charging too little for package delivery, the evidence shows that package delivery is not subsidized and, in fact, that package revenue is playing a key role in shoring up shaky USPS finances.

As the volume of traditional mail continues to decline and as e-commerce grows, the importance of package shipping to the U.S. Postal Service (USPS) will only increase. Yet, because USPS operates two lines of business – the traditional monopoly business (e.g., first class mail) and the competitive businesses, including packages – it is critical that USPS fairly prices package shipments. Some, including President Trump, assert that USPS is subsidizing packages and unfairly competing with private package shippers. The facts show that USPS is competing fairly.

There are two central issues involved in the debate over whether the USPS is charging too little for package delivery. The first is whether USPS is abiding by the requirements in the 2006 Postal Accountability and Enhancement Act. On this issue the record is clear: USPS is abiding by the provisions in the statute. The Postal Regulatory Commission, whose job, among other things, is to regulate the prices USPS can charge for products that compete with the private sector, has found that USPS is abiding by the law and is not using its mail monopoly to unfairly subsidize package delivery.

The second central issue is whether the law itself is designed in a way that lets USPS undercharge for package delivery. The ability of the USPS to use its mail network for package delivery not only lowers the total overall costs of package delivery in the United States, it provides badly needed “profits” to help USPS reduce the deficits on the monopoly side of the business (e.g., first class mail, marketing mail, etc.) which has been badly hurt by the rise of the Internet and e-commerce. Indeed, if it were not for parcel delivery, USPS deficits would be much higher. Parcels generate approximately 30 percent of “profits” for USPS, and this revenue reduces the USPS deficit, caused in part by its higher costs from its universal service obligation and from the declining volumes of mail, particularly first-class mail. Mandating increased package prices would lead to overall lower productivity in the U.S. package industry, while at the same time having negative impacts on equity and opportunity, particularly in rural communities.

If the Trump administration and Congress wants to fix the Postal Service’s finances, reforms on the competitive products side are not the place to look. Packages provide a healthy surplus that reduces the net USPS losses from market dominant products. Rather, USPS needs to focus on cost cutting on the market dominant side.

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