Testimony

Postal Service Privatization

By Edward L. Hudgins
April 30, 1996
Subcomittee on Treasury, Postal Service, and General Government
Committee on Appropriations
United States House of Representatives

I would like to thank the Members of this committee for the opportunity to testify today on the need to privatize the U.S. Postal Service.

While fast, efficient communications are vital for advanced industrial economies and societies, the United States is poised to enter the 21st century with a postal monopoly established in the 18th.

The federal government maintains a monopoly on the transport and delivery of messages on pieces of paper or other material media. It is a federal crime for private suppliers to offer these services. Yet problems with the U.S. Postal Service (USPS) are chronic. More and more, the defects of the Postal Service stand in contrast to the successes of the private sector-created telecommunications revolution. Critics compare e-mail with what they call the Postal Service’s snail mail.

In about a month the Cato Institute will publish a collection of papers under the title, The Last Monopoly: Privatizing the Postal Service for the Information Age. This book outlines in detail the problems inherent in the Postal Service, shows how markets are undercutting the need for this last monopoly, and offers approaches to privatization. My written testimony is a preview of the introductory chapter of the book.

While all of the policy and economic arguments are on the side of private postal service, I will focus here on several facts that I consider of particular interest at this time.

Composition of the Mail

First, look at the composition of the mail today. Of particular interest to most consumers is the use of the mails simply to send a letter or card to a friend or relative, that is, household-to-household mail. But in 1991, this mail comprised only 8.4 percent of total mail flows (down from 12 percent in 1987). Some 3.3 percent of all mail was correspondence, while 4.9 percent was greeting cards. The vast majority of mail, 44.3 percent in 1991, is composed of businesses-to-household communications, mainly advertisements. Mail sent from households to businesses, mostly payment of bills, comprised 15.4 percent in 1991. The phrase “The check is in the mail,” of course, is the euphamism for “Don’t blame me, the post office takes forever to deliver the mail, or at least enough time to allow me to put some money in my account to cover the mailed check.” Mail send from businesses to other businesses constitutes 31.5 percent of the mail in 1991.

These forms of communications more and more are handled by faxes, e-mail and private delivery companies such as Federal Express that are allowed to deliver emergency mail as long as they charge at least $3 or twice as much as the first-class rate, whichever is more. Most advertisers would welcome competition for their business. Greeting cards now can be generated and customized by computers. With less costly, high quality printers it will be easier to surprise friends and relatives with hard-copy best wishes without resorting to the mail.

And the capacity for customers to pay bills electronically is growing. So far the paperless office has not come about, and the actual volume of mail has continued to increase. Yet integrated, multimedia systems increasingly will be introduced into homes and offices during the next decade, promising new 21st century services.

These facts suggest that few customers would miss the postal monopoly.

It is impossible to predict for certain the evolution of communications over the next two decades nor the specific role of mail delivery in the mix. But it is possible to say with certainty that the evolution will be distorted and retarded if the government postal monopoly continues to exist. Suppliers of innovative services always will be slowed by the elements of their services dependent on the Postal Service. They will stumble over postal regulations. They will be blocked by the weight of the costly 800,000 postal employees. They will fight constant battles against Postal Service attempts to extend control over their activities, and against unfair government-subsidized competing services.

The Record of Similar Sectors

A second important fact about the Postal Service, the record of similar sectors, suggests that the mail would be delivered without a postal monopoly.

A cursory look at the complex technological society around us refutes the claims that only the federal government can provide swift, high-quality, cost-effective mail delivery, and that the private sector somehow is not up to the task. Private airlines safely convey passengers from all parts of the country to disparate destinations. (The major causes of delays are the government-owned and operated airports and air traffic control system.) Trucks and trains transport perishable food, delicate consumer goods, costly industrial equipment, and fragile furnishings to customers in every corner of the country. Why, then, do supporters of the government postal monopoly believe that private entrepreneurs cannot successfully transport messages on paper door to door?

The prices of products and services drop when markets and economic freedom force suppliers to become more efficient. Airlines were deregulated beginning in the late 1970s; as a result, the cost of air travel per passenger mile, adjusted for inflation, has dropped by at least half. Truck transportation was deregulated at about the same time; the savings in transport costs, passed along in lower prices for many products being transported, is estimated as high as $100 billion over a decade. As important, reliable efficient tranportation allowed the development of just-in-time inventory systems that allowed enterprises to increase their productivity.

