“The Postal Service is a joke because they’re handing out packages for Amazon and other Internet companies. And every time they bring a package, they lose money on it.”
— President Trump, in remarks to reporters, April 24
President Trump is threatening to veto financial aid for the beleaguered U.S. Postal Service unless it hikes the price it charges for delivering packages — which he said should be quadrupled.
Note that he mentioned Amazon by the name. The Washington Post, of course, is owned by Jeff Bezos, the founder and chief executive of Amazon. The president is often displeased by reporting in The Post, which he occasionally labels the “Amazon Washington Post” even though The Post is not part of Amazon. Bezos has owned The Post since 2013 as a personal investment via Nash Holdings LLC.
Be that as it may, it’s certainly worth fact-checking whether the Postal Service loses money delivering packages for e-commerce merchants, as Trump claims.
The Postal Service is losing money overall, primarily because the rise of email has sharply cut flat-mail volume, and because Congress requires it to prepay pension and health benefits. One problem is the USPS must charge the same price for first-class mail delivery anywhere in the country, no matter how remote.AD
But the USPS consistently says package delivery is a bright spot in its revenue picture, increasing every year.
“As a percentage of operating revenue, Shipping and Packages generated approximately 32%, 30% and 28% for the years ended September 30, 2019, 2018 and 2017, respectively,” USPS said in a 2019 regulatory filing. “As a percentage of total volume, Shipping and Packages represented 4.3%, 4.2% and 3.8% for the years ended 2019, 2018 and 2017, respectively.”
Of course, revenue is not profit. And we do not know the details of the contracts between USPS and Internet retailers. But USPS says it has been raising prices: “Prices for these Competitive services increased an average of 7.4%, 4.1% and 3.9% in January 2019, January 2018 and January 2017, respectively.”
Amazon uses the Postal Service for the last mile or so of a package’s journey. But the Postal Service says there are signs Amazon may emerge as a competitor.AD
“The primary competitors of our Shipping and Packages services are FedEx Corporation and United Parcel Service, Inc., as well as other national, regional and local delivery companies and crowdsourced carriers,” USPS said in the regulatory filing. “We see additional competition coming from existing customers, such as Amazon.com, Inc., that are testing and in some cases implementing ‘last-mile’ services.”
In its most recent 10-K filing with the Securities and Exchange Commission, Amazon said it had spent $27.7 billion in 2018 and $37.9 billion in 2019 on shipping costs and was looking for ways to “mitigate costs of shipping over time.”
Note the use of the phrase “competitive services” in USPS documents. Under a 2006 law, USPS has two product lines — services such as first-class mail in which it holds a monopoly and competitive products in which it competes with companies such as FedEx and UPS. Under that law,
“By law, prices for each Competitive service must cover ‘attributable costs’ (meaning the Postal Service’s costs attributable to such product through reliably identified causal relationships), and Competitive services collectively must contribute an appropriate share to the institutional costs of the Postal Service, currently 8.8%,” the regulatory filing says.
Indeed, the USPS’s most recent public cost and revenue filing shows that in the competitive services sector, first-class package services covered 148 percent of operating costs, while ground parcel post covered 189 percent of operating costs associated with these deliveries. That would suggest profits are being made.
So, the law says USPS cannot lose money on package services, and USPS says costs are being covered. How can Trump claim the agency is losing money?AD
We contacted the Treasury Department for an explanation, as Treasury Secretary Steven Mnuchin is handling this issue for Trump. Mnuchin was at Trump’s side when the president made these remarks, and he indicated he agreed USPS should charge more to e-commerce merchants.
Essentially, Treasury’s answer is that USPS’s calculation methods are off-kilter and provide a misleading picture of profits and losses — even as it concedes that USPS is following the law.
“It is correct that the law only requires them to contribute to institutional costs and therein lies the problem,” said a Treasury official. “Judges uphold that the USPS’s accounting functions within the law. However, the law also requires the USPS to be self-sustaining and to not receive appropriations. In order to achieve sustainability without ongoing appropriations, the packages need to cover their proportional share of institutional costs rather than simply contribute to them.”AD
The official added: “USPS’s cost allocation method was originally developed 45 years ago to align mail prices with marginal mail costs when USPS operated on a break-even basis. It was never designed to fully distribute costs to products or to determine the profitability of products, let alone to distinguish cost drivers between mail vs. packages. As such, it does not reflect the drivers of its costs today — the rapid decline in mail and rapid rise in packages over the last decade.”
The official pointed to the sections of a 2018 task force report, produced after Trump complained e-commerce merchants — in particular, Amazon — were getting too sweet of a deal from USPS. “Modernizing the USPS’s cost standards and allocation methodology is a key principle needed to reform the USPS,” the report said. “This modernization will provide the USPS the information it needs to inform critical management decisions, government policies, and regulatory reporting.”
Notably, the report did not say e-commerce merchants were taking advantage of USPS — or even offer an alternative way to calculate profits. But it did say USPS could exploit its prominence in rural areas. “The Task Force recommends that USPS price its competitive products in a manner that is not geared simply toward maximizing volume, but instead toward generating income that can be used to fund its capital expenditures and long-term liabilities,” the report said. “Alternatively, the Task Force recommends that in any of its pricing decisions, the USPS consider the potential market distortions that could drive industry participants out of the market.”AD
The Treasury official said: “Until USPS modernizes its cost allocation method, using standard business practices, it will not be able to determine the true profitability of products.”
(One private-sector analysis that attempted to calculate whether the USPS subsidized Amazon turned out to be based on out-of-date numbers. Recalculated figures by Josh Barro of Business Insider found barely any subsidy. Not to get too technical, but there is an economic concept called Ramsey pricing concerning how much a public monopoly should charge to cover its fixed costs. This can result in some customers — those with better options — getting smaller markups as long as they contribute to covering fixed costs.)
Update, Sept. 19: Internal USPS documents obtained by The Washington Post found that Amazon generated $3.9 billion in revenue for the agency in the 2019 fiscal year that ended in September. The Postal Service turned a $1.6 billion profit on that business, nearly twice as much as any other customer, according to one memo obtained by The Post.
The Pinocchio Test
Regular readers know the burden of proof rests with the speaker. The president says USPS loses money on every package it delivers for e-commerce merchants. But that appears to be an analysis derived more from his gut — or his animus toward Amazon — than from any sophisticated analysis of the numbers.AD
USPS, by its own calculation, says revenue from package deliveries far exceeds costs. With Amazon perhaps seeking to bypass USPS, the agency must be careful not to price itself out of the market — and thus face a bigger financial squeeze. Moreover, under the law, USPS is prohibited from losing money in the package-delivery sector.
The Treasury Department, while acknowledging USPS’s calculations passed muster with the courts, says USPS’s methodology is flawed. We acknowledge government accounting sometimes can be opaque and different from private-sector accounting. But the Postal Service’s business model also is burdened by rules set by Congress and thus cannot easily be compared with private business.
In the end, Treasury cannot show us USPS is actually losing money on its contract with Amazon, as Trump claims. It can assert only that USPS does not know whether it makes a profit.
Trump earns Four Pinocchios. We’re happy to revisit this fact check if any evidence supporting his position emerges.
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