The notion that the Postal Service is losing $1.50 on every Amazon delivery has become something of a meme, but unless you have a perverse sense of humor, it’s not very funny.
Trump’s tweets attacking the deal between the Postal Service and Amazon have recklessly misled the country about two of its largest employers, unfairly driven down Amazon’s stock prices, and spawned a Presidential task force that will inevitably produce recommendations for further privatization of the post office.
Even though his motive for criticizing the Amazon deal is transparent — it’s an easy way to attack the Washington Post and its owner, Jeff Bezos, who also happens to be the founder and CEO of Amazon — Trump is not totally to blame for his claim that the Postal Service is undercharging on Amazon deliveries.
The figure Trump cites in his tweets comes from an op-ed in the Wall Street Journal by Josh Sandbulte (July 13, 2017) that was based on an equities analysis by Citigroup (“The Free Shipping Tax,” April 18, 2017).
Citigroup was recommending FedEx and UPS stocks as good “buy opportunities” because a “day of reckoning” is coming when the Postal Service will have to make big increases in parcel prices, much to the advantage of its competitors. In the meantime, claims Citigroup, taxpayers are essentially paying for the free shipping offered by Amazon.
News outlets have repeatedly referenced the Citigroup report without questioning it. According to a search on Lexis-Nexis, since Trump’s tweets began last December, there have been about 2,500 news reports mentioning Trump, Amazon, and the Postal Service (including the republication of the same article in different outlets). About 400 of these articles have referred to Trump’s claim about the $1.50 undercharge on Amazon deliveries, and about 300 have mentioned the Citigroup report.
Almost without exception these articles cite Citigroup’s claim that the Postal Service is undercharging Amazon as if it were true. Too bad it’s not.
As discussed at length in this previous post from April 3, 2018 (“Talk about Fake News: How a flawed Citigroup analysis led to Trump’s bogus tweets about Amazon and the Postal Service”), the Citigroup report bases its claim on two “scenarios.” One of these scenarios uses absurd assumptions, and the other is just plain wrong.
Scenario #1: Parcels cover retiree health costs
In the first scenario, Citigroup suggests that the “true cost” of delivering parcels should include outstanding obligations to the Postal Service’s Retiree Health Benefit Fund (RHBF).
According to this 2017 OIG report, there is currently about $52 billion in the fund, and the ultimate liability for postal retirees, decades down the road, is about $104 billion. (As the OIG points out, from FY 2007 to FY 2016, the Postal Service lost $62.4 billion, with $54.8 billion of that total related to the RHBF.)
In this scenario, parcel shipping is required to cover annual payments of about $6 billion to the RHBF as well as $2 to $3 billion for anticipated increases in USPS operating costs. Shipping services would thus need to generate additional revenue of $8.3 billion in 2017, growing to $9.6 billion in 2019. That, Citigroup estimates, would require an increase of 50 percent on shipping services, or about $1.75 per parcel (from $3.50 to $5.25).
That scenario is absurd for two reasons. First, there is no chance that the RHBF obligation would have to be paid off in such a way. When the RHBF was created in 2006, Congress and the Bush administration agreed on ten annual payments of $5.5 billion primarily for budget scoring reasons, not an actual necessity. Any reasonable solution to the problems caused by this mandate will involve re-amortizing the obligation over a longer period of time, like 40 years, which would mean annual contributions of about one billion dollars.
Second of all, the Citigroup report assumes that the additional revenue to cover the RHBF and the increase in operating expenses would need to come only from raising parcel rates. But there’s no basis for this assumption, and the report provides none.
If pressed to raise rates to cover these costs, the Postal Service would do some sort of across-the-board increase. To raise an additional $1 billion annually, the Postal Service (with annual revenues of about $70 billion) would need to raise rates across-the-board by about 1.5 percent. The cost for a First Class stamp would go up about a penny, and the average price for an Amazon delivery, currently about $2, would go up about three cents.
Expressed in terms of how much the unfunded RHBF liability is “costing” taxpayers, one might say that Amazon is getting is a three-cent “subsidy” on every parcel. But even that would be misleading, since the Postal Service does not receive tax dollars and there’s no reason why it will need to do so in the future.
In any case, a three-cent “undercharge” is nothing to tweet about.
Scenario #2: A “fair” contribution to institutional costs
As for Citigroup’s second scenario, on this one they simply made a big mistake than renders the scenario meaningless.