The newest information transmission and processing sector, a result of private sector innovations, consists of millions of personal computers as well as as main frames connected by the Internet. In 1981 the first personal computers came with 64 kilobytes of memory and sold for $3,000, or about $46,000 per megabyte. Today a megabyte of memory in a computer can be had for under $1. Why, then, has the price for sending first-class mail not gone down? Why have stamp prices risen nine times since 1973, from 8 cents to 32 cents today? The Postal Service’s chief financial officer, Michael J. Riley, defends the USPS record: “If we had not automated [at a cost of over $600 million in the late 1980s] we would have had an $8 billion price increase, instead of a $5 billion increase [represented in the 32 cent rate].” [1]

Of course, where competition with the Postal Service is allowed, as in overnight delivery, the private sector prospers and the USPS simply is not a significant supplier. Also of interest is the fact that federal law mandates that private-sector prices for the service must be at least $3 or twice the cost of the first-class mail equivalent. Yet customers pay the price, indicating a preference for the private-sector guarantee of delivery over the government’s less-reliable monopoly, even if it costs 10 or 20 times more than a stamp.

Public-Private Convergence?

Some of the techniques available to or used by the Postal Service to improve quality and contain costs call into question the claim that a postal monopoly is needed. These techniques are used in the private sector, thus suggesting that they would be used without a government monopoly. For example, to hold down costs, the USPS offers discounts for businesses that presort mail going to different cities, and allows transportation of such presorted bags by private trucks to post offices in the cities of destination. The USPS also offers discounts on bar-coded mail. In early 1996 the Postal Rate Commission, a government body that must approve prices for mail services, endorsed a plan to offer even more substantial discounts for large business mailers using such techniques. But why not contract out all bulk shipments between major distribution centers, or all mail sorting to private suppliers, or simply allow the private sector to perform those functions entirely?

The Postal Service used to claim as one of its virtues that it delivers door to door. Yet in 1978 it decided that no service would be provided to the doors of newly built residences. Roadside boxes are used where appropriate. But increasingly the Postal Service delivers to cluster boxes in housing developments. Cluster boxes allow carriers to serve dozens of customers in a fraction of the time it takes to go door to door. Now individuals must travel as far as half a mile to retrieve their mail. Private suppliers, if allowed to deliver mail, might find it profitable to offer delivery to the door for no extra charge in densely populated areas. Many customers might be willing to pay a fee for such convenience.

But the lines between the USPS and the private sector are becoming blurred. More and more, a trek of a half mile or less brings one to private establishments such as Mail Boxes, Etc., that offer mailboxes for rent at offices in shopping centers and other locations convenient to customers. Even with postal boxes for rent in government post offices, customers often choose private-sector alternatives. So why not allow private carriers to deliver to government cluster boxes in housing developments or to establish their own boxes in such locations?

All the functions performed by the Postal Service are being performed well at some level by the private sector. And to the extent that the Postal Service turns to contracting with the private sector as a means to increase efficiency, the more it advertises that others can do its job.

Efficiency: Lost in the Mails

The importance of postal privatization is written in the Postal Service’s roller-coaster record of quality crises followed by improvement followed by more crises. Each postmaster general pledges to improve mail services and hold down costs. Some do, for a time. But problems and price hikes always come back.

The country was shocked in recent years by tales of Postal Service incompetence. Inspectors at the South Maryland processing facility found 2.3 million pieces of bulk mail delayed for up to nine days and 800,000 pieces of first-class mail delayed for three days. [2] The mail was stashed in tractor-trailer trucks—apparently because it is not counted in postal statistics as “delayed” if it is not actually in the facility. Naturally this calls into question the reliability of other Postal Service statistics and claims of improved efficiency based on them. One suburban Washington, D.C., mail carrier was found to have bags of mail stored in his apartment with corpses of animals.

