Stamping Out Misconceptions

by Don Boudreaux on December 22, 2007

in Myths and Fallacies

Today’s Wall Street Journal published this letter of mine:

Opposed to privatizing
first-class mail delivery, Edwin Andrews asks "How do you suppose rural
locations will be served by a company that is interested solely in the
bottom line"? (Letters, Dec. 4, responding to "Don’t Be a Square At the Post Office," page one, Nov. 15).

Is this question
serious? Firms in the private sector earn higher profits the better
they are at discovering cost-effective ways of meeting consumer
demands. For example, Wal-Mart got its successful start by creatively
figuring out how to serve small-town America. Especially as the costs
of communication and transportation continue to fall, the false notion
that folks living in rural areas would not be served by private mail
deliverers should be stamped out.

Donald J. Boudreaux
Chairman
Department of Economics
George Mason University
Fairfax, Va.

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{ 24 comments }

Don December 22, 2007 at 10:26 pm

How well does FedEx or UPS serve rural areas?

Don December 22, 2007 at 10:27 pm

How well does FedEx or UPS serve rural areas?

Gil December 22, 2007 at 11:38 pm

A term you don't hear nowadays but was a common term in the 1800s is that of 'ghost town'. In laissez-faire people were more mobile as there weren't any subsidies for living in a dying small town. Apparently 'small, isolated rural town' is the modern term for a ghost town that won't die because of government intervention.

Sam Grove December 23, 2007 at 12:58 am

"How do you suppose rural locations will be served by a company that is interested solely in the bottom line"?

There is a very effective way of finding out.

brotio December 23, 2007 at 2:53 am

Gil,

That's probably the first thing you've ever posted that I agree with 100%.

John Dewey December 23, 2007 at 7:33 am

Don: How well does FedEx or UPS serve rural areas?

I'm so glad you asked!

As an industrial engineer at FedEx two decades ago, I coordinated FedEx's delivery expansion into previously unserved rural zip codes in the western states.

In either 1988 or 1989, FedEx CEO Fred Smith directed Ground Operations to offer delivery service to all continental U.S. zip codes. His orders came immediately after UPS advertised they delivered to more zip codes than did FedEx.

A tiny percentage of FedEx deliveries – those going to very remote areas – were accomplished by independent contractors. These couriers worked on an as-needed basis, as the remote areas they served often had no deliveries for several days. As I recall, we primarily used retirees and others unemployed by choice to make these deliveries.

FedEx today offers priority delivery service to all zip codes in the 48 states and Hawaii. They offer pickup service in over 99% of all zip codes, with the exceptions being very remote rural areas.

It is important to remember that FedEx does not offer the same service as the USPS. They are prohibited from providing non-priority pickup and delivery services – the USPS monopoly. We cannot make conclusions about what FedEx and USPS would offer in the non-priority letter and bulk mail categories if allowed to do so. But we can conclude this: competition between private companies – FedEx and USPS – was exactly the reason that all rural zip codes now enjoy timely delivery of packages and priority mail.

John Dewey December 23, 2007 at 7:36 am

Correction to last post:

"We cannot make conclusions about what FedEx and UPS (United Parcel Service) would offer …"

Gil December 23, 2007 at 8:14 am

awwwwww . . .
8)

SheetWise December 23, 2007 at 10:07 am

We cannot make conclusions about what FedEx and USPS would offer in the non-priority letter and bulk mail categories if allowed to do so.

There is another piece of evidence. USPS charges more than UPS and FedEx Ground to send most parcels, with service that is so inferior that it's really an insult to compare the services. Since USPS has a monopoly on mail, services rural routes, and delivers daily — how is it possible that they can't competitively deliver a package to an address they are going to in any case. FedEx and UPS have to add every rural recipient to their route.

Dano December 23, 2007 at 10:29 am

Slightly off topic but does USPS still audit companies' use of FedEx and UPS? Years ago the WSJ had an article about the postal service fining GE and a couple of other companies for sending things via FedEx or UPS when, in the opinion of the USPS, it should have gone via first class mail.

Per Kurowski December 23, 2007 at 10:52 am

You should not “stamp” anything out since you are supposed to argue your way out, like for instance John Sweeney does well. Stamping things out can be a most dangerous proceeding and lead to disastrous consequences; like when the regulators of the financial sector thought that they with some cute looking minimum capital requirements based on risks and the appointment of the credit rating agencies as the financial overseers of the world, had forever stamped risk out of banking

In this case, if you can substitute active competition, FedEx and USPS, for a government monopoly, USPS, you should be able to obtain great results, at least initially, as long as the competition is there and for real. In many other markets unfortunately the service of special needs does not necessarily survive that long and we could also see a future ad campaign based on “We care about you living in the cities and we do not want you to subsidize a farmer… that is getting too many subsidies anyhow!”

In the long run we’ll have to see. We might just end up with John Farmer having to go to town to collect priority mail and deliver it to himself and getting paid for this service at the same rates someone is invoiced to send him the letter in the first place, less of course the franchise owner’s share. Outsourcing to oneself could be the way to go!

shawn December 23, 2007 at 12:04 pm

…let's also not forget about DHL, which seems to be giving the other two a run for their money. Competition is alive and well in parcel delivery.

Sam Grove December 23, 2007 at 1:33 pm

the false notion that folks living in rural areas would not be served by private mail deliverers should be stamped out.

You should not “stamp” anything out since you are supposed to argue your way out,

So you are opposed to stamping out false notions?