In 2006, the Postal Regulatory Commission (formerly the Rate Commission) determined that competitive products (aka shipping services) should cover 5.5 percent of the Postal Service’s institutional (or fixed) costs. Since then, parcels have come to represent a much larger portion of the Postal Service’s business, and UPS has been arguing that the 5.5 percent is much too low. According to briefs and studies filed by UPS with the PRC, the contribution should match the percentage of total revenues that competitive products bring in — about 24.6 percent in 2016 and 29 percent in 2017.
That approach to determining a “fair” contribution has been rejected by the Commission (as well as numerous economists) on several occasions, for a variety of reasons (mainly because it essentially eliminates any distinction between fixed and variable costs). Citigroup ignores this fact and proceeds to describe a scenario, advocated by UPS, in which competitive products are required to contribute 24.6 percent to fixed costs.
The difference between a 5.5 percent contribution and a 24.6 percent contribution comes to about $7 billion a year — the amount that would need to be figured into pricing on parcels. This would require raising shipping rates by nearly as much as in the first scenario, about $1.46 per package — the number cited in Sandbulte’s Wall Street Journal op-ed that became the basis of Trump’s tweets.
The problem here is that shipping services don’t cover only 5.5 percent of fixed costs. That’s just the floor set in 2006. Since then, as the e-commerce business has grown, competitive produces have consistently contributed much more than that — 12.6 percent in 2014, 13.3 percent in 2015, and 16.5 percent in 2016. In 2017, competitive products covered about 23 percent of institutional costs. There was no $7 billion gap between “actual” contribution and the “fair” contribution of 24.6 percent. Citigroup simply misunderstood that 5.5 percent was the floor, not the actual contribution. Scenario number 2 is just plain wrong.
Three who got it right
These flaws in the Citigroup report should not have been all that hard to identify. But dozens and dozens of reporters have just repeated the Citigroup conclusions as fact. As far as we have been able to determine, there have been only three exceptions, and they deserve mention.
Eric Katz, writing for Government Executive on April 2, 2018 (“What Trump Is Getting Wrong About the Postal Service and Amazon”) points out the error in the Citigroup analysis concerning the 5.5 percent figure in scenario #2. He also notes that “Congress is currently considering legislation with bipartisan support to virtually eliminate the prefunding burden and amortize any remaining liabilities over the course of 40 years,” which takes care of scenario #1.
Manuela Tobias, in an article for Politifact.com (“No, USPS doesn’t lose $1.46 on every Amazon package,” April 6, 2018), thoroughly explained the problems with Citigroup’s second scenario in a fact-check piece about conservative pundit Eric Bolling’s retweeting of Trump’s claim about the $1.46 undercharge. Tobias actually picked up the phone and called the PRC as well as reviewing the relevant comments in the PRC dockets.
Josh Barrow, an editor at Business Insider, also explained the flaws in the both scenarios in an April 7, 2018, piece entitled “One of the central arguments in Trump’s attacks on Amazon is all wrong — and it’s Citigroup’s fault.” Barrow spoke with Citi’s lead analyst on the report, Christian Wetherbee, and asked him whether it was simply a mistake that the figures on the post office’s actual contribution to institutional costs weren’t used to calculate how much it would need to raise prices to meet the benchmark proposed by UPS.
“I’d love to say it wasn’t a mistake,” Wetherbee said. “It’s not something that should have been in there.”
While acknowledging his team’s error with respect to scenario #2, Wetherbee has continued to defend his report, mostly by focusing on scenario #1.
In an April 3rd article in Business Insider (“Trump says a new report backs up his beef with Amazon’s Post Office deal — here’s why he’s wrong”), Wetherbee told reporter Kate Taylor,
“We never said Amazon is getting a $1.50 subsidy. If you read what that number is, it’s the total package business is priced below cost. It has nothing to do with Amazon specifically.”
In fact, Wetherbee’s report is largely about the potential impacts on Amazon of a large USPS price increase, and while the $1.50 is not meant to apply specifically to Amazon, his report does say that due to either of his two scenarios parcels overall will ultimately get a 50 percent price hike (which would come to about $1 per Amazon delivery). In the meantime, he says, Amazon parcels are getting a substantial subsidy.
In another April 3rd article, this one on NPR by Alina Selyukh, Wetherbee suggested that the rates on packages generally aren’t enough to cover all of the expenses across the entire Postal Service. “They do make money; there’s revenue associated with their business — what they’re not taking care of is the retiree benefits,” he said. “When they don’t make the pension payments … that’s when you get the big splashy losses.”
Wetherbee thus reiterates his report’s assumption that revenue from parcels should be taking care of the RHBF obligation, but he doesn’t explain (at least in the interview quotes) why shipping services alone would need to make up for all those “big splashy losses” and why they would need to do so in a very short time-frame as well.