In Chicago in 1994, 5.9 million pieces of forwarded mail were delayed for a month. A hundred bags of months-old mail were found in one truck; 200 pounds of burned mail were found under a viaduct. [3]

In that same year in the Bronx, New York, a private high school principal found that mail sent to other parts of the city was taking two weeks to reach their destination. Documents that were 13 days in transit to a Manhattan destination a few miles away caused the school to miss budget deadlines, costing it $7,000. [4]

Such incidents have brought pressure on the Postal Service from angry customers and members of Congress. Rep. Steny H. Hoyer (D-Md.) said, “The bottom line is we are outraged about the persistence of poor mail delivery service in this region.” [5]

Postmaster General Marvin T. Runyon has vowed to reverse the Postal Service’s poor record and make it operate more like a business. And of late there have been no major scandals of the magnitude of those in Washington and Chicago. Further, USPS figures show a 4 percent improvement nationally over the past year in next-day delivery, up to 88 percent of test letters mailed. [6]

But the inherent problems of the Postal Service as manifest in its roller-coaster record on service in many ways this is not surprising. The average wage and benefit package of clerks and sorters is nearly $43,000, compared to about $35,000 for all private sector workers. [7] The Postal Rate Commission found recently that “nonproductive time” constitutes 28.4 percent of mail-processing labor costs. There is 1 manager for every 10 workers at the USPS, compared with 1 for every 15 workers at Federal Express.

Of course, the facts that there are 800,000 mostly-unionized postal workers, and that the USPS is a protected monopoly, combine to create an economic dynamic that almost ensures periodic cost and quality crises. There are very few hardships for the Postal Service if quality suffers, since customers cannot turn to competitors for services. But it is politically very difficult for the Postal Service to cut its work force to hold down costs. One cause of this difficulty is the fact that all congressional districts have numerous post offices and postal workers to remind elected officials and candidates of their special interests. Another cause is the fact that postal union political action committees make generous contributions to political campaigns, $3.27 million for the 1993-1994 election cycle. [8]

If the Postal Service were subject to competition, it is likely that quality would not have sunk so low nor prices continued to rise. The situation likely would not have reached a crisis, with customers inconvenienced and policymakers outraged, before action was taken. With competition, as quality declined, consumers would start switching to alternative suppliers. The Postal Service would have a choice: act quickly to correct its problems, or lose its customers and either shut down or be bought out by competitors.

Self-Promotion and Power Seeking

The Postal Service has taken steps to polish its tarnished image. Like a typical bureaucracy, it is engaging in heavy self-promotion, advertisements not about the services it offers but simply about itself, to protect its existence as a monopoly.

Many critics were dismayed when, with scandals breaking in 1994, the Postal Service announced it was spending $7 million to develop a new logo. That should have been no surprise. After all, the USPS is the monopoly that spent $90 million for advertising in the 1992 Olympics in Barcelona, Spain, and Albertville, France. [9] It is doubtful that the USPS increased its business through the ads. After all, Americans, and for that matter Spaniards and French citizens, could hardly induced to switch to the Postal Service from competing carriers because no competitors are allowed.

In late 1995 the USPS paid for a series of radio commercials that feature actor George C. Scott extolling its virtues. Scott explains that the price of stamps goes up because the Postal Service does not receive government funds and operates solely on receipts from customers. But this information is misleading. Total postal revenues in fiscal 1996 are estimated at $56 billion. In that year the federal government will give an estimated $770.9 million to the Postal Service, with $625 million of the sum listed as off budget and $145.9 million on budget. Of the on-budget expenditures, $109.1 is principally to offset revenues forgone on federally mandated free or reduced rate mail such as Congress’s franking privileges. Subsidies to the Postal Service have fluctuated over the past decade, hitting a high of $2.23 billion in 1988. (See Table 1)

Table 1
Federal Outlays to the Postal Service
(in billions of dollars)

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Total 1.35 .758 1.59 2.23 .13 2.12 1.83 1.17 1.60 1.23
On budget 1.35 .758 1.59 2.23 .44 .49 .51 .51 .16 .13
Off budget -.31 1.63 1.32 .66 1.40 1.10

In past years the Postal Service has run deficits. What George C. Scott does not mention in the commercials is that the Postal Service has special preferential borrowing privileges with the federal government. He does not mention that the monopoly power of the Postal Service to jack up stamp prices without fear of customers turning to competitors is a kind of government-backed power to tax. He does not mention that stamp prices might go down, as do the prices of many other goods and services, if the Postal Service were subject to competition. He does not mention that the USPS has billions of dollars in unfunded pension liabilities backed by the federal government, that is, by American taxpayers. He does not mention that, unlike private enterprises, the Postal Service is exempt from most taxes.

