The Post Office is No Bank
Progressives are understandably troubled about the high price that the poor pay for financial services, such as check cashing or payday loans. Last month, the Inspector General of the U.S. Post Office suggested that the Post Office might turn a tidy profit by supplying those services at lower cost.
Last Thursday, I responded to that idea with skepticism in the Boston Globe.
Economists can reasonably debate why the poor often pay so much for credit. Are the high rates charged for payday loans reasonable given high administrative costs and the probability of default? Or do these high rates reflect a predatory lending system?
The appropriate policy response depends, in part, on the answer to those questions. Analysts who believe that high rates reflect real costs tend to favor laissez-faire. Observers who see a predatory system tend to favor stronger regulation of lending. But prior to the Post Office Inspector General’s report, I doubt that anyone would have thought that the natural policy intervention was to get the Post Office back into the banking business.
Indeed, a cynic might see the Post Office idea as more of a bid for legislative allies than a realistic business model. Making billions by providing money orders to the poor is far harder than getting billions via legislative largesse. By making itself a champion of a progressive political cause, the Post Office attracts new and powerful friends, who may be quite helpful if the Post Office needs more financial aid from taxpayers. Indeed, progressive allies were quite helpful to Fannie Mae whenever critics suggested its business model posed a grave risk to taxpayers.
As I argue in my Globe piece, I do not think that the Post Office is a natural banker. Its physical infrastructure is just not that valuable a banking asset. Real estate in poor communities tends to be inexpensive. Human capital—skills and experience—is far more important. It is hard to see where Post Office workers would have gotten the training needed to become bankers.
The Post Office as Bank idea is an unfortunate distraction from two very real problems. The first problem is the Post Office’s own financial problems. The second problem is that banking services are too expensive for the poor.
The first problem does not need brilliant ideas, just ordinary advice. To get out of the red, the Post Office needs to cut costs and raise revenues. Cutting costs will almost surely mean reducing the number of days of delivery, but that is not such a bad thing. Nobody depends on “snail mail” for speed anymore. Raising revenues means that the Post Office’s regulators must agree to permanent increases in stamp prices. The only impediment to these steps is unfortunate politics.
The second problem—the high costs of banking for the poor—is far more complicated. Even if there are market failures in private lending, which I accept, the case for public action always depends on being sure that the public remedy will not be worse. Human societies have been regulating lending for millennia, and I tend to think that usury laws have on the whole done far more harm than good. I have gotten slightly more paternalistic in my old age (probably fatherhood has something to do with it), and that has made me more accepting of moderate regulation that prevents extremely high rates. There are social downsides from over-borrowing, so I can tolerate some limits on extreme debt.
Yet I am far more skeptical about public lending, as an antidote to high private interest rates, and I am even more skeptical about the Post Office being the right entity to engage in such lending. The political pressures facing any public lender will be enormous, and that will make it difficult to force repayment. Let the Post Office figure out its core business, before it starts doing something totally different.
Edward Glaeser is the Fred and Eleanor Glimp Professor of Economics at Harvard and a contributor to e21.