Tag Archives: USPS

Does Washington, D.C. create value?

In recent remarks on the Senate floor, Senator Mike Lee (R-UT) contended:

There is a reason that six of the 10 wealthiest counties in the United States are suburbs of Washington, D.C.–a city that produces almost nothing of actual economic value.

This assertion prompted a fact check from the Washington Post’s Glenn Kessler. Kessler grants that Lee is correct in that “six of the 10 wealthiest counties are suburbs of Washington, D.C.” But he goes on to contend:

There’s not really an economic concept that equates to “tangible economic value,” at least as Lee seems to be suggesting. Thus it is hard to disaggregate activity ultimately benefiting from the federal government.

I think most economists would disagree. There is, indeed, an economic concept that distinguishes between “tangible economic value” and the lack thereof. The idea is called rent-seeking.

First, consider how people profit from voluntary exchange. If two parties voluntarily exchange, both expect to gain from the interaction. The consumer expects to gain some value from the product that is in excess of what he pays (otherwise he wouldn’t part with his money). And the producer expects to receive some price in excess of her costs, including the opportunity cost of doing something else with the product (otherwise, she wouldn’t part with the product). The sum of this consumer and producer surplus is called “economic surplus” and it is at the heart of economics. Indeed, it is at the heart of human progress.

Sometimes, however, the producer is the exclusive producer of the particular product. Her exclusivity could be natural (only Michael Jordan could do what he could do), or it could be contrived (by law, only the USPS is allowed to deliver non-urgent mail). Whether natural or contrived, exclusivity permits a producer to capture a larger share of economic surplus than she otherwise would. This above-normal producer surplus is a payment in excess of what would be necessary to bring the good to market. Economists call it an economic rent (and it has nothing to do with apartments).

Significant problems arise when exclusivity is contrived. One problem is that people will invest valuable resources–time, money, effort–into convincing those with political power to grant them an exclusivity. People will lobby. They will donate to campaigns. They will make products that politicians like instead of products that consumers like. All of this is potentially wasteful and it is called rent seeking.

It isn’t easy to measure the losses from rent seeking (though a few have tried). But I suspect this is exactly what Senator Lee had in mind. After all, Washington, D.C. Is the place people go to seek rent. Want to force people to buy your product? Go to Washington and seek an individual mandate. Want to make your competitors’ product more expensive than your own? Go to Washington and seek tariffs of up to 250 percent on foreign producers. Want to raise the production costs of your competitors? Go to Washington and seek a production standard that plays to your competitive advantage.

Rent seeking is hardly a fringe concept. Professors Roger Congleton, Arye Hillman and Kai Konrad have just released a two-volume anthology of rent seeking research called 40 Years of Research on Rent Seeking (I know; not cheap). They report that the EconLit database has over 401 academic journals and books with “rent seeking” in the title and that a Google Scholar search produces 1,500 papers include the term.

Mr. Kessler is right that much of what happens in D.C. is not rent seeking. But his assertion that only 40 percent of the region’s gross product came from government spending is hardly convincing. That isn’t just a “big chunk.” It’s a mammoth chunk. Moreover, it misses the fact that a lot of “private” economic activity in the region is still related to rent-seeking. See, for example, the K-Street corridor.

These critiques aside, the fact check missed a nice opportunity to educate the public on an important concept at the core of modern economics.

President calls for an end to government-granted privilege

As expected, there were a number of beautiful words in the President’s Second Inaugural. In my view, the most-beautiful were:

The patriots of 1776 did not fight to replace the tyranny of a king with the privileges of a few, or the rule of a mob. They gave to us a republic, a government of, and by, and for the people.

(Okay, so the POTUS didn’t provide a hyperlink to my Mercatus paper on government-granted privilege, but maybe the Government Printing Office will one day add one).

cronyismIn any case, one can only hope that this is a signal that the president has decided that the time has come to abandon government-granted privileges. No more bailouts of particular firms like GM (or, more accurately, certain of GM’s creditors but not others). No more expected bailouts that allow firms like Fannie Mae to borrow at significantly lower interest rates than their competitors. No more subsidies to farmers. No more regulations that require consumers to buy certain products such as health insurance. No more tax breaks for manufacturers just because they make things rather than provide services. No more loan guarantees for certain energy firms because they make politically correct products. No more monopoly status for the USPS. No more price supports for sugar producers or tariffs that benefit domestic makers of solar panels.