Why is the quasi-government agency wasting money not on advertising its services but simply on boosting its image? Perhaps part of the answer is to counteract the embarrassing content of the actual advertisements for its services. One is for “Priority Mail.” Several years ago this was guaranteed two-day priority mail, for $2.90. But in 1995 the ads read “Are you paying for tomorrow when the day after is so much cheaper? Priority Mail. 2-day delivery* within your region, starting at $3.” And what does one find at the bottom of the page under the asterisk? “*Average two-day performance within the region shown. Delivery measured from post office to post office excluding time of delivery to address. Such performance is an average, not a guarantee. Delivery outside a region may take longer.” [10]

This is in sharp contrast to ads by the private Federal Express proclaiming “When it absolutely, positively, must be there,” or “We can deliver before 8:00 a.m., or by 10:30 a.m., or by 4:00 p.m. etc.”

The Postal Service recently did decide to stop one form of advertisement. It will no longer publicize the results of customer surveys. Apparently the less-than-perfect results do not create the image the Postal Service is cultivating.

Yet the Postal Service does have time and money to engage in enterprises that have absolutely nothing to do with delivering the mails. It has gone into the business of marketing prepaid phone calling cards for long-distance calls. Provision of the cards of course is not part of mail delivery. The Postal Service uses its assets and facilities gained from its monopoly position to compete with private-sector suppliers.

But the Postal Service is notorious for attempting to grab any market it can. In the late 1970s it tried to assert its monopoly control over mail to ban the use of the newly emerging technology of electronic mail. Fortunately it was overruled. [11]

The Darker Side of Monopoly

Customers standing in long lines at a post office, listening to clerks in back rooms talking and laughing while only one or two clerks provide service, likely would concede that the USPS is inefficient. But they might be surprised to learn that the monopoly that employs kindly carriers delivering postcards to Grandma also maintains its power and control at the expense of civil liberties.

Traditionally, government control over the mails has been used to silence communications of which political authorities did not approve. Before the Civil War anti-slavery material in the mails would be stopped in certain parts of the country. Under the Comstock Act of 1873, material deemed “obscene, lewd or lascivious” was banned from the mails. Birth control information was kept out of postal circulation. In 1912 postal officials refused to allow mailings of a newspaper article by feminist Margaret Sanger entitled “What Every Girl Should Know” because it contained the words “gonorrhea” and “syphilis.” [12] Works of literature by authors such as D. H. Lawrence, Theodore Dreiser, and Edmund Wilson were suppressed. In this century material defined as “obscene” has been targeted by postal inspectors.

In 1993 the Postal Service stepped up efforts against businesses that “misused” overnight couriers such as Federal Express. It claimed that some enterprises were illegally bypassing the Postal Service by using private providers for communications not deemed “urgent.”

How does the USPS know of these “misuses”? A businessperson seals a document in a FedEx envelope, FedEx accepts the envelope and transports it to its destination, and the recipient opens it. Does the government place spies in the mailroom in the sender’s office or do federal agents pose as secretaries working for the recipient? In fact, armed postal agents have conducted inspections and audits of records in private firms and, over a three-year period, levied half a million dollars in fines. Postal inspectors also conduct surveillance, with binoculars and telescopes, of shipments and delivery trucks to collect evidence or count the volume of “misuse” of couriers.

Another case of abuse concerned a direct mail marketer, Benjamin Suarez, who distributes sweepstakes-type promotionals similar to those of Publishers Clearinghouse. In December 1994 the Postal Service obtained a Temporary Detention Order against Suarez’s business, claiming that four promotionals were fraudulent. This meant that during the busy Christmas season, the USPS seized and held all mail addressed to Suarez’ enterprise, with no explanation sent to customers, and with no way for the enterprise to inform customers what had happened to their money and requests.

