Postal Service Banking
While Senator Elizabeth Warren (D., Mass.) may proudly brand herself a populist, in her latest crusade she is casting her lot with the fat cats. Warren wants to bestow banking privileges upon the United States Postal Service (USPS), an organization with executives living high on the hog even as, by Warren’s own admission, its “financial footing” is in doubt.
The USPS pleaded poverty last month as it raised the price of a first-class stamp from 46 cents to 49 cents and promised that more rate increases are on the way. In the meantime, it apparently hasn’t used this extra revenue to improve service, as many mailboxes in Maryland and Washington, D.C., have remained empty for almost two weeks, angering Maryland’s largely Democratic congressional delegation. “Constituents report that they are waiting for prescription medications which are a week overdue,” wrote Senator Barbara Mikulski (D., Md.) in a February 21 letter to Postmaster General Patrick Donahoe.
Yet if Donahoe’s own mail is affected, he can probably just buy a pharmacy. In 2012, the USPS managed to pay him $512,000 in total compensation, according to page 67 of the USPS annual report. And in 2008, then–Postmaster General John E. Potter received more than $800,000 in total compensation and retirement benefits. As the Washington Times noted, “that is more than double the salary for President Obama.”
Dozens of other USPS executives also rank among the vaunted “1 percent.” According to the Federal Times, “As the U.S. Postal Service was careening toward a record $8.5 billion loss in 2010, it was paying more than three dozen top executives and officers salaries and bonuses exceeding [those] of Cabinet secretaries.” In fact, in 2012, Representative Kathy Hochul (D., N.Y.) and other House Democrats sponsored legislation to limit USPS executive salaries to the same level as Cabinet secretaries.
The USPS and its defenders respond that this compensation isn’t as high as that of executives at competitors Federal Express and United Parcel Service, and Warren might argue that it’s not as high as that of the CEOs of the nation’s biggest banks. But it’s certainly higher than the average compensation of the top folks at community banks and credit unions, as well as other lenders that will be hurt if the USPS expands into banking. And it is certainly higher than that of the average taxpayer, who will almost certainly be even further on the hook for the USPS’s woes. Though the USPS is losing money to the tune of billions of dollars a year and may require a direct taxpayer bailout, it still has been granted enough privileges by the government to crush private-sector competitors, such as small financial institutions, should it go into their line of business.
The Postal Reorganization Act of 1970 changed the Post Office into the Postal Service, a government-owned enterprise that must, under the terms of the Act, be largely self-supporting. It’s run by a board of governors appointed by the president of the United States and approved by the Senate.
But the USPS still retains many privileges, such as exemptions from income taxes and state and local property and sales taxes. The Private Express Statutes, which had given the U.S. Post Office a monopoly over first-class mail delivery since 1845, also apply to the successor Postal Service.
Under the law, companies like FedEx and UPS can compete with the USPS for “urgent” deliveries. But rivals must charge at least $3 or twice the Postal Service “first class” rate, whichever is higher, for anything they deliver.
Yet Warren and many others on the Left, including those who call themselves “anti-monopoly,” gloss over these privileges in backing this new postal venture. On the Huffington Post, Warren opines, “If the Postal Service offered basic banking services — nothing fancy, just basic bill paying, check cashing, and small dollar loans — then it could provide affordable financial services for underserved families, and, at the same time, shore up its own financial footing.” Warren puts much faith in a report from the USPS inspector general estimating that the USPS could garner $8.9 billion in annual revenues (but not necessarily profits — an important distinction, as we shall see) from such banking ventures, and she maintains that “the Postal Service is well positioned to provide non-bank financial services to those whose needs are not being met by the traditional financial sector.”
Yet financial services for low-income Americans are already being provided by many entrepreneurs in the private sector, and to the extent they are not, it is mostly because of the regulatory burdens from Dodd-Frank and extraconstitutional crackdowns such as the Obama administration’s Operation Choke Point. The new postal plan is the latest chapter in what my Competitive Enterprise Institute (CEI) colleague Iain Murray has dubbed “Obamaloans” — a scheme that envisions “the regulatory nationalization of the U.S. financial system . . . from top to bottom.”
On NRO, Murray writes that after “waging subtle war on the small financial businesses” that serve low-income consumers, the Obama administration is “subtly building an infrastructure to allow the federal government to lend money to the poor through a network of intermediaries, financed by taxpayers rather than investors.”
Only now, with the postal putsch, it’s not so subtle any more. The Treasury Department is still quietly funding so-called Community Development Financial Institutions to provide small loans, as Murray documents, but Obamaloan advocates are now pounding the table with the “public option” of the Postal Service.
