NCPA - National Center for Policy Analysis


September 1, 2004

By borrowing directly from the U.S. Treasury, the U.S. Postal Service enjoys significantly lower interest rates than even the most credit worthy private-sector business can obtain. The USPS usually pays about 1/8th a percentage point above the interest rate on Treasury securities.

This provides an unfair advantage over private postal competitors, says Michael Schulyer of the Institute for Research on the Economics of Taxation. Congress is looking at ways to remedy this problem, but current proposals would create additional problems. To finance products that Congress classifies as competitive, the Postal Service would be required to borrow from the private credit market and issue securities that would carry no government guarantee.

Theoretically, it would be required pay market rates of interest. But even though the obligations would not be backed by the full faith and credit of the U.S. government, there is an implied guarantee. Lender would treat them as no-risk securities, as they have the securities of government sponsored mortgage financiers Fannie Mae and Freddie Mac.

Thus, the Postal Service would still have access to low-cost financing that would create an illusion of market discipline where none exists:

  • Below market interest rates could finance a large wave of economically unjustified expansion by the Postal Service into competitive markets.
  • It might lead Congress to increase the Postal Services debt limit (currently at $15 billion).

Schulyer says it would be better if the Treasury Department charged to the Postal Service corporate bond market rates when it lends them money for services that compete with the private sector. This would reduce the interest rate subsidy compared to the current law and the new proposals in Congress.

Source: Michael Schulyer, "Limiting the Postal Service's Interest Rate Subsidy; A lesson from Fannie Mae and Freddie Mac on What Would Work and What Would Not," Institute for Research on the Economics of Taxation, August 10, 2004.


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