Doug Mataconis has a piece up on the urban-to-rural subsidization of post offices. The post and the response to the post are predictable (including my own). But I wanted to share a great comment on there from a guy named Kip Smith, chalk full of interesting information:
OK Doug — do you want a serious answer to your question? I actually worked for the USPS as a rate economist AND published a paper about the economics of delivery 15 years ago (and can provide a cite if you’re really interested). That paper was (believe it or not), one of the the first attempts to quantify where the USPS made money on a route basis.
So this is actually a REALLY complicated question – when I wrote the paper profitability was dictated NOT by location (e.g. rural vs. urban) but by level of affluence. Think about it — there is a fixed cost to run a particular route. The “profitability” of any individual route will be based on the number of pieces of mail that are delivered on the particular route. Which makes sense, if you think about it. And who gets the most mail? The most affluent people. There are also costs associated with mail processing (primarily class based — a presorted barcoded bill is MUCH less expensive to process than a hand written letter and that has an impact on overall profitability) — but the idea that “rural” delivery is in and of itself unprofitable is wrong. Delivering to people who are generally NOT sent much mail is unprofitable; delivery to those who receive a great deal is profitable. I’ve been out of postal economics for a long time now but the economic logic should co!
ntinue to hold.Well, I could go on for many hours — but here are a few key points:
1) Most USPS delivery is “unprofitable” — delivery to the top 10% is and business delivery was (and is?) where the USPS makes most of its money.
2) Implicit cross-subsidies are rampant — it’s not simply rural vs.urban
3) There is a HUGE value in having universal service
4) YOU don’t personally cross-subsidize mail delivery (and for individuals, the cross-subsidy runs from all those business TO you when you want to send a holiday card or a check to the dentist)
6) Of all the crap that’s going on in the US and the world, WHY (!) do we want to spend the time on the USPS? Aren’t there better things to do with our limited time?
As I have said before, there is a powerful networking effect that would likely compel someone to assure delivery to the vast majority of rural areas (Alaska might be out of luck) and most likely for a predictable cost. The USPS (and government, more generally) is not the only entity that will take some losses here and there for the sake of cost-predictability and universal service.
Another interesting thing is that I may have underestimated the extent to which UPS and FedEx pass things off to the USPS for final delivery. But commenter Ron Beasley points out something interesting: The potential environmental benefit. It’s great that UPS and the USPS are working together to cut down on consumption. But, absent the USPS, I remain skeptical that UPS or FedEx would let large parts of the country go unserved. If not for the person in Glasgow, Montana, then for the person in Atlanta who wants to send something to them.
There are, of course, areas of “give” that are possible and ways in which ruralites would have to accommodate. For instance, though delivery may be guaranteed, the back-end of how long it takes might become much longer (“We deliver to some places only once a week.”) and it’s also possible that ruralites would need to incorporate getting the mail into their various trips into town (or wait for the once-a-week delivery).
Don’t get me wrong: People out here appreciate the postal service. There was a lot of resistance to the shuttering of local post offices around here. And I personally like the post office and whether I live out here in ruralia or not, I will support subsidies where necessary to ensure that people can get their mail*. But contrary to a lot of assertions, life would go on without it.
Except maybe in Alaska.
* – Here is where the debate over the extent to which the Post Office’s problems are caused by Republicans and if it weren’t for that it would be profitable. That’s beside my point, though, which is that I would be supportive even if this were not easily made solvent.
Interestingly I posted about this to facebook today, to a decent amount of dissent.
I like the post office. I prefer them to UPS most of the time (note: now that I work, this is not as much of an issue because I get almost everything delivered there). UPS used to do all sort of dumb things like leave my package at the front gate without ringing the door bell. Plus they always seem to deliver when you are not home and Priority Mail is faster and cheaper than UPS. Before I worked, very few companies annoyed me more than UPS.
Lots of people dissented with tales of USPS woe and Christmas cookies delivered in June. Honestly this has never happened to me.
UPS and FedEx do not deliver to rural areas. They send their packages to USPS and the post office is the final deliver. Even sometimes in San Francisco, some UPS packages are delivered “SurePost” which means UPS gives it to the Post Office and the Post Office gives it to me.
UPS does deliver to rural areas. Just not all of them. They deliver around here, as does FedEx. I believe that if there wasn’t the USPS, they would deliver to the other rural areas, too. Or FedEx would or they would contract it out to a third party. They wouldn’t let those areas go unnerved because it would create network holes and people would gravitate to whichever one had the larger network so they don’t have to look up whether a particular address is deliverable. Unless they can discount and entireregion like Alaska .
