A Financially Self Sufficient Postal Service

Three recent articles and blog posts illustrate why any postal reform measure has to go beyond fixing retiree obligations or restructuring operations to reduce costs.   If the White House Postal reform bill does not deal with these three issues than Congress will likely have to revisit the Postal Service Business model again in three or four years.

The Postal Service Cannot be Self Sufficient Unless it is Profitable.

Andrew Gelman, a professor of statistics at Columbia University and a prolific writer on statistics and its use in public policy and political campaigns illustrated that the financial problem facing the Postal Service is a legacy of the regulatory structure and financial objects of the Postal Service under the Postal Rate Commission. While not familiar with the current debate, his post in Statistical Modeling, Causal Inference, and Social Science, states what should be clear for anyone who has studied business.  An enterprise will find profitability difficult if not impossible if its customers have more market or political power than it has.

Basically, the post office is always broke because it’s legally required to be broke. It’s not like other utilities which are regulated in a gentle way to allow them to make profits. Looking at this from a political direction, things must somehow be set up so that the Postal Service’s customers have more clout than the Postal Service itself. I don’t really have a sense of why this would happen for mail more than for gas, electricity, water, etc.

Rates charged by the Postal Service need to reflect rates that a profitable well managed firm would charge.   The Postal Service cannot afford to offer lower rates to customers that have political clout.   This will likely result in higher rates for single piece First Class, Periodicals, and non-Profit Standard mail.

The Postal Service Cannot be Self Sufficient Unless it is Independent.

Felix Salmon, in a Reuter's op-ed focuses his attention on freeing Postal Service from Congress.  His solution is deregulating the Postal Service to free it from the shackles that Congress has created.

It seems to me that a significant part of the problem here lies with Congress and that a massive bout of deregulation could be just the solution that the Post Office is looking for. Congress is micromanaging the Post Office, telling it how much it can raise postage rates, telling it that it can’t offer financial services (despite its huge business in money orders), telling it that it can’t get into all manner of other businesses either and telling it that it has to deliver mail on Saturdays. Astonishingly, amid all these rules and regulations, the Post Office is losing billions of dollars.
I see a lot of scope for bipartisan agreement here — unshackle the Post Office so that it has a hope of serving the country indefinitely into the future. Republicans like deregulation, right?

His idea of deregulation goes further than any bill before Congress.  His focus is on commercial freedoms that includes a significantly reduced role for the Postal Regulatory Commission.

He also offers the suggestion that the Postal Service expand into financial services like Australia Post, La Poste (France) and Poste Italiane.   Even without expansion into financial services, expansion of the Postal Service's business interests could include the sale of non-postal products through both its corporate-staffed and franchised outlets as Australia Post does, or the provision of secure e-mail boxes as both Canada Post and Deutsche Post do.

Deregulating the Postal Service is a different direction than any bill in Congress is now taking.   Part of the reason is the political challenge that Mr. Salmon clearly understands. 

The problem, I think, is that for all that Republicans like deregulation, they really hate the idea of a state-owned organization competing with the private sector. Of course, the Post Office does that already — it competes with FedEx and UPS. But the USPS, as a government-subsidized organization with thousands of locations nationwide and a massive reserve of public trust, could be a formidable competitor in all manner of different markets and none of the incumbents in those markets would welcome the competition.

A Self Sufficient Postal Service Requires a Corporate Business Model and Possibly Privatization.

Privatization is a dirty word in postal policy.    However, privatization is the 800 pound gorilla in the room that cannot be ignored.
Two articles by economist Gary Becker and Judge Richard Posner in the Becker-Posner Blog make a strong case for not only political independence but also financial independence from the Federal Government.  
Gary Becker's commentary focuses on privatization and elimination of the monopoly.  

The solution: completely privatize the postal system, and allow other carriers to make daily mail deliveries using business and residential mailboxes. There are now enough actual and potential competitors, including the Internet, to make delivery of mail a highly competitive industry.

His thoughts on competition in the market and the mailbox monopoly represent a naive understanding of competition in the delivery of mail and parcels.  It also ignores security issues that are important for differentiating delivery by the Postal Service from delivery by a newspaper carrier or other hand delivery service.  However his discussion as to why privatization should be considered is worth listening to.

In particular are these points that he makes:

• Defenders of the postal service correctly point out that part of its troubles is due to regulations that significantly raise its costs of operation.
• Nevertheless, the efficiency of the postal service still lags far behind that of Fed Ex and UPS. Part of this lag is due to regulatory restrictions, but some is due to its own mismanagement. As in prior discussions on our blog I refer again to the small town on Cape Cod where I have a summer home. Since its population expands 8-10 times during the summer, first class and other mail rises enormously during the summer. Fed Ex adjusts to this peak load problem in many ways, including renting trucks from Enterprise rental, delivering packages during longer hours, and shifting some employees from other locations. The local post office, by contrast, hardly adjusts at all. It has exactly the same hours as during the low volume winter months, which includes closing from 12-1 on weekdays, and only being open until noon on Saturdays. Since there is no mail delivery in this small town, most residents have mailboxes at the post office. Even though these boxes are in a separate room, which could be kept open when there is no other mail service, this room is closed too at about the same times when other mail service at the post office is closed.
• Government enterprises, even quasi-independent ones like the USPS, are notoriously inefficient because of political and regulatory inefficiencies.