A hearing was held in February 1995 before a federal judge on whether to make the Temporary Detention Order “preliminary,” that is, to keep it in effect until the case could be resolved, potentially for months or even years. Such preliminary injunctions are routinely granted. But at the hearing, part of the Postal Service’s concerns about Suarez became clear. In the materials that the postal inspector submitted to the judge were pages from Suarez’s book, Seven Steps to Freedom II, that were extremely critical of the Postal Service, as well as sections critical of federal judges. Excerpts included “The laws under which the U.S. Postal Service operates are unconstitutional and constitute mock justice,” and “The USPS administrative court is rigged.” Suarez further wrote:

The U.S. Federal Court System is also rigged in the USPS’s favor—the USPS wins virtually 100% of the time in temporary restraining orders (TROs), injunctions and appeal suits on USPS administrative court decisions.

Suarez might enjoy First Amendment privileges to publish his opinions, but apparently postal officials thought it acceptable to use their government power to punish him for those beliefs.

Fortunately, Suarez’s description of federal courts ultimately proved wrong in his own case. One judge refused to hear the case. Another told the Postal Service to work out a consent agreement with Suarez and return his mail to him. But the Postal Service apparently continues to seek ways to punish Suarez for his opinions and for beating it in court. In July 1995 a meeting was held between postal officials and representatives from the Federal Bureau of Investigation, Internal Revenue Service, Secret Service, Federal Trade Commission, and Justice Department Criminal Division, among others, concerning future proceedings against Suarez.

There is reason to suspect that such abuses could increase in the future. Whenever government power is mixed with free institutions, the free institutions suffer. For example, printed material such as books and newspapers enjoy First Amendment free-speech protections. So do telephone conversations. Unfortunately, television and radio broadcasts are subject to censorship.

With the telecommunications revolution the distinctions among the media are breaking down. It is possible to read a book, newspaper, or other material on a computer screen hooked up to the Internet, or to have conversations via keyboards. But in the Telecommunications Act of 1996, the U.S. Congress expanded censorship to the Internet. Specifically, the law makes it a crime to knowingly display indecent or patently offensive material to children under 18, a broad and vague standard that now will cover a wide range of content that is permitted not only in print but even on cable television.

The more the Postal Service attempts to integrate its activities with those of the private sector or with electronic forms of communications, the greater the danger that it will get its wish from the late 1970s to control e-mail.

Abolishing the Last Monopoly

The case for privatizing the Postal Service is clear. Indeed, the burden of proof should be on those who would retain the postal monopoly. The correct question to ask, then, is not “Should the Postal Service be privatized?” Rather, is “Is there any compelling reason for maintaining the postal monopoly?” The answer is a loud and ringing “No!”

The Postal Service survives through sheer political power, not through its ability to satisfy customers. As the country moves into the 21st century, and as policymakers attempt to restore economic liberty, those policymakers should show the courage to abolish the last monopoly and privatize the U.S. Postal Service.

Notes

[1]Quoted in Mark Lewyn, “The Check’s Still Not in the Mail,” Business Week (March 18, 1994), p. 38.

[2]Bill McAllister, “Millions of Letters Undelivered,” Washington Post (July 20, 1994), p. A1.

[3]Jonathan Franzen, “Lost in the Mail,” New Yorker (October 24, 1994), p. 62.

[4]Matthew Purdy, “Mystery in the Bronx: Third-Rate Service for First-Class Mail,” New York Times (March 12, 1994).

[5]Quoted in Kenneth J. Cooper and Bill McAllister, “Mail Delays Spur Investigations,” Washington Post (July 22, 1994), p. A4.

[6]Cited in Bill McAllister, “Postal Service Better, Especially in Maryland,” Washington Post (December 20, 1995), p. A23.

[7]Cited in John Merline, “Can the Postal Service Deliver?” Investors Business Daily (October 28, 1994), p. 2.

[8]Figures compiled by the Center for Responsive Politics in Washington, D.C.

[9]Alvin Snyder, “The Post Office Is an Ad Agency’s Dream,” San Francisco Chronicle (March 10, 1994).

[10]Washington Times (August 10, 1995).

[11]U.S. Congress Joint Economic Committee, The Future of Mail Delivery (June 18, 1982), p. 12.

[12]Cited in Nadine Strossen, Defending Pornography: Free Speech, Sex, and the Fight for Women’s Rights (New York: Scribner, 1995), pp. 226-227.