In Canada, there are areas sufficiently rural that the Canadians don’t deliver to them. Instead you have a Post Office Box in town. You pick up your mail when you pick up your horse feed and hardtack.
And I’m not even talking about somewhere out in the boonies in Saskatchewan. I’m talking PEI!
It seems to me that there are worse ways to do it.
Or Nova Scotia, my Mother gets her mail at a PO box.
Actually if you look at the UPS site there is a long list of zip codes where a $2.75 to 3.25 surcharge applies due to the remote nature of the location. Of course it should be pointed out that at least here in the Texas Hill country the post office does not deliver to mailboxes on dirt roads, rather you put your mailbox along with others on the corner with a paved road. Or in newer developments you have cluster mailboxes, but you gain a locked mailbox in the deal. (They have a larger parcel box next to the mail boxes, the key is put in the mailbox if you have a parcel) Actually you can sort of see the difference in price, by comparing what is now called standard shipping where the UPS/FedEx parcel is dropped off at the post office for delivery with the say 3 day service typically it runs about $7 to $10 more. But then the parcel is dropped at your door (at least on a paved street).
Listen here Mr. Turnip Mobile, on behalf of all heavily subsidized Alaskan’s “bite us.”
But anyway i’m sure most if not all rural alaskan villages would be unable to support a PO if it even had to come close to breaking even. Most villages have less then a thousand people. The mail is delivered to the village on the extensive and often subsidized network of small private bush air services. From there the local PO picks it up. Not having a PO would be a killer for many people. Most rural alaskan are less techy and often have spotty intertoobz. Life would go on, but it would be with less access to the courts for one thing since timely service is important, business would be harder, among other things. There is no UPS of FX to most of Alaska.
That’s Turnip Mobil…. no “e”.
Yeah, I figured that Alaska would be in trouble. According to Kip, most mail doesn’t break even so it would mostly be a question of whether it would be worth it for UPS and/or FedEx to support the state so that they can bill nationwide support.
In other news, and mostly unrelated, my sister-in-law just moved to Anchorage. I was helping her out with her cell phone situation. I was actually very impressed with the price and availability in Anchorage. I figured Anchorage would have service due to its size, but for some reason I figured that AT&T and Verizon would take a pass (it looks like Verizon did) and the local option would be really, really expensive. GCI’s rates seemed quite competitive.
There is a big rural/city divide in AK. The cities ( well Anchorage and Fairbanks) and the suburbs are mostly white while the rural areas are mostly Native. There are plenty of white city folk who aren’t happy with the money spent on rural airports or moving Native villages because the sea is going to wash them away. Most of the truly rural areas are like Indian Reservations that can only be reached by small planes when the often crappy weather is to crappy. Some of them don’t even have indoor plumbing.
GCI is decent for most things. We’re lucky to have a little competition. If your SIL needs any info or suggestions let me know.
Couldn’t a few bucks from the permanent fund payout cover those subsidies if it ever came to it?
Yes the PFD could cover it. However touching the PFD for anything but giving out checks in the fall is an absolute no go. People like their checks. Heck rural folks depend on their PFD’s to stock up for the winter.
The USPS exposes all sorts of weird breaks in our typical political taxonomies. If you and I outlined our philosophical commitments and general political approaches, I suspect the average person would predict our feelings about USPS reform would be switched.
That liberals support the USPS it isn’t that ironic, I don’t think. That the GOP CCers want it gone – like, yesterday – is, it seems to me, since the people who will be most adversely affected vote Republican. It’s one of those strange situations where the politics seems to really outpace policy. I just can’t imagine that most rural conservatives want to eliminate their only convenient access to mail services.
My point was that Will, being not-very-liberal, supports the USPS far more than I do, and I’m a for-real liberal.
I’ll admit that I love the end of Saturday delivery on a purely selfish basis. It’s 98% spam that I can’t unsubscribe from. If I could pay the post office 10 bucks a year to NEVER deliver to me, I’d be thrilled.
I’m pretty sure all that will come on Monday now.
Thanks for sharing that comment, Will. It provides more depth on the issue than most of us have considered before (well, at least more than I’ve considered before–no intent there to disparage any of the rest of you all!).
I find the comment itself to be a big dodge to the question, though. There are almost no wealthy rural areas in the US, it’s just making the point that poor urban/suburban areas might not be all that worthwhile to the USPS, either.