Hopefully, this signals a new era of non-discriminatory democracy. I won’t hold my breath.

The USPS: A Business or a Welfare Organization?

In our oped in the Chicago Tribune yesterday, Maurice McTigue and I argue that Congress needs to decide if it wants the USPS to be an independent business or a taxpayer-supported welfare organization.

Currently Congress wants to have its cake and eat it too – it wants to maintain the government controlled quasi-monopoly over postal delivery but it also wants USPS to operate as a profitable competitive organization. Striving to have the USPS operate in this sort of middle ground will simply not work.

From our oped:

In order for the USPS to operate as a business and become profitable, Congress needs to allow it to make the same decisions every private-sector business makes, which includes choosing the location of its assets, closing post offices, laying off workers and competitively pricing its services. This also means the USPS should not be allowed to borrow from the government or receive written guarantees.

Given the current fiscal problems stemming from the already overcommitted welfare system in the United States, creating another one is simply not an option. If instead, Congress were to remove the barriers to postal delivery, it would allow the USPS to restructure itself into a 21st century organization – an organization that could provide an improved quality of service at competitive prices.


In Less Than One Month the USPS will Face Financial Insolvency

According to a report that the GAO released yesterday, “By the end of this fiscal year—in less than one month—the U.S. Postal Service (USPS) projects that it will incur a $9 billion loss; reach its $15 billion borrowing limit; not make its $5.5 billion retiree health benefits payment; and thus, become insolvent.”

The GAO report examines a series of structural policy recommendations, focusing largely on making changes to pension benefits for new employees, employee health benefits, collective bargaining agreements, and retail services.

However, other ideas for reform that have become more popular in the media, such as getting rid of Saturday delivery, are often marginal in nature and fail to address the underlying structural issues that the USPS faces. It is unlikely that a few minor tweaks to the largest federal civilian employer will significantly improve its current financial crisis.

One key factor contributing to the inefficient performance of the USPS is simply that it is an outdated organization. As Maurice McTigue argues, the USPS is “trying to run a 1920s business in a 21st Century economy….The current system is poorly configured with archaic facilities in the wrong places.”

Joshua Hall and I further argue that the main concern with the USPS is that it is a quasi-monopoly. The Federal government has implemented barriers to postal delivery that directly prevent people from reaping the benefits of competition. Removing these barriers and letting markets work would allow competitive forces to eliminate inefficiencies and determine better ways of operating.

Therefore, with the USPS nearing financial insolvency, it seems that there are three possible paths for its future: 1) making minor tweaks that will result in little (if any) improvement, 2) making structural reforms to the current system, or 3) letting the market process work via privatization of postal delivery.

The U.S. Postal Service Lumbers On

The LA Times reports that in spite of 40,000 job cuts and billions in cost-saving measures, the U.S. Postal Service lost $3.8 billion in FY 2009, which is $1 billion more than they lost in FY 2008.  The USPS’ financial health is “sobering” to quote Postmaster General John Potter. Decreased mail volume coupled with “the impossible demands” of pre-funding future health retiree benefits.  The short-term worry, by September 1, 2010, the USPS must make a payment of $5.5 billion for its retirees. The longer-term reality: e-mail or “electronic diversion” have taken a huge bite out of mail volume.

To address the immediate-term, like other “too-big-too fail” entities, the USPS has gotten a reprieve. In October, Congress allowed them to defer contributions to its health care plan.

To address the other matter – technology’s effect on the market for snail mail – there is only one way out of the USPS’s dilemma: “Free the Mail”, as CATO’s Tad DeHaven and Chris Edwards note . But, there’s a big obstacle in the room – public sector unions.