The Albatross December 23, 2007 at 1:36 pm

This is my favourite paragraph from the Wikipedia article on the U.S. Postal service.

"During the 1830s and 1840s several entrepreneurs started their own letter mail delivery companies, with the intent of ending the postal monopoly. These included Lysander Spooner and his American Letter Mail Company,[8] Henry Wells (of Wells Fargo) and Alvin Adams. To begin with, they were financially successful. However they were forced out of business by several postal reforms leading to lower postage rates in the 1840s and 1850s as well as Congressional legislation enforcing the mail monopoly, or in the case of the Pony Express, became mail contractors.[9][10] The average price charged by the Post Office to mail a letter in 1845 was 14.5 cents, whereas the private postal systems generally charged between 5 and 6.5 cents. By 1851, the Post Office had cut their rates to 3 cents, which has been cited as the main factor in driving the private mail companies out of business. Another consequence of the rate cut was that by 1860, the formerly self-supporting Post Office depended on the Treasury for half its income.[11]"

Larry Sheldon December 23, 2007 at 2:45 pm

Not only FedEx and UPS (which often make a couple of trips "out here"–even in mid-summer), but DHL, and several others.

And without subsidies that I know of, they are price-competitive against the service.

(Out here the Rural USPS person (not clear if she is an RFD contractor or a USPS employee) will take outbound mail (dunno about parcels anymore) but the other carriers will come on demand.

Stephen Reed December 23, 2007 at 4:18 pm

A more fundamental question: With so many good substitutes to old fashioned mail delivery, why should tax payers subsidize mail delivery to very remote areas if the mail is so unimportant that the sender is not willing to cover the costs of that delivery?

Chris December 23, 2007 at 4:26 pm

Servicing anyone in a remote location requires some kind of invisible cross-subsidy, whether it's the government or a company. So another result of passing more realistic costs of remote servicing onto the remote customer is that they reappraise the cost and the value of the reasons they chose to live there, and that then drives (long story short) we all end up paying the actual cost (much more) for beef (and other stuff they produce out there – minerals, vegetables), and then we find other, cheaper things to eat.

Bob December 23, 2007 at 8:20 pm

Anyone who wants to defend the government monopoly by saying that the rural areas would be ignored by private companies, should be aware that the USPS has been closing rural post offices at an alarming rate for at least two decades. In addition, most rural mail is carried by contractors (so-called Star Routes) anyway. It becomes a matter of paying the contractors from a company, rather than from the U. S. government.

In addition, many rural users get their primary utilities through co-ops, which often provide electricity, satellite TV, and even telephone service. Mail carriage could easily be handled in the same way.

In California in the Gold Rush era, the U. S. mail was so unreliable, that companies like Wells Fargo carried the mail with a high degree of reliability and security. People had to pay Wells Fargo IN ADDITION TO the payment to the U. S. post office, even though the PO rarely touched the mail. Now, that's a government monopoly for you.

Kent Gatewood December 23, 2007 at 10:28 pm

Can we go through the entire federal budget this way?

To start it out, how much would an 18 year old who earns minimum wage with cost of living increases have at 68 if her 15.3 percent were put in an index fund instead of social security and medicare?

Lee Kelly December 24, 2007 at 6:29 am

We cannot make conclusions about what FedEx and USPS would offer in the non-priority letter and bulk mail categories if allowed to do so. – John Dewey

I have made such a conclusion, and I suspect you have, too. No need to pretend otherwise. It is only relevent that you hold that conclusion open to criticism and refutation.

saifedean December 24, 2007 at 12:53 pm

"How do you suppose rural locations will be served by a company that is interested solely in the bottom line"?

-By charging the people more for their mail. If you want to live in the end of the world, why should I (through taxes and higher stamp prices) pay for your mail?

It really is one of the weirdest things I've seen in America that I send a letter to an address a few blocks away in Manhattan for the same price that someone would send a letter from rural North Dakota to rural Arizona. Something has to be wrong in this. I don't think anyone is born with an inalienable human right to $0.41 postage stamps. People should pay the costs of their postage, not me.

True_Liberal December 24, 2007 at 9:06 pm

Bob informs: "the USPS has been closing rural post offices at an alarming rate for at least two decades."

Ummm – not alarming to ME.

True_Liberal December 24, 2007 at 9:07 pm

Bob informs: "the USPS has been closing rural post offices at an alarming rate for at least two decades."

Ummm – not alarming to ME.

John Dewey December 26, 2007 at 10:54 am

safeidean: "It really is one of the weirdest things I've seen in America that I send a letter to an address a few blocks away in Manhattan for the same price that someone would send a letter from rural North Dakota to rural Arizona. Something has to be wrong in this."

If not required by law, USPS would probably still do so. Costs to administer and police variable first class postage rates would exceed the revenue USPS might realize.

Consider the marginal costs for an intra-city letter and a typical rural-to-rural mail.

Sorting: Even with automation, sort labor is still very high for both intra-city and rural-to-rural letters.

Delivery: Delivery labor is less productive in North Dakota. But a rural mail carrier moving down a highway at 60 MPH can almost keep up with an urban mail carrier on foot encountering stop-lights and elevator delays. Urban carriers generally deliver door-to-door. Rural carriers stop at collection of boxes along the highway. Also, Manhattan's effective wage rate is much higher than Fargo's.

Transport: The marginal interstate transport cost for a 1 ounce letter is probably only a fraction of a cent.

I analyzed such sortin, delivery, and transport costs at FedEx for over a decade. IMO, marginal costs for rural-to-rural and intra-city letters are not that different.

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