Though it sounds to me like the question proper wasn’t investigated, instead a different one was looked at. I would hardly call that dispositive.
I particularly have an issue with his comment #6, the USPS is in the news because it’s running out of money and I don’t see much appetite for the US to start direct subsidies again.
Like just about every other budget issue, Congress wants a pony and someone else to pay for it/ It’s fine to say the USPS is worth it, but I’m pretty sure the folks that need that convincing are sitting members of Congress, not Doug Mataconis or his readers.
I always thought that the big problem with USPS is that Congress requires it to operate its pension in a way that no other government agency needs to.
That sort of gets to the asterisk in my post. The USPS has heftier pension obligations, though I don’t actually consider that to be an altogether bad thing. At least, I’ve yet to be convinced that the increased set-aside requirements are worse than the thinner obligations elsewhere. (Then again, I’m skeptical of defined-benefit pensions more broadly.)
There are also accusations that the congressional problems with the USPS go deeper than that. I chose to avoid getting into that since my post is not contingent on how profitable or not the post office is, but rather whether and how it should be subsidized if required.
Nobody — nobody — prefunds 75 years worth of pensions upfront, because it is effing’ stupid.
The USPS has a lot of problems — most of them stem not from the USPS, but from Congress. Congress mandated an idiotic health pension system that would bankrupt Apple itself. Congress controls stamp price raises, Congress won’t even let them do things like expand into malls and strip center or sell stuff inside of post offices beyond commorative stuff or the bare minimum stamps and envelopes basics.
They won’t allow cuts to rural deliveries either. Heck, they technically said no to cutting Saturday service but USPS did it anyways (well, specifically USPS needs Congressional approval to do that. Which they didn’t bother asking for. Which is somewhat telling). I’m not sure their actions are technically legal on that.
Suffice it to say, either even the minimal common sense of Congress departs when USPS comes up, or there is a sizeable constituency trying to drive it into enough ruin to scrap it.
It reminds me of FEMA (which only seems to work under Presidents who think FEMA serves a purpose) in a way. Only more..deliberate.
I think the issue is that if 90% of places lose money, suggesting that we cut services to rural areas because they lose money loses some of its charm. What about the other places that are losing money? They get a pass because their shoddy neighborhood is adjacent to a nice one? Or should we upcharge mail to or reduce services from most places, since they are losing money?
Or… do we simply not look at this through that particular prism? Do we look at them as part of a national network, with national network pricing? Because spending too much time making sure that nobody is subsidizing anybody else is not always the way to go. Not even in the private sector.
Anyway, I considered the comment to be very on-target. Mataconis thinks we should consider cutting subsidies to rural delivery because it’s unfair. But ruralia is simply a conspicuous target, if most locations are actually losing money.
*shrugs* deliver once a week to rural areas. I don’t want to cut off a reliable civic feature. Just trim the costs…
If it comes to it, I think that’s something that should be considered. I’m still not convinced that ruralia isn’t just a particularly conspicuous target. It may cost a lot to deliver to each person in Wyoming, but not a lot of people live in Wyoming. And that’s (apparently) not the only place where the money is being lost (which brings us back to conspicuousness).
But, if as part of a broader reform package, then yeah, cut it down to twice a week for some places and once a week for others. A bigger issue might be the degree to which we have an independent post office in every rinky-dink town. People out here cried bloody murder when they tried that, but it might be a bigger money-saver.
Simplify and standardize. Everybody likes the post office? Fine, let them handle the DMV stuff as well. Add more duties to places people like, and streamline out the others.
The places I’m referring to don’t have a DMV. And out here the DMV tends to already be included with other things (treasurers office or sheriff’s dept). I was thinking more like contracting it out to a local store or something.
I believe all those ideas — and quite a few more — have been floated by the USPS and shot down by Congress.
The USPS has very little free reign over it’s own setup.
Morat20, no one here seems to be blaming the Post Office itself. Mataconis might want it privatized, but that would have the effect of loosening the oversight you are condemning. But I am perfectly aware of the congressional roadblocks. The question is what we might do if they were overcome or how the market might handle it.
I don’t think the market can — rural areas are simply going to be unprofitable, and there’s not a lot of reason to subsidize it outside of the general welfare kind of thing.
Honestly, I think FedEx and UPS themselves would take a serious hit if USPS went out of business.
