The sentiment to provide banking for the poor is admirable but misplaced.
Last month, the Office of the Inspector General of the U.S. Postal Service issued a white paper arguing that the agency “is well positioned to provide nonbank financial services to those whose needs are not being met by the traditional financial sector.” The Postal Service wants to bolster its faltering finances, but the proposal’s most prominent supporters, including Sen. Elizabeth Warren, D-Mass., care more about improving financial access for the less fortunate.
I’ve read this script before. It’s the story of the Fannie Mae and Freddie Mac debacle, in which progressive legislators team up with financially ambitious government-created entities to start a supposedly win-win business that earns profits and helps the poor. That story ended in a multibillion-dollar bailout, and it’s hard to be optimistic about a radical mission expansion for the Postal Service.
Like many 20th-century corporate behemoths, the post office’s future business model is uncertain, and its legacy obligations are vast. Revenues from first-class mail shrank by almost 20 percent between 2008 and 2012, and the Postal Service’s liabilities exceed its assets by about $40 billion. The service lost about $5 billion last year, which is at least an improvement over its $15 billion loss in 2012.
These losses include the approximately $5 billion or so that the post office must set aside annually to cover the future costs of current employees’ retirement health benefits. The Postal Service deeply dislikes the prefunding requirement. But as the Government Accountability Office notes, mail volumes and revenues are projected to keep declining, which can only make it harder over time for the Postal Service to pay the cost of its retiree health benefits. Declining companies — like people facing retirement — should be saving for leaner years ahead.
The natural path forward is for the post office to continue raising fees and cutting expenses. Speed is not the comparative advantage of first-class mail relative to e-mail. Congress should allow the Postal Service to reduce the number of delivery days. The Postal Regulatory Commission should allow permanent increases in the cost of first-class stamps. The post office can also consider moneymaking innovations that make good use of its core competencies, such as delivering packages on Sunday for Amazon.
But for the post office to enter an entirely different business — such as banking for the poor — is more likely to bring congressional allies than economic success.
The inspector general’s report notes that the average household underserved by conventional financial institutions spends $2,412 a year on interest and fees for alternative services. This is a troubling problem. But before we conclude that the Postal Service provides the natural solution, we must ask why market competition doesn’t reduce banking costs for the less fortunate. After all, the post office is essentially arguing that there is a profit opportunity here that other, less-perspicacious investors have missed.
The right-wing view is that the low-income population is costly to service and that high interest rates offset high rates of default. The left-wing view is that shifty lenders engage in unscrupulous practices that snare the underinformed. There is truth in both views, which is why scrutiny on payday lending is entirely reasonable. Regulatory agencies should support nonprofit credit unions that want to engage more with the financially underserved, for these entities already know about lending.
The inspector general’s report notes that the Postal Service already has offices in high-poverty areas and that postal offices in other countries offer banking services. Yet the presence of office space isn’t much of an asset, because real estate in low-income areas is cheap. Far more important is the human capital — the knowledge and experience — needed to successfully lend to the poor, but the Postal Service has not developed such skills. Moreover, political pressure will make it difficult for the post office to ever collect on delinquent loans. Many foreign postal savings systems are deeply troubled, and our own post office shuttered its savings system, amid declining deposits, almost 50 years ago.
We must not simply ignore the past. The lesson of Fannie Mae and Freddie Mac is that when public entities do too much, they may gain congressional allies, but they also lose discipline and the ability to link costs and benefits. A politically palatable mission statement can lead congressional supporters to understate the risks of oceans of red ink.
Warren is right to crusade for better financial conditions for the poor, but expecting an already overstretched postal agency to tackle this challenge is a mistake.
Edward L. Glaeser, a Harvard economist, is director of the Rappaport Institute for Greater Boston. He wrote this article for the Boston Globe.
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