April 4, 2018

Trump vs. Amazon In Exactly 100 Words

Chris Kleponis/CNP via ZUMA

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I think I’ve now read upwards of a dozen articles about whether Amazon pays a fair rate for shipping its packages via the post office. It’s insane. The journalists of America are apparently required to write detailed explainers about every single stupid thing that Donald Trump tweets. They do this even when they know that Trump is motivated solely by personal animus, not by any serious policy preference.

Here is everything you need to know in 100 words. In every business, there are centralized departments—factories, billing, computer services, etc.—that are used by lots of different product lines. The cost of these common services has to be allocated across different products, and the post office is no different. It has lots of costs—trucks, planes, distribution centers—that are used by all their product lines: first class mail, priority mail, packages, etc. The question is: are they allocating these costs properly to their package business? If their allocation is low, they can charge less for package delivery while still making it look like they’re turning a profit.

That’s it. It’s a technical question of cost accounting, and as I can tell you from personal experience, every product manager lobbies creatively to get their allocations as low as possible. The Postal Regulatory Commission believes the current allocations are OK, but if you put your mind to it you can come up with nearly any allocation formula you want. As it turns out, some guys from Citigroup did exactly that and came up with a higher allocation formula for packages. This allowed them to predict that USPS package charges would eventually have to go up and therefore FedEx would get more business, which made FedEx a great buying opportunity. Given the history of Wall Street firms finding creative ways to hype their stock picks, you may decide for yourself whether to believe this.

As for Trump, who cares? He saw this on Fox News and tossed off a tweet because he hates Jeff Bezos. Why does he hate Bezos? Because Bezos (a) really is a self-made billionaire, and (b) he owns the Washington Post. Everybody knows this. Can we all stop pretending that cost accounting for the USPS package delivery business is a genuine story that we should all be concerned about?

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