How Congress Makes the U.S. Less Competitive

The New York Times reports today that that the Patent Office is opening up its first satellite office.  This opening is designed to help to deal with the backlog of 700,000 patents awaiting their first action by an examiner and the 500,000 patents that are in process.

Once patent applications are in the system, they sit — for years. The patent office’s pipeline is so clogged it takes two years for an inventor to get an initial ruling, and an additional year or more before a patent is finally issued.

The delays and inefficiencies are more than a nuisance for inventors. Patentable ideas are the basis for many start-up companies and small businesses. Venture capitalists often require start-ups to have a patent before offering financing. That means that patent delays cost jobs, slow the economy and threaten the ability of American companies to compete with foreign businesses.  

The Patent Office like the Postal Service is self supporting.  Application and maintenance fees generate "$2.1 billion in income" in 2010.   This has made the Patent Office an inviting target for Congress, which "over the last 20 years has diverted a total of $800 million to other uses, rather than letting the office invest the money in its operations." [emphasis added] 

While there are changes in Obama's budget to add resources to the Patent Office, previous Congressional actions suggests that Congress wants the revenue from the Patent Office more than the economic benefits generated by the patents the office issues.

"In two consecutive sessions, Congress has defeated a bill that would allow the patent office to keep all of the fees it collects."

The problems faced by the Patent Office in its dealings with Congress are quite similar to those faced by the Postal Service but on a smaller scale.   The impact on the economy is also similar as Congress's actions regarding the Patent Office and the Postal Service have had the effect of retarding the economic growth by making doing business in the United States more difficult and more expensive than it need be. 

Unfortionately for the Patent Office and the Postal Service fixing the problems do not have solutions that fit easily into political arguments that use words that poll favorably or fit within the 140 characters available in Twitter.   The willingness of members of Congress to adjust their language to fit real solutions to the budgeting and policymaking issues of the Patent Office and the Postal Service will determine if the country reverses the anti-growth policies that now exist.

Are the Postal Service's Earnings Forecast Too Optimistic?

Readers that are expecting an answer to the question in the title will be disappointed.   The truth is I do not know.   However, I do know that the most recent forecasts, or at least those contained in the exigent rate case are woefully out of date even though they are at worst 6 months old.

The problem with the financial projections does not lie with the Postal Service or those that are responsible for their development.   At the time the forecast, they represented the best understanding as to the near term (under 2 year) prospects for Postal Service revenues and costs given the economic data and management plans at the time they were made.   The problem exists because 1) the regulatory lag associated with preparing and litigating any proceeding before the Postal Rate Commission; 2) the lack of shareholders and investment analysts that are developing independent forecasts that force enterprises to announce how changing economic conditions affect future earnings at least quarterly and in the cases of many companies monthly; and 3) the risk that the Postal Service faces that the time frame for litigating proceedings before the Commission could lengthen if it would regularly suggest that the numbers that it presented were better or worse than they now are.

Now why would I be concerned that finances may be too optimistic?

The primary reason is that the general understanding of economic growth is worse today than it was 6 months ago.  Why?

1. The consumer has become significantly more risk adverse than ever seen before.   This affects the economy in a number of ways.   Consumers are investing their savings in the most secure investments possible (e.g. CD's and Treasury Bonds) and no longer see either real estate (i.e. their home) or stocks as reasonable ways to save for retirement or children's college tuition.  Consumers are stopped borrowing as they realize that the cost of loans now is greater than the change in the value of the goods they plan to purchase, whether that is a major appliance, car, or home.   If one believes that prices are not going to rise, it may be cheaper to save rather than borrow.   That explains why lay-a-way programs are starting to make a comeback.   Finally,  consumers are changing views on what they believe are necessities.  Whether this reflects the state of the economy or changing demographics does not matter.   Items such as electric dryers, microwave ovens, and air conditioners are considered to be necessities by fewer consumers tan prior to the recession with the shift occurring before the recession began.
   