And some don’t even bother trying to hide the fact that they view the postal plan not as an additional option, but as a takeover. Collectivist financial writer David Dayen expresses his desire in The New Republic that postal banking will “help drive out of business some of the most crooked companies in America.”
Dayen doesn’t specify which of the USPS’s potential competitors he believes are “crooked” or spell out the evidence against them, but Dodd-Frank and regulatory actions have certainly driven many community banks, credit unions, and other legitimate financial-service providers out of the business of serving low-income consumers.
Dodd-Frank’s Durbin Amendment, which places strict price controls on what banks and credits unions may charge retailers to process debit-card purchases (greatly benefiting the nation’s wealthiest retail chains, such as Walmart and Home Depot), has resulted in a dramatic reduction in free checking for low-balance accounts. As a result, notes George Mason University law professor (and board member of CEI) Todd Zywicki, the Durbin Amendment is partly responsible for an increase in the number of unbanked households from 9 million to 10 million between 2009 and 2011.
Because of Dodd-Frank and Durbin and because of bad economic times in general, many Americans have gravitated to “alternative” financial-service providers such as pawn shops and payday lenders. The growing popularity of reality-television series about pawn shops — such as Pawn Stars and Hardcore Pawn — has helped boost trust in pawn shops by showing that the terms of both loans and sales are justified by the risks these entrepreneurs take.
Indeed, a closer look at the much-distorted interest charges of payday and other small-dollar lenders shows that these are also justified by risk and that these institutions are often the best among the available options for low-income Americans. In the bizarre regulatory world of “annual percentage rates” (APRs), a payday lender’s $15 charge on a two-week $100 loan suddenly becomes an APR of 390 percent. As the great economist Thomas Sowell has written, “Using this kind of reasoning — or lack of reasoning — you could quote the price of salmon as $15,000 a ton or say a hotel room rents for $36,000 a year, when no consumer buys a ton of salmon and few people stay in a hotel room all year.”
Moreover, as I note in a CEI OnPoint titled “The 400 Percent Loan, the $36,000 Hotel Room, and the Unicorn,” even if we were to concede the APR as a valid measurement for such loans, we should then note that bounced-check fees can be equivalent to a 4,000 percent APR. Also, “the fees associated with charging more than the credit limit on a credit card are in many cases significantly higher than the fee on an equivalent payday loan,” writes Kelly Edmiston, senior economist at the Federal Reserve Bank of Kansas City.
And this gets us back to the fuzzy math of the USPS inspector general’s report. The report postulates that the USPS could provide loans at a 28 percent APR. Yet that comes to earnings for the Postal Service of at most $1.08 per $100 over the two-week pay period of the borrower’s loans. Commenting on a proposed 36 percent APR rate control, a spokesman for the Utah Consumer Lending Association said, “Payday advance lenders could not even meet employee payroll at that rate, let alone cover other fixed business expenses and make a profit. ”
Chances are that the USPS would have to spend much, much more than that just to retrain employees to provide financial services — if indeed it didn’t need to hire new employees to do so.
The report says the USPS could reap $8.9 billion in “revenues” a year, but it carefully sidesteps the question of whether the USPS could actually turn a profit with these loans, even if it were the only loan game in town. It cautions, “This work is not in any way intended to be a business plan, which would be necessary for the Postal Service to closely examine the potential costs, revenue, and other details for any new services.”
Even Adam Levitin, the Georgetown University law professor who was Warren’s coauthor on various academic papers, writes in American Banker, “To the extent that a postal banking system is designed to provide low-cost services to consumers, it is potentially at odds with the USPS’s need to find new revenue sources. “
One proposal in the USPS report should give special pause to those willing to give this power to the “friendly neighborhood post office.” It says that, to help minimize losses, the USPS could grab tax refunds as “collateral.” This is of course something no payday lender or pawn shop can do. It’s a power reserved only for government agencies “here to help you.”
There are many reforms that could produce more options in the small-loan market by lifting government barriers to genuine private-sector competition. The de facto moratorium, begun during the Bush administration, that denies retailers like Walmart and Home Depot the ability to create banking subsidiaries needs to go. Bipartisan legislation to allow nonbank lenders to provide across-state-lines short-term monthly installment loans, praised by many experts as a sustainable borrowing method for the poor, should be enacted. But granting banking privileges to a government organization with monopoly powers over mail is an idea that must be marked “Return to Sender.”