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Cato Policy Report, March/April 1999
Vol. 21, No. 2

Competing with the Postal Service

by Frederick W. Smith

Frederick W. Smith
Frederick W. Smith, founder of Federal Express and member of the Cato Institute’s Board of Directors, criticized the U.S. Postal Service’s overreaching attempts to extend its monopoly on December 2 at the Cato Institute conference “Mail @ the Millennium: The Future of Private Postal Service.”

My perspective assumes that the Cato Institute is one of the few institutions that seem to have learned some lessons from history. It also assumes that people have not changed much in recorded time and that there are certain eternal truths about human nature. These assumptions apply to the subject we are here to discuss today: competing with the Postal Service.

The first “postal services” were established by the Romans. They understood the importance of rapid communications to preserve the far-flung organization of a vast empire. In fact, the Roman road system was essentially built to carry those communications, most of them military or state business. The infrastructure for that communication system heralded a modern type of market economy for the Roman Empire.

Subsequently, people marveled at the prowess of Genghis Khan in assembling his trans-Asiatic empire. However, few people recall the exquisite communications or post system he established for the purpose of controlling that vast empire, just as the Romans before him had done.

A similar pattern was reproduced with the emergence of modern society in the late Middle Ages. Modern postal systems had their inception in England during the reign of Charles I, who desired not only to have good communications but also to extort substantial taxes from the people who wanted to communicate with one another. This miscalculated overreach of authority literally cost him his life; he was beheaded.

I am sorry to report that in the recent past the U.S. Postal Service has exhibited the same lack of judgment that proved so costly to Charles I by overextending its authority beyond that which was intended by Congress when in 1871 it gave the Post Office a monopoly on the transportation of letters in this country. Prior to that time, the movement of mail was mostly a private endeavor. However, as the country moved in the post–Civil War era toward achieving its “manifest destiny,” it became extremely important to establish a system of communications capable of connecting all the points of the growing domestic economy. I am confident that the lawmakers who enacted the 1871 postal monopoly law clearly understood the meaning of the word “letter,” a term whose common usage had long been established.

Most physical items in the 1870s were relatively large and bulky and were transported by private transportation companies. It is noteworthy that they continued to provide that service even after the Post Office was given its monopoly on first-class letters. Many famous names with which we are familiar today, among them Wells Fargo and American Express, were in the business of transporting these physical items from one point to another. However, in the early years of the 20th century the distinction between the movement of things and letters began to blur. We started sending through the mail items that did not conform to Congress’s understanding of the commonsense definition of the word “letter” under the 1871 postal monopoly law. I assume this development was directly related to the creation of the Sears Roebuck catalog. I read recently that the number of catalogs delivered in this country grew, in a relatively short period of time, from a yearly average of 6.5 billion in 1908 to approximately 13 billion in 1925.

Moreover, commodities, such as clothes, farm implements, and household items, began to be smaller and have more value. In addition, these commodities were no longer produced locally and thus had to be moved from one point to another. The increase in long-distance commerce generated by these new circumstances in turn produced an increase in the flow of commercial papers like waybills and printed advertisements. Correspondingly, the Post Office unilaterally added to its “letter” monopoly the movement of “commercial papers” and “advertisements” even though Congress did not explicitly or implicitly intend for the Post Office to have a monopoly on carrying these items. Thus, the Post Office’s heavy-handed expansion of its monopoly from letters to other types of documents was accomplished through very aggressive legal steps. It continued this practice following the Postal Reorganization Act of 1970, which, inter alia, redesignated the Post Office as the U.S. Postal Service (USPS) in 1971.

Postal Service Imperialism

In one famous incident in the 1970s, the USPS responded in the affirmative to the question, “Is a political bumper sticker a letter and thus subject to the postal monopoly?” The postal official who responded to the query did concede, however, that if the bumper sticker were affixed to a bumper he would not consider it a “letter.” This anecdote exemplifies the extent to which the USPS tried to overreach its monopoly authority. For many years, the USPS attempted to classify as “letters” and hence subject to its monopoly various types of items not commonly considered as such.

Fred Smith (left) and conference organizer Ed Hudgins share a laugh during the lively question period that followed Smith’s talk.
United Parcel Service’s (UPS’s) emergence as a transport delivery company in the early part of this century eventually posed a challenge to the USPS’s carriage of lightweight parcels. After World War II, UPS flourished as a department store delivery company. UPS did a marvelous job of developing over a number of decades an efficient nationwide parcel delivery system that was so effective in dealing with Washington on postal rate and other relevant matters that it actually had a de facto quasi-monopoly on the movement of lightweight parcels in the United States. UPS’s effectiveness along with other practical considerations, which are addressed below, compelled the Postal Service to rethink its participation in the movement of commodities and eventually to exit the parcel market.

