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178 IRET Congressional Advisory 1 (2004)

handle is hein.taxfoundation/iretcgadv0175 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. August 10, 2004 Advisory No. 178 LIMITING THE POSTAL SERVICE'S INTEREST RATE SUBSIDY; A LESSON FROM FANNIE MAE AND FREDDIE MAC ON WHAT WOULD WORK AND WHAT WOULD NOT Executive Summary Proposed Congressional legislation, the Postal Accountability and Enhancement Act, would make major changes in the Postal Service's powers and the regulatory oversight it receives. (H.R. 4341 is the House version, and S. 2468 is the Senate version.) Currently, the Postal Service, which is part of the federal government, borrows directly from the government at just slightly above the interest rate on Treasury securities. Because lenders think Treasuries are free of default risk, the Treasury interest rate is significantly lower than even the most credit worthy private-sector business can obtain. One provision of H.R. 4341 and S. 2468 would try to make the Service pay a normal, unsubsidized market rate of interest when it borrows to finance products that the bills classify as competitive. The provision would require the Service to do its competitive-product borrowing in the private credit market and issue securities there that would carry no government guarantee. (For products sheltered by the Postal monopoly, the Service could continue borrowing directly from the government at just above the interest rate on Treasury securities.) The proposal is well intentioned but unrealistic. Real-world experience with Government Sponsored Enterprises (GSEs) like Fannie Mae and Freddie Mac demonstrates that lenders would still believe a federal credit guarantee exists, albeit an implicit one. Hence, lenders would offer the Postal Service a lower interest rate than they would offer private-sector businesses of comparable riskiness. Experience with GSEs like Fannie Mae and Freddie Mac also shows that an implicit government credit guarantee and the subsidized borrowing associated with it create economic problems. It would be foolhardy to establish another GSE-style problem, this time at the Postal Service. A workable alternative would be to require the Postal Service to turn to the federal government when it wishes to borrow for its competitive-product activities and require the government to charge an interest rate pegged to what private-sector businesses are paying in the private credit market.