Spreading the news
The mainstream media have repeatedly cited the Citigroup report as if it were true, without examining its underlying assumptions.
The nation’s newspaper of record has cited the Citigroup report in at least three articles, and in none of these cases did it offer any analysis about its veracity.
Michael Gold and Katie Rogers had a piece in the Times aptly titled “The Facts Behind Trump’s Tweets on Amazon, Taxes and the Postal Service” (March 29, 2018). Citing Citigroup’s case “that the agency was charging below market rates for package delivery,” the authors reply, “If that is the case, Amazon, widely believed to be one of the Postal Service’s biggest customers, certainly benefits.” The big “if” goes unexamined.
In another New York Times article (“Is Amazon Bad for the Postal Service? Or Its Savior?” April 4, 2018), Nick Wingfield cites Citigroup’s claim that if the full costs “were fairly accounted for, it would cost $1.46 more to ship an average package through the Postal Service.” Wingfield follows up with a comment from Joseph Corbett, the chief financial officer of the Postal Service, saying that the report provided an “inaccurate and unfair account” of its package business. But there’s nothing more about why the Citigroup report is inaccurate.
Michael Shear (“Trump, Having Denounced Amazon’s Shipping Deal, Orders Review of Postal Service,” New York Times, April 12, 2018) suggests that Trump’s task force might make recommendations that “take into account previous studies, including a 2017 analysis by Citigroup, which concluded that the service was charging below market rates for package delivery.” Shear has nothing to say about the accuracy of the Citigroup report.
The Washington Post, which you might expect to push back against Trump’s tweets, has mentioned the Citigroup report in a few pieces, again without questioning its accuracy.
Phillip Bump wrote a pretty good analysis of Trump’s claim (“Trump vs. Amazon: The sequel,” March 29, 2018), but he simply quotes Citigroup’s conclusion that “the USPS does not act as a rational price-setter in the parcel market…. To this day, price still does not cover all-in costs.” According to the Citigroup report, writes Bump, “the average cost of parcel shipments might jump from $3.51 to $4.97 if the USPS appropriately priced the service.” Bump doesn’t question this conclusion, nor does he cite anyone who might.
Also on March 29, 2017, Brian Fung wrote a WaPo piece (“Cheap Amazon shipping leaves the Postal Service ‘dumber and poorer,’ Trump says”) in which he discusses Sandbulte’s op-ed and the Citigroup report, again without questioning the report’s conclusions.
Marc Fisher (“Trump, Bezos: Billionaires across a cultural divide,” Washington Post, April 6, 2018) points out that Trump’s claim the Postal Service will lose $1.50 on each Amazon delivery comes from the Citigroup study, and he goes on to note the study’s conclusion that the price on parcels ‘has been maintained at artificially low levels, creating . . . a government-enforced taxpayer subsidization’ and putting FedEx and United Parcel Service at a competitive disadvantage.”
Fisher acknowledges that “Trump’s statements about Amazon and the Postal Service have been called into question by Wall Street analysts and journalists,” but he doesn’t explain why, and one is left thinking Citigroup is right even if Trump is wrong.
Given that an op-ed in the Wall Street Journal was the cause of much of the brouhaha, one might hope the Journal would do something to correct the record. Unfortunately, one would be disappointed. The Journal does not seem to have published any news articles discussing the Citigroup report, and the only references to the report appear in two op-eds.
On April 2, 2018, the Journal’s Editorial Board recalled Sandbulte’s contention that the Postal Service should allocate more of its fixed costs to packages, and it cites the Citigroup analysis that estimated “parcels would on average cost $1.46 more if shippers were required to absorb a greater share.” The editorial then adds, “The post office isn’t a profit-maximizing business, so perhaps the agency is leaving money on the table.” That big “perhaps” is also left on the table.
In a more recent op-ed in the WSJ (“The Post Office and Trump’s Culture War,” April 21, 2018), Holman Jenkins, Jr., writes, “Mr. Trump is right: The post office can be said to be subsidizing Amazon because the U.S. Postal Service subsidizes business generally, and ultimately is subsidized by the taxpayer to do so. Don’t let post-office propagandists buffalo you.” You can imagine where Jenkins is going, so nuff said on that.
One could go on and on quoting from the hundreds of articles that have cited the Citigroup report without questioning its accuracy. It’s easy to blame Trump for spreading fake news, but in this case, the mainstream media deserve plenty of credit too.
(Image credit: How false news can spread)