Good time to take Post Office private

Last week, the Government Accountability Office, Congress's chief investigative body, removed the U.S. Postal Service from its list of "high-risk" government agencies. For the first time in recent memory, the Postal Service is back on solid financial ground.

Being taken off the GAO's "watch list" is great news for the Postal Service, and an important victory for Postmaster General John Potter and his leadership team. But for the rest of us, even better news could be right around the corner. The Postal Service has taken the first step down a path of true reform – a path which could ultimately lead to granting employees ownership of USPS through privatization.

Each year, the GAO lays out those agencies at risk of becoming unable to "economically, efficiently, and effectively perform their missions." The Postal Service had been on the list for over five years. But recently, under Potter's leadership, it has had considerable success in reducing costs, repaying outstanding debts, and increasing productivity, all of which contributed to the GAO upgrade.

The most critical reason behind the Postal Service's new financial outlook was a recent congressional law that set up a dedicated stream of cash to pay down the USPS's unfunded liabilities, which exceed $80 billion. These debt obligations largely represent future healthcare costs for postal workers.

At the insistence of the Bush administration, the new law requires the Postal Service to use dedicated income — which has resulted from an over-calculation of USPS pension obligations — to pay down its remaining liabilities responsibly.

Prior to this requirement, a taxpayer bailout of the Postal Service was growing increasingly likely. Moreover, until now, privatizing the USPS was unrealistic because it would require finding investors willing to buy an organization saddled with such enormous unfunded liabilities.

But with sustained productivity gains, falling costs, and a new funding source for previously unfunded liabilities, the U.S. Postal Service has overcome a major obstacle to making itself attractive to investors.

"If the Postal Service ever considers privatization, it no longer has to worry about the poison pill of massive unfunded liabilities," says Michael Schuyler, an economist and postal expert at the Institute for Research on the Economics of Taxation.

Privatization is not as far-fetched as it sounds. In 2001, Postmaster General William J. Henderson suggested privatizing the entire USPS and giving stock ownership to the employees.

Yet despite its international image as a free-market leader, the United States lags behind in opening up its postal market. Countries all over the world — including Germany, Austria and Japan — are privatizing their national posts, without subjecting consumers to gaps in the quality of service.

Others are de-monopolizing their postal markets, a process known as liberalization. The United Kingdom has fully liberalized, allowing private firms to compete with the Royal Mail's erstwhile monopoly.

The rest of the European Union has committed to full postal liberalization by 2009. While each of these countries presents a different model for implementing reforms, there are valuable lessons to be learned about how privatization could best work for the United States.

And those lessons may soon be put to work. By creating a dedicated funding stream for future retirement costs, the postal reform legislation makes the USPS a much more attractive investment. Companies like G.M., struggling under the weight of similar unfunded liabilities, would envy the Postal Service's newfound financial outlook.

And consumers would benefit too. If privatization were coupled with de-monopolization, consumers would be able to send their letter from one of several companies, all of which would compete to offer the lowest prices and best service. The U.K. alone has licensed 20 companies to deliver its version of liberty-stamp mail, with significant savings for consumers.

Postal workers could also benefit, as they would finally have the chance to share in the Postal Service's profits. Just like many other private-sector employees, postal workers would have the chance to own a stake in their employer, building their own reserve of private equity for their personal retirement funds or their children's education.

When the President's Commission on the U.S. Postal Service set out to reform the agency back in 2003, Treasury Under Secretary Peter Fisher declared, "Our goal is not to privatize the postal service." Given the USPS's current financial outlook, and the favorable experiences of other nations with postal liberalization, however, the time for privatization is now on the horizon.

Robby Schrum is a research fellow at the Lexington Institute.