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January 29, 2001

Tags Big Government

The Post Office recently raised the price of a first-class letter from $0.33 to $0.34, and that of a parcel from $3.20 to $3.50 (for a one-pound package) and to $3.95 (for a two-pounder).  Thanks to the Private Express Statutes, passed in 1845, the government has stymied competition in the delivery of both types of mail, although an exemption in the statutes allows private firms to deliver certain types of time-sensitive material.  The rub is that they must charge at least triple the statutory tariff.  

Despite this impediment, the exemption has enabled companies such as FedEx, UPS, DHL, Airborne, and a host of regional carriers to compete in the lucrative parcel market.  The Post Office has gradually ceded its market share of the parcel business, which continues to decline.  

Competition has been more effectively frozen out of the market for letters, which means that a wealthy power couple residing in, say, Chappaqua and/or Washington, who send letters to their friends in, say, Hollywood, are being subsidized by an elderly widow in, say, Harlem, who sends a rent check to her landlord across town.  

In a free market, postal companies specializing in intracity next-day letter delivery would charge a fraction of the price that cross-country carriers would charge. Moreover, because the Post Office is legally barred from offering discounts to high volume first-class mailers who don’t qualify for presort discounts, anyone sending nonpresorted letters cannot negotiate a rate better than the retail rates. Even the presort rates are constrained by anti-competitive laws. To top it off, postage has to be prepaid, following an 1855 law; mailers are not free to contract for alternative payment methods.              

Lost in the public outcry is the little-known fact that, twice in the last two years, the Post Office has quietly lowered first-class rates for envelopes weighing more than two but fewer than thirteen ounces.  The rate for these packages, generally known as flats, is determined by adding the first-class rate for one ounce ($0.34) to the product of the incremental rate per ounce, which was recently lowered from $0.22 to $0.21, and the number of additional ounces.  

Thus, a two-ounce flat costs $0.55 ($0.34 + $0.21), a three-ounce one $0.76 ($0.34 + [$0.21 x 2]), and so on.  Last year the price of a letter rose from $0.32 to $0.33, but the incremental rate per ounce of a flat fell from $0.23 to $0.22.  Thus, last year a two-ounce flat cost $0.55 ($0.33 + $0.22) to mail, but a three-ounce piece cost $0.77 ($0.33 + [$0.22 x 2]).  A ten-ounce flat mailed for $2.39 in 1999, cost $2.31 in 2000, and now costs $2.23.

Since FedEx and its rivals find it tougher to compete for lower-priced flats because of the pricing barrier written into the postal statutes, why has the price of flats fallen the last two years?  

A large chunk of the flat mail market is business-to-business mail produced by banks and brokerage firms in the form of research reports and prospectuses. Most of these reports are sent to their institutional clients at investment firms—mutual funds, hedge funds, banks, and insurance companies. The Private Express Statutes have been interpreted to exempt time-sensitive periodicals (and dated research reports are periodicals), thus opening the door to competition.  What about the pricing issue?  

In 1976, two Post Office employees, Richard Fredricks and Al Reese, had an entrepreneurial epiphany when they realized that institutional research was going daily to the same money managers, who happened to be located largely in the business districts of major cities, such as New York, Boston, Chicago, and San Francisco. These reports, coming from dozens of sell side firms, could be consolidated and delivered B2B by private couriers, who operated at a fraction of the cost of the Post Office. Thus was born Fredricks and Reese, which was acquired last year by Complete Management Services (CMS), based in New York, and now the biggest firm in this business.  

Citipost (recently bought by the British Post Office) and Independent Delivery Service, both located in New York, as well as New Jersey-based International Postal Consultants (recently purchased by the German Post Office), also compete in the market for financial research.  The industry is small but very competitive; I estimate it to be capitalized at about $200 million.  These companies ship research by a combination of their own couriers, who deliver in major cities, and by subcontracting with consolidators such as UPS and Airborne (FedEx and DHL don’t compete in the mail consolidation market), which deliver for them to investment firms in smaller cities.  

They compete on both service and price, effectively doing an end run around the statutes, based on their interpretation, which the Post Office has not formally challenged.  As a result, they offer volume discounts, and faster, more accountable delivery.   Their prices are as low as half the first-class mail rates, or less, and their transit times are better.  They also charge by the pound instead of by the piece, thus resulting in additional savings; and they offer credit terms to their customers, obviating the need for prepayment, unlike the Post Office.  

The upshot is that, 25 years after the founding of the research delivery industry, the USPS has lost almost an entire market that it monopolized in 1976.  The happy consequence for the public is that the Post Office has belatedly been forced to cut its rates for flats, as outlined above.

The Post Office has used other tactics as well, as befitting a government monopoly.  Aware that it was losing market share in the 1980s, it reportedly sent a "cease and desist" letter to the owner of CMS, which he heroically ignored, as he proceeded to build his business.  Its postal inspectors periodically harass the research delivery firms.

However, now that the research delivery industry is well established both in the U.S. and abroad (there are six companies vying in the London research market, and Citipost has an office there), the Post Office has finally decided to lower its prices rather than risk an ugly legal battle, which it would almost certainly lose.

In the meantime, opponents of real, government monopolies, as opposed to phony, pseudo-monopolies, should raise a hue and cry for the immediate repeal of the Private Express Statutes.  Let us heed Murray N. Rothbard’s call for replacing the exploitation of man by man with the administration of things, starting with the Post Office.     


William J. Stepp (wstepp@mindspring.com) is a New York writer who is active in anarcho-capitalist intellectual circles in New York.

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