April 19, 2010 8:35AM

The Postal Service’s Union Problem

Comments from members of the House Oversight and Government Reform Committee at a recent hearing on the U.S. Postal Service’s woes indicate they don’t appreciate the USPS’s union problem. Postmaster General John Potter went before the committee to make his case for restructuring the postal operation, including greater labor flexibility.

From GovExec.com:

"You have to find people meaningful work, or no matter how compassionate you are, you're not doing them any favors," said Rep. Darrell Issa, R-Calif., the ranking member of the House Oversight and Government Reform Committee, criticizing holding rooms where underemployed postal workers wait until there are tasks for them to perform. "How many billions of dollars would have been saved if you'd aggressively right-sized the force before you came to us and said you want to go from six days [of mail delivery] to five?"

Congressman Issa should be informed that it is union rules that prevent postal management from laying off underemployed postal workers and having to put them in holding rooms.

Issa told Potter during his opening statement that the Postal Service has "more or less a third more people than you need," but he said it "is not really acceptable" to convert full-time jobs to part-time positions, unless applicants are looking specifically for part-time work or part-time positions that lead to full-time work. Rep. Diane Watson, D-Calif., said she was concerned that part-time workers might not be treated fairly or could be excluded from collective bargaining agreements.

Lawmakers insisted repeatedly that even as the Postal Service confronts harsh financial realities, the agency must take into consideration the jobs of postal workers. "I'm hopeful this committee will find a way to deal with it that preserves the good faith that the people who serve the U.S. Postal Service have a right to expect," said Rep. Dennis Kucinich, D-Ohio.

These members might want to read the Government Accountability Office’s latest report on the USPS, which called the mail monopoly’s business model “not viable.” Union labor is part of the problem. The average postal employee earns $83,000 a year in total compensation and 85 percent of its workforce is covered by collective bargaining agreements. Labor accounts for 80 percent of the USPS’s cost structure.

The GAO cites the following as reasons why USPS labor costs are so high:

  • The USPS covers a higher proportion of employee premiums for health care and life insurance than most other federal agencies, which is impressive because it’s hard to be more generous than federal agencies.
  • USPS workers participate in the federal workers’ compensation program, which generally provides larger benefits than the private sector. And instead of retiring when eligible, USPS workers can stay on the “more generous” workers’ compensation rolls.
  • Collective bargaining agreements limit the amount of part-time and contract workers the USPS can use to fit its workload needs, and they limit managers from assigning work to employees outside of their crafts. The latter explains why you get stuck waiting in line at the post office while other postal employees seemingly oblivious to customers’ needs go about doing less important tasks.
  • Most postal employees are protected by “no-layoff” provisions, and the USPS must let go lower-cost part-time and temporary employees before it can lay off a full-time worker not covered by a no-layoff provision.
  • If the collective bargaining process reaches binding arbitration, there is no statutory requirement for the USPS’s financial condition to be considered. This is like making the decision whether or not to go fishing, but not taking into consideration the fact that the boat has holes in its bottom.

The fact that Postmaster Potter has to go to Congress to plead for help to make business decisions points to a fundamental problem. Government-run businesses are necessarily hamstrung by the whims of politicians, who often only have a vague understanding of economics and business. If FedEx or UPS had to get congressional permission to manage its workforce, both would collapse. As mail volume falls, that’s where the USPS is headed unless we privatize it and deregulate postal markets.

March 23, 2010 8:32AM

Postmaster Indicates Need for Privatization

A recent Senate Appropriations subcommittee hearing on the U.S. Postal Service’s dire financial prospects found little enthusiasm for the USPS’s idea to eliminate Saturday mail service. Financial Services subcommittee chairman Sen. Richard Durbin (D-IL