2. Companies focused on selling everything from appliances to shoes to consumers realize that their projections for consumer spending during the back-to-school and Christmas seasons were overly optimistic.   To the extent that these companies can, they are scaling back purchases to get their inventory more closely aligned with consumer demand.   Companies selling to consumers realize that managing overhead, selling, and inventory costs are critical if they are going to meet profit goals.  Those that were late to this realization will likely force higher levels of promotions during the upcoming selling seasons pressuring corporate profits.
   
3. The way we use computers, telecommunications, and energy have shifted both businesses and consumers toward technologies that require less labor to produce and maintain.  In addition, service and manufacturing companies have used these changes to reduce the use of labor intensive processes that take advantage these technologies.  The shift has resulted in the double digit unemployment among blue-collar workers which may not improve in the lifetime of the employees affected.

The slowdown in the economy should affect mail volume and revenue as much of the Postal Service's business is economically sensitive.  However, not all is bad news. 

• The Postal Service is likely to have a good 1st quarter in FY 2011 as political and retail advertising max out available broadcast advertising capacity and look to mail as the only advertising media that has the capacity to reach voters or customers. The increase in demand may have a negative impact on costs as the bump in volume may result in a bump in overtime to deal with peak volumes in October, 2010.  Also, this is a one time bump in revenue and volume and should not be mistaken for a longer term trend as the volume gained this fall will not come back again until the 2012 election.
  
• Costs for energy and labor will likely not rise much.   Lower energy prices will hold down transportation and facility costs.  Depending on the energy price assumptions used in the forecast, costs may be lower than now projected.

Given these trends it is clear that forecasting the Postal Service's finances need a second look.  In addition, it would seem that if the Postal Service wants to make any major effort to reduce its overhead and capacity, it may make sense to begin planning for changes that will begin after the January 1, 2011.   Once the election and shopping seasons are over, demand will be back down to normal seasonal levels reflecting only the general state of the economy and the technological shifts away from mail.

The Importance of a Viable Competitive Postal Sector

In its report "Economic Policy Reforms: Going for Growth 2010," the Organization for Economic Co-operation  and Development (OECD) suggested that Canada could enhance its economic prospects if Canada liberalized its "postal services by eliminating legislated monopoly protections and privatising Canada Post."  Canada's minister for transportation Rob Merrifield in response restated the Harper government's policy that Canada Post will retain its monopoly.

The OECD concern for the post reflects its position that a vibrant and competitive postal sector can promote sustainable economic growth.   The OECD's first developed its position over a decade ago, in a report entitled "Promoting Competition in the Postal Sector."  At that time, the OECD began raising the concern that member nations were not paying sufficient attention to updating the ownership, business objectives and corporate governance of national postal operators and regulation of the postal sector.  The OECD's work implied that retaining outmoded business models and regulatory structures hindered economic growth and the development of those sectors of a nation's economy that rely on the mail to expand their business or deliver the products that they sell.

The challenges that the Postal Service faces today were the challenges that most national posts faced at the end of the prior century.  These challenges included:

• First, meeting the growing competitive threat from electronic communication, on the one hand, and express and parcel carriers, on the other
• Second, internal reform and restructuring to improve efficiency and customer responsiveness and to reduce losses.

While in 2000, the "growing competitive threat from electronic communications," appeared to be far in the future, that is no longer the case. Today, no party is likely to make arguments similar to those presented to Presidential Commission on the Postal Service that implied that concerns about digital diversion were overblown.  Many of these presentations compared those that warned about digital diversion to the boy who cried wolf who had previous opined the end of the Postal Service as the telegraph, telephone, and facsimile machine became ubiquitous. 

OECD countries that prepared their national posts by advancing reforms and restructuring have weathered the combined impact of a severe economic downturn and a rapid shift in consumer preferences for digital delivery of documents.   While profits are down, most posts in these countries remained profitable in 2009.   These posts are successfully adjusting to the new competitive environment that in addition to digital competition, now may include a viable physical delivery competitor.

As Congress and the Obama look for ways to more rapidly grow the economy and create private sector jobs, it is time to take a serious look at how reforming the postal sector of the economy could speed economic growth and private sector job formation.