The Postal Service discovered in the course of its daily operations that the equipment, the sorting facilities, the pickup and delivery vehicles—among other things—that function so well for the transportation of letters did not so easily accommodate the movement of bigger parcels and commodities. This difficulty is perceivable in the structure of the small postal jeep vehicles, which are specifically designed to allow the driver, who sits on the right side, to insert in post boxes lightweight publications and letters without having to leave his seat.

The Emergence of Express Mail Services

A few years ago a number of circumstances forced the USPS to rethink its expansionist strategy, which sought to encompass various items beyond its congressional mandate for a letter monopoly. In the early to mid-1970s the USPS became the subject of scathing criticism from postal customers whose very urgent parcels it failed to deliver in a timely manner. This significant shortcoming was publicized by the financial services industry and served to highlight the first breach in the USPS’s very broad definition of “letters,” which was set out in a series of postal monopoly regulations prom-ulgated by the Postal Service and not by Congress.

The USPS counterpoised this attack by excluding from its monopoly very urgent communications, which it classified as “letters” although most of them were not “letters” at all. They were bond rate sheets, abstracts, manuscripts, and all sorts of other documents whose late delivery had an adverse impact on the business of customers. The nature of those items made it necessary that they be delivered “absolutely, positively overnight,” to borrow a phrase coined for FedEx’s incipient transportation service, which was fast and reliable. Hence, the emergence of the private express mail business was a rational response to market demands. Moreover, it emanated from the necessity to counterbalance the USPS’s inefficiency by facilitating the movement of urgent communications, which the USPS duly recognized had to be excluded from postal monopoly regulations.

Notwithstanding its acknowledgment, the Postal Service attempted to carve for itself a niche in the market for an express mail service. However, it found itself unable to compete with the service features, the reliability, and the performance standards initiated by FedEx whose innovations were later emulated by UPS and Airborne. The USPS’s unsuccessful foray into the express mail market is best illustrated by its declining market share, which has gone from about 45 percent of a very small market in the mid-1970s to around 6 percent today. In contrast, FedEx has a comparative share of 50 percent of that particular segment of the overnight market. The rest is divided primarily between UPS and Airborne. The express mail portion of FedEx’s business actually accounts for a relatively small part of FedEx’s overall revenues and an even smaller part of FDX’s, FedEx’s parent company, revenues. Nevertheless, it is an extremely important segment of our business.

In the years that followed its rout from the express mail market, the Postal Service was content to focus mainly on the movement of invoices, letters, magazines, catalogs, and similar items. However, in the past decade or so it began to face a business problem with which many private companies have had to contend on numerous occasions: technological obsolescence. Letters and all the “things” that the Postal Service had subsequently categorized as such, which constituted the foundation of its monopoly, were now being diverted to an entirely different means of communication: electronic transmission. The Postal Service responded to this new innovative assault by diverting the revenue it derived from its monopoly on letters and their first cousins, publications and printed matter, and using the profits to reenter a business that was being handled successfully by the private sector.

Yet, its retreat from the overnight express mail business did not completely deter the USPS from exploring a new venture in this market. It developed a “quasi-express” product cleverly positioned between mail, which is considered slow and not very modern, and express, which is fast and provides instantaneous proof of delivery to customers. This new product was branded Priority Mail and it has, in essence, supplanted parcel post as the Postal Service’s packaged-goods transport endeavor.

The problem with the USPS’s vain attempts to compete in the express mail market is that there is not a shred of evidence that its entry into the field serves any public interests. There are, to be sure, important interests worthy of consideration, primarily those of postal workers and the postal family. However, a convincing argument has yet to be made to show that the public interest requires the Postal Service to use its monopoly on the movement of letters to gain an advantage in a service that can be and is being provided more efficiently by private enterprise. Moreover, it is noteworthy that these private companies, with which the USPS seeks to compete, pay taxes while the USPS does not; purchase license plates for vehicles, which the USPS does not; and, unlike the USPS, must comply with zoning restrictions and pay fees and other charges; are subject to customs laws; and are constrained by a host of government-imposed burdens.

False Advertisement?

It is not only vexing that the USPS takes the position not only that it can provide a competitive service like Priority Mail under the foregoing conditions but that it can also advertise it to the public without being subject to the same rules that govern private-sector advertising. This abuse of governmental privilege prompted Federal Express to file a lawsuit against the Postal Service for its Priority Mail advertisements because they were false and misleading. If a private enterprise like FedEx sought to imitate the USPS’s advertising practice, our company would undoubtedly be found liable for fraud. The Postal Service defended itself against our lawsuit by stating essentially the following: “We’re the Postal Service and we don’t have to obey those rules.” The “rules” to which the USPS made reference are provided under the Lanham Act, a federal law that prohibits deceptive competitive trade practices.