The example that he gives regarding the Cape Cod Post Office is exactly what the new contract with the American Postal Workers Union should allow the Postal Service to deal with.   Hiring seasonal summer employees or even transferring employees from other offices for a few months to expand operating hours during the summer should be normal operating practice in seaside towns and other communities with a large number of snow-birds or sun-birds.

His last point is similar to the conclusions of Andrew Gelman and Felix Salmon.  As a government enterprise, the Postal Service cannot compete on either service quality or price effectively and efficiently due to political and regulatory inefficiencies imposed by the Postal Service and the Postal Regulatory Commission.

Judge Richard Posner concurs with Dr. Becker's conclusion that the Postal Service should be privatized.

Becker is certainly correct that the U.S. Postal Service should be privatized. Although government is probably more efficient at providing some services than private enterprise is, such as the military, national security intelligence, the police, the judiciary, the central bank, and prisons, because the output of these services is so difficult to measure, there is no reason to think it any more efficient at providing postal service than it would be at providing telephone service or airline service. Its origins as a public service reflect government concern with conspiracies (and its desire therefore to be able to read letters in transit), the natural-monopoly character of postal service (multiple postal services would require duplication of delivery trucks, post offices, and sorting stations), and the desire to provide universal service at flat rates in order to improve information flow throughout the entire society (i.e., to achieve network externalities).

However, he uses his more practical experience as a Court of Appeals Judge who has dealt with economic regulatory issues as well as his understanding of universal service obligations that exist in the provision of telephone, electricity, natural gas, and water services to develop a practical method of considering both freeing the Postal Service from the shackles of Congress and regulatory precedent and still ensure the provision of universal service.

Judge Posner notes that neither outright sale of the Postal Service with the current restrictions imposed by the Congress and the Postal Regulatory Commission nor the sale of the Postal Service without these restrictions are not acceptable solutions.

The federal government could no doubt sell the postal service, just as states are busy selling turnpikes and bridges. If it sold it subject to the buyer’s assuming the universal service obligation, it would have to convey along with the postal service's physical assets its monopoly protections against cream skimming—the monopoly of first- and third-class mail and exclusive access to post boxes. But then little would have been achieved by the sale—not nothing, because the buyer would be more strongly motivated than government to seek economies, but not a lot.

A sale without conditions would be different—the results would be radical: a large reduction in post offices and delivery trucks, and correspondingly large reductions in numbers of employees. But then what of the people living in remote areas? Email and fax are not a complete answer, because there is still a demand for letters, magazines, advertising brochures, and other items of snail mail. All these are things that can be delivered by Fed Ex or UPS, but the price for pick-up and delivery in remote areas might be quite high. There is no good economic reason to subsidize people who decide to live in remote areas, but there would be political pressures to do so.

As neither of these options seems realistic, Judge Posner proposes a third one.  This option reflects a fairly straightforward and traditional  economic approach to handling the transition to privatization while still ensuring rural service and is based on a traditional public utility model.

As a practical matter, reform of the postal service should I think proceed in three stages over a period of years. In the first stage, the postal service should be allowed to charge double postage for mail to or from designated remote areas and to terminate Saturday mail service to and from those areas. In the second, the postal service should be sold to private enterprise but with the legal restrictions (universal service, in its modified form with double postage and no Saturday delivery in remote areas, and exclusive access to post boxes) intact. And in the third the legal restrictions should be removed and all postal service be open to competition.

His proposal to double rural mail delivery prices  is absurd.  It indicates both a lack of understanding of both Postal Service costs and the competition that faces the Postal Service for hand-delivery of communications and parcels.  However it identifies a key point.  To survive, the Postal Service needs to have pricing freedom to price its commercial letter, flat and parcel services based on regional cost differences and regional competition differences. 

His second point on privatization reflects the current public utility model.  This model requires that regulated utilities are governed by laws that ensure that universal service is provided within their service areas.

His third point suggests that eliminating all competitive restrictions, including elimination of the mailbox monopoly, depends on more careful study of the delivery market than has been done to date.  

Three Keys to Successful Postal Reform

Postal reform has to both serve the citizens of the United States both in urban areas and the most rural parts of the Great Plains and Appalachia.  It must also ensure that business customers that now generate 90% of mail volume will continue to see the Postal Service as an attractive delivery service in 5 and ten years.  These four individuals who have limited understanding of the details of the Postal Service's problems identify three critical elements that have to be part of any postal reform that ensures both universal service and the Postal Service's survival as a self-sufficient entity. They are:

1. Profit must be an explicit goal for organization and profit must reflect a sufficient operating margin to ensure cash is generated to make capital investments needed to improve service once the current financial difficulties pass.  There is no excuse for the Postal Service to be the only large national post suffering major losses in the Euro Zone, North America, and Oceana and Australia. 
2. The Postal Service has to be granted significant relief from both Congressional and Postal Regulatory Commission oversight.   To the extent that either law or regulatory precedent freezes the status quo and prevents market-based pricing and market-based service quality that law and those regulations must be removed.  In particular both restrictions on distance based and regional pricing for commercial mailers need to be lifted in order to develop market-based and not cost-based prices.
3. Transition of the Postal Service to an entity that operates under standard corporate business, employment, and contract law must occur within a reasonable period.  During this period, the privatization of the Postal Service as a public utility providing delivery services must be examined serious.