Why we need serious postal reform (US)
President Bush recently named a nine-member commission to study reform of our Postal Service-the first time a U.S. President has done so since the Johnson Administration. Businesses and consumers relying heavily on the mail-concerned about recent rate increases-are hoping for some dramatic changes, but fear they will get only tinkering. Gene Del Polito, president of the Association for Postal Commerce, recently told Catalog Age he expects the commission "is not going to make revolutionary recommendations." He said the committee seems likely to take a cautious path "that preserves the Postal Service as a federal institution but trims its sails."
Bolder and braver changes would make far more sense, however. At some point in the not-too-distant future the Postal Service's structure will have to change dramatically. It can be altered deliberately now, by design, or chaotically down the road, by default. The President's commission enjoys a rare opportunity; let's hope its leaders grab their chance.
By almost any standard, the U.S. Postal Service is gigantic. It employs 854,000 people. In 2002 it pulled in $66.5 billion in revenue. It handles about 40 percent of the world's mail. Proper organization of such an entity is clearly important to U.S. economic health.
The United States Postal Service (replacing the Post Office Department) was created by the Postal Reorganization Act of 1970. While that act had several goals, its main focus was on achieving independence for the new entity, both financially and managerially. The USPS was given power to negotiate wages, set prices with regulatory oversight, borrow from the Treasury, and independently sue and be sued. The USPS was exempted from federal, state, and local taxes, and granted the power of eminent domain (allowing it to condemn property for its own use). The Postal Service was expected to become financially self-sufficient and break even over time. The Act retained two key elements of the Post Office's structure, however: It retained a monopoly over letter delivery (as well as use of the mailboxes), and it remained government owned.
The new structure was clearly an improvement over the old Post Office. The productivity of the Postal Service improved. The cost of the postal system was shifted onto mail users and away from direct taxpayer subsidies. The Postal Service was, in many ways, operated in a more businesslike manner.
But the reorganization also failed in important ways. It failed to reduce cross subsidies from monopolized classes of mail to other forms of delivery where private companies compete with the Postal Service (in fact, it appears to have exacerbated them). Contrary to the express aim of the reorganization act, postal wages rose above private sector wages. Although direct costs to the Treasury fell, recurring deficits dissipated taxpayers' equity in the Post Office-the Postal Service's net worth is now negative $1.36 billion, down from positive $1.7 billion when the Postal Service began in 1971.
The Postal Service now appears to be undergoing a slow-motion train wreck. In 2002, for the first time in recent history, the number of pieces of first-class mail delivered actually declined. First-class mail provides over 57 percent of the Postal Service's total mail income, and last year's decline snatched away $607 million, or 1.7 percent of the Postal Service revenue. The Postal Service's other big mail class is standard mail, mostly advertising items, accounting for almost 25 percent of mail income. The number of standard mail pieces delivered last year fell 3 percent, while revenues from that class increased slightly due to rate hikes.
Other mail classes also showed declines. The number of priority mail pieces dropped a precipitous 10.7 percent. The number of express mail pieces tumbled by 8.6 percent. The number of periodicals mailed declined by 1.8 percent. The number of packages mailed declined by 1.6 percent. International airmail pieces were off a whopping 15.4 percent. Unsurprisingly, the Postal Service's financial condition has suffered. Despite double-digit rate increases, its net loss in 2002 was $700 million, on top of a $1.7 billion loss in 2001.
In the 33 years since the Postal Service was born, momentous technological innovations like e-mail, faxes, and inexpensive telephone services have transformed communications. Continuing changes are likely to cause further declines in the demand for physical mail delivery. Further postage increases are not the solution, since they will only encourage additional substitution of alternate communication methods. Nor is simple deregulation of the Postal Service in its current form a viable alternative, as that would only encourage the Postal Service to use its monopoly powers, tax exemptions, and access to government borrowing to drive away competing private firms.
We are at a decisive moment in U.S. postal history. Inexorable technological and commercial demands cannot be addressed through minor alterations in the postal bureaucracy. The model of an independent government-owned agency enjoying a legally enforced monopoly is inappropriate for the United States today. The Bush commission should recommend a bold departure from the outdated 1970 model.