I’d expect the market to come up with something due to the network effect. What that something would be, I don’t know. But they don’t want to tell companies that ship that they will only deliver to some addresses and will take a hit not to.
I’m pretty sure it’ll be “not deliver to unprofitable areas unless forced to by law”.
Private companies don’t service all needs — just the needs they can make money on. There just aren’t enough people in some places to make it worthwhile — not at prices anyone is willing to pay.
The problem is not delivering to Glasgow (Montana) will cost them customers in Atlanta. They can lose money on some shipments because it keeps customers on moreprofitable ones. This is common business practices. I doubt UPS makes money supporting where I live, but they do it anyway because they network effect matters.
Actually, they probably ship the last leg via the USPS if it’s not profitable. I’ve even gotten some that way, and I don’t exactly live in the backwoods. You can’t even tell unless you saw the USPS guy drop it off. (A friend of mine mentioned he became aware of it when UPS tracking had his package marked ‘delivered’ and it wasn’t there. Turns out they meant ‘delivered to the USPS’ in his town. It made it to him the next day, via his postman).
Removing the USPS will cause FedEx and UPS prices to rise noticeably.
No, the last leg is UPS. I don’t think that shipments are unprofitable when they utilize the USPS, I think they just have a better profit margins by using them. You’re right that prices would likely go up if we took that away from them, but no one knows how much. It would cost more, but I don’t think they’d stop delivering. They’d want the business of companies that want to send stuff there.
(As always, Alaska might be an exception.)
15 years ago, the price of gas was quite a good deal lower than it is today. Profitability may be based on “how much mail” a person gets… but unprofitability is based on how much it costs to get the mail to a person, it seems like…
Both are factors. The more mail you have, the more you can divide gas costs by.
My two cents: We should have a nationalized mail service. There should be a way to do so that is both affordable/accessible and not a massive drain on the government. That might mean changes to the current system, but it seems like a very doable thing if folks are properly motivated.
+1
Much of the problem is also that mail is becoming even more and more obsolete in the areas that it’s easiest to turn a profit (delivering mail to high-rise apartments or otherwise densely populated areas): Cities.
The places where you are most likely to find people who manage all their bills online, for example, are the places where it’d be easiest to get a bill to them for a price that turns enough of a profit that it (well, and the three dozen envelopes with it) will defray (or cover) the price of an envelope sent to the middle of nowhere, Wyoming.
And more and more citified people are post-USPS. And more and more rural folk ain’t.
JB,
Is that structural? Or cultural?
Both, probably. For one, you’re more likely to have high-speed internet. For another, you’re more likely to have someone nearby who can explain to you that they’ve been using online bill pay for years and they’ve never been ripped off and the power company has always gotten their payment.
Half of my utility bills here have to be paid by mail.
Seriously? I didn’t know there was any place left where you couldn’t set up automatic payment out of a checking account.
Michael.
You try doing that with companies that have a habit of quadrupling your bill. Let alone Verizon, which tends to multiply bills by about a 100 or so.
Yeah, I imagine that cities are more likely to have hip “download our app at the app store!” utility companies than rural areas are.
The cities are more likely to have bandwidth. 🙂 My wife’s grandmother can’t get cable (she can get satellite) and her phone lines won’t support DSL — they barely support voice. (The only reasons he has a phone line is government).
The cell networks give a single bar, on a good day.
Until recently, there were not satellite internet options — and even now, what she has a choice from is basically dial-up or very expensive internet of a 15 years ago. (Satellite).
She’s one of several hundred people in that lakeside community with that problem.
Ever tried to load a modern website using internet speeds from 2000 or before?
When Yahoo took Geocities down, our water department lost its official hhomepage. Anyway, I shared Michaels assumptions until I moved here. Now I have a check-writing place designated in the house. Never needed thatbefore .
I was initially weary of online payments. Now I’m terrified of mailing checks. WHAT IF THEY GET LOST?!?!
I have dealt with some companies and services that required a check, but never a regular utility or anything.
I’m reminded of conversations I’ve had about the prevalence, or seeming lack there of, of EZPass or similar systems. “Why doesn’t EVERYONE have them? Then we’d never have toll traffic,” people argue, including myself. That is, until I visited an EZPass Center and saw folks who were refilling their account balances with cash payments. These folks likely lacked credit cards for auto-refill, and perhaps even checking accounts. As such, it was a pretty huge inconvenience for them to have an EZPass tag, making it only worthwhile if they did a lot of driving through the tolls.
It’s really easy to forget things like that.