Tuesday, January 19, 2010

Enshrining a Twentieth Century Postal Service

The Postal Regulatory Commission in a decision announced last week illustrates how the Postal Accountability and Enhancement Act (PAEA) freezes the Postal Service in the 20th Century.   The Commission ordered the Postal Service to terminate two non-postal services and issued guidelines for the sale of licensed CDs and DVDs.   [Press Release] [Decision]  This decision follows the requirements of the PAEA that the Postal Service not offer any non-postal service that were not offered prior to January 1, 2006.   While the PRC may have had little choice in its decision, the impact is likely to be much more significant that limited loss in revenue and net-income.  
The decision will stifle innovation.

The Commission determined that products that employed innovative uses of Postal Service human capital, physical capital, and intellectual assets violated the PAEA.  The decision will make the Postal Service think twice about making any change in its product offerings.  From this point forward, the Postal Service will consider first every reason why the PRC might reject a new innovative idea to generate increased revenue.   Even ideas that pass muster with marketing and operations staff will face the challenge of the Postal Service's lawyers who will use their knowledge of PRC precedent to further narrow what is actually offered in order to minimize the risk of objections from the Public Representative of firms in the private sector.
The Commission's decision prevents innovative ideas developed by APWU President Burrus, authors of papers on new postal business models, and witnesses at a recent House hearing from seeing the light of day.   The decision will reinforce the culture that discourages innovative ideas to generate revenue and innovation generally.
Representative Connolly showed his understanding that the Postal Service needs a culture of innovation in his questioning of former Deputy Postmaster General Coughlin at the last House hearing on the Postal Service.   A culture of innovation that will ensure the Postal Service's future is described in Richard Foster's book: Innovation: The Attacker's Advantage. He recommended that firms in the Postal Service's position must be close to ruthless in cannibalizing their current products and processes just when they are most lucrative and begin the search for new products and processes again, over and over.    As long as the Postal Service works within a regulatory framework that discourages innovation and prevents the development of products that did not exit prior to 2006, this cannot happen.
The decision illustrates how much US postal policy differs from policy in other countries. 

Outside the United States Postal operators operate within a public policy framework that understands that limiting the post to just what was done before policy reforms will not ensure the financial viability of the country's mail industry and universal service.    The business models and regulatory frameworks in all of these countries reflect this policy framework.

Postal operators outside the United States are using the commercial freedom granted by the postal policy framework in their country to expand far beyond the limited set of services that the Postal Service can offer.   Outside of the United States, postal operators generate no more than 70% of their revenue from letter mail and for many posts, less than half.    The Postal Service generated 84 % of its revenue from letter mail services and it is not higher because letter mail revenue shrank faster than the decline in parcel shipping in 2009.

Restrictions in commercial freedom are only some of the differences between the Postal Service's business with the business models of foreign posts.   Foreign posts operate under fairly limited regulatory restrictions, standard private sector business law, employment law, and increasingly tax law.   In no country do these differences prevent the national post from continuing to offer universal service.  In many cases, the differences allow the national post to offer universal retail access, and especially retail access in rural areas at levels far greater than what exists in the United States.

The decision illustrates the limitation of governmental models for the Postal Service.

Nearly all of the governmental models proposed by the Postal Service and other authors of papers on business models included changes in the Postal Service's charter to allow it to compete more openly with the private sector in a way that would allow it to offer the services terminated. They all argued that the Postal Service needed the additional competitive ability in order to replace revenue from declining mail volumes. The change in law required would require Congress to allow the Postal Service, operating as a government entity, to go into direct competition with the private sector.  The Commission's decision, and in particular Pitney Bowes's active participation shows that private sector firms have a real interest in keeping the Postal Service from gaining an expanded competitive mandate.   The nature of the debate over a public health care option illustrates that passage of a charter that allows the Postal Service more room to compete with the private sector is highly improbable as long as the Postal Service remains a part of the Federal Government.

The decision has adverse inflationary and economic growth impacts.