Apologists for the Postal Service's monopoly say that it allows guaranteed letter delivery to all communities. But there is no logical link between universal service and enforced monopoly. All firms facing competition have a strong business incentive to provide service to every community. Because customers prefer dealing with a firm that has a universal delivery network over one that does not, universal service is an important competitive asset. That's why today's private delivery firms stress that they "go anywhere" when advertising their services. They may lose money on particular delivery routes, but have a strong incentive to maintain universal service nevertheless for its overall business value.
The experience of other countries that have eliminated their postal monopolies shows that competition does not harm universal service. Sweden and New Zealand, both with remote hinterlands, have eliminated their postal monopolies. Delivery service to rural areas has been maintained.
The arguments for a delivery monopoly that assume the cost of rural service is significantly higher than for urban delivery are based on a false premise. If rural communities fear losing letter delivery service in a competitive market, the government can simply contract with particular firms with the proviso that they maintain universal service. The benefits of a postal monopoly are approximately zero, and its costs are numerous.
The second major oversight of the 1970 reform was leaving the Postal Service under government ownership. It is useful to remember that most members of the last commission to study postal reform, in 1968, believed that the Postal Service would be better off investor-owned. Only fear of strikes, and worry that the Post Office's earnings record would not attract buyers, prevented a recommendation of full privatization.
The attractiveness of a private Postal Service to investors depends on the institutional arrangements made before any public offering-regarding pension liabilities and employee costs, for instance. There is no reason why those arrangements cannot be made attractive to investors. When the Deutsche Post was offered in a large privatization, investors clamored for eight times more shares than were actually available. The Dutch post office was privatized in a similar way. Other large previously government-owned firms have recently been privatized to great success, including British Telecom and Deutsche Telekom. Investors would snap up U.S. postal shares.
When a firm lacks private owners, it is unclear to whom it should be accountable. The deepest problem of the U.S. Postal Service is that it lacks accountability to any specific group. That dissipates incentive to increase earnings by cutting costs and maximizing revenues. Under privatization, the Postal Service would be accountable to a clearly defined group: stockholders.
Other network industries like trucking, natural gas, airlines, and railroads were de-monopolized in the 1970s and 1980s. This created huge benefits for consumers. But what about the providers of delivery services at today's Postal Service? Many postal workers have built their careers on expectations of a government-owned post, and the transition to a competitive market may disrupt those careers. It thus seems appropriate that in addition to selling shares in the equity markets, postal workers should receive shares in a new investor-owned entity.
The issuance of ownership shares to postal workers and managers is a case where fairness and economic efficiency are aligned: Employees would receive compensation for the disruption of their previous work patterns. And the new accountability of private ownership would improve efficiency and incentives to innovate, control costs, improve service, issue new products, and become more responsive to customers' needs. Such an ownership transition would
require institutional changes. The Postal Service would have to be given freedom to spin off or shut down under-performing sectors, and to make other prudent business decisions, such as the closing of unprofitable post offices. It may wish to replace them with counter services at other outlets, for example grocery stores or gas stations.
It must also be relieved of the privileges and immunities it now enjoys, such as special borrowing privileges and exemption from taxation and the antitrust laws. It would also face the same disclosure requirements facing any publicly traded firm. Any aspect of government sponsorship or preference must be eliminated.
Without major reform, serious losses and problems at the U.S. Postal Service will continue. Selling ownership shares would create enormous benefits. Postal employees would gain a stake in their firm, and become accountable to a clearly defined group. Managers would likewise be held to meaningful measures of firm performance. The Postal Service would finally have the incentive to keep costs down-and to respond to the millions of customers who are now captively dependent on it.
The Postal Service is undergoing a slow-motion train wreck.
Other large postal services have recently been privatized, to great success, in places like Germany and Holland. Investors would snap up U.S. postal shares.
Economist Rick Geddes is an assistant professor at Cornell University and an adjunct scholar at the American Enterprise Institute.
Copyright American Enterprise Institute for Public Policy Research Jul/Aug 2003