A recent Consumer Reports study published last year during peak season, the time it is most difficult for us to maintain the highest possible service levels for our customers, supports our contention that the Priority Mail advertisements are false and misleading under the Lanham Act. Consumer Reports found that FedEx’s overnight delivery service was reliable over approximately 97 percent of the time. Our very good and able competitor, UPS, had 94 percent overnight reliability. The USPS’s express mail overnight product, according to Consumer Reports, was 65 percent reliable. In the area of second-day delivery service, FedEx again led the pack with a reliability success rate of 97 percent, followed by UPS, which had a 90 percent rate. In contrast, the USPS, which spends hundreds of millions of dollars a year advertising Priority Mail as a two- to three-day (the latter in very small print) product, had a reliability success rate of 60 percent for the two-day service.

I want to reiterate my last statement to underscore FedEx’s point about USPS’s false advertising practices: Express Mail sent “overnight” via the USPS was not delivered overnight 35 percent of the time, and the USPS’s Priority Mail (two- to three-day service) was delivered as promised 60 percent of the time. The USPS states in defense of its appalling performance that its Priority Mail service is provided with the added premium (i.e., free of charge) of Saturday delivery, a service which private transportation companies provide at extra cost. Yet, anyone who goes to the post office and asks for Priority Mail service with the Saturday delivery feature will be told by the postal clerk that the USPS does not guarantee that feature. In a nutshell, the problem as I see it is this: despite vast differences between the Postal Service’s products and those of private express companies, the Postal Service advertises its products as comparable to ours. Therefore, in essence, the USPS’s advertising claim for such products is, to put it kindly, an incredible overreach. I would not go so far as to characterize this overreach as being as great as that exhibited by Charles I, but it is perhaps not far behind.

Legislative Reform

Now, let us consider the specific circumstances of our subject: we have a very large and distinguished public institution; it is the best in the world; it is a great value; it built this country; and it has an impressive history. I make this characterization sincerely. I like the people who work for our Postal Service. However, there are many things in American life that have had a great history, for example the calvary. Yet, we do not do cavalry charges anymore. We must recognize that there are many institutions that long ago passed into history. Therefore, the question that the United States needs to ask itself in 1999 is as follows: should this hallowed institution be allowed to diversify into new areas and provide services that taxpaying private enterprises provide more reliably and efficiently? I believe the answer to this question is no.

This is not to say that I do not understand quite clearly the political reality and the important private interests represented by the postal workers and their families. I also understand people’s interest in subsidized universal mail service, a relevant fact in the remote areas of the United States. Yet, it would be entirely reasonable to say that Congress should keep the USPS from encroaching upon competitive sectors like overnight and express mail services. Federal Express would endorse this position if we thought it were politically feasible.

However, since it is not, we support the McHugh bill (H.R. 22 in the 106th Congress) because it is a step in the right direction. It aims to separate the commercial business of the USPS, which should not be supported under any rationale by taxpayer or mailer subsidization, by moving it toward the time it should be handled on a purely commercial basis, probably by a privatized USPS, Inc. The McHugh bill would give the Postal Service time to adjust, time to become commercially more responsible. For example, it would allow the USPS to accept that it is subject to the same advertising laws as the rest of the express transportation industry. It would also begin the process of leveling the playing field. This last consideration is most important and necessary because no justification exists for the unfair advantage the USPS has been allowed to enjoy in the past few years: massive diversification without any rules to control its use of public privileges. I am also pleased to report that we applaud a recent law that shifts the representation of the United States in the Universal Postal Union from the USPS, which competes in areas where the private sector performs quite adequately, to the State Department, which has no self-interest to safeguard and thus is better able to consider the broader interests of all concerned parties in the UPU.

In closing, I would like to stress that at Federal Express we do not regard the Postal Service as an enemy. The problem I have described is not one of life, liberty, or the pursuit of happiness. Rather, it is a question of the transfer, backed by the full force of government, of rents from one sector of the economy to another. The following comparison illustrates my point: FedEx operates one flight a day to China, where there are all sorts of public institutions that engage in private business. If we follow the example of the Postal Service, why would it be impossible to contemplate a scenario wherein the Army would carry the freight of our country to China? The Army has a marvelous fleet of trucks and many skilled truck drivers. Given that it costs the taxpayer and the country a great deal to support the Army, consider how much money we could save if we were to expand the job responsibility of the Army to include the trucking business, thereby allowing us to cross-subsidize the purchase of a few extra Tomahawk missiles.

Far from being an outrageous fantasy, the foregoing illustration underscores the sophistry that underpins the Postal Service’s justification for cross-subsidizing universal mail service to remote Inuit villages in Alaska. The notion that cross-subsidization can be useful in that way is a fallacy. The few examples we have in the postal area have shown exactly the opposite of their intended effects. Canada Post was allowed to acquire a private express delivery company and before long its monopoly rents were subsidizing the competitor in the commercial sector, not vice versa.

As I conclude my remarks on the Postal Service and postal reform, I hope I have made it clear that my point is not to disparage the Postal Service, which I believe is wonderful, has a marvelous historical record, and employs wonderful people. Rather, it is that I believe what the USPS is attempting to do simply does not correspond with the values of the United States of America and is not in the best interest of the citizens of this country.

This article originally appeared in the March/April 1999 edition of Cato Policy Report.
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