The Commission's decision restricts entry by the Postal Service into markets that it could serve profitably.  In its decision, it cited both concerns of private sector competitors and the public representative that argued for terminating products that the Postal Service offered.

The theoretical impact of restricting entry in postal markets have been studied and published in numerous papers over the past 20 years.   The impact on economic growth is less clear but given that most mailers require a positive economic return on their mailing expenses, regulations that restrict entry and raise prices should raise the probability that a mailing would not meet the return hurdle that would allow for a mailer to print and mail.

The Commission's decision requiring the Postal Service to terminate two products is reminiscent of decisions of the Interstate Commerce Commission under trucking regulation. In particular, objection by competitors could derail proposes to expand the geographic area served by a trucking company.  Entry restrictions in transportation and other markets have been shown by economists as having both inflationary and economic growth slowing impacts.   Numerous economic studies were sponsored by the U.S. Department of Transportation, and a number of books were published on the topic including:
The Decision Hurts Postal Labor.

 The Postal Service's workforce faces tremendous strain due to the need to cut costs as volume and revenue declines.   Any regulatory decision that limits the Postal Service's ability to fully utilize its human, physical or intellectual assets will require that reductions in the workforce come more swiftly and cut more deeply than might otherwise be necessary.   Restrictions on entry also reduces the sources of potential cash to cover transfer and retraining costs, retirement incentives and severance pay that accompany a downsizing process.

The Decision Illustrates the Political Challenge of Changing the Postal Service's Business Model.

Changing the Postal Service's business model and regulatory framework will affect nearly all stakeholders.   Those stakeholders who could lose a favored position by a change in the business model and regulatory framework will oppose those changes.    Those that would benefit from change are less likely to actively pursue change as the benefits of change are less clear to them than the risks are to those who currently enjoy a favored position.

Trucking deregulation illustrates a successful change in regulatory model that forced changes in business models in dozens of firms over the objections of business, labor and regulatory stakeholders. In particular, during the early days of regulatory reform the Interstate Commerce Commission (ICC) focused on protecting its regulatory responsibilities and the due process rights of those that would be hurt by entry and pricing freedoms that the Ford administration promoted. A combination of pressure from the Ford Administration and appointments of new commissioners and ICC chairman resulted in an ICC that actively supported the deregulation of trucking and the elimination of much of the ICC's regulatory responsibilities.

A review of politics of policy reform for the trucking is instructive in trying to understand the politics of policy reform for the Postal Service and in particular the risks and opportunities available for governmental officials that believe a new business model and regulatory framework is needed.  In that regard, I recommend the following books:


Postal Sanity said...


So who will deliver the sword to cut this Gordian knot?

Anonymous said...

The USPS is a quasi government organization. There is no good reason that government should compete with private industry. We certainly need the USPS to do what our founding fathers intended it to do—bind the country together by moving the mail. The USPS can and should innovate for that purpose. The PAEA took a wise choice by limiting the USPS scope. In consideration was the huge sums of money lost by the post office when they “attempted” to enter e-commerce activities. As a quasi government agency, facts:
· Not subject to taxes: gas, income, property, sales tax.
· Any profits belong to the taxpayers.
· Exists exclusively to provide universal mail service to all Americans. That's why the USPS has been granted several advantages that shield it from market forces.
· Has no investors or shareholders.
· Has 2000 federal law enforcement officers as employees.
Government has many important roles to play in business.
* Our country owes our high level of health care to the government's willingness to fund basic research that profit-oriented businesses won't touch, for instance.
* Only the government can perform certain policing roles.
* Some products, like education, are so important to the public welfare that having national policies—or even federal financing or services—makes the most sense.

We don't need it moving into profitable enterprises where there's no problem that needs government attention.

Any company that develops products and services needs to know that it will compete on a level playing field. That's the main role of government in business—to insure that everyone abides by the policies and practices necessary for our common good.

No company needs to be worried that the government will step into its market, using the vast influence and power of the state to drain the profits away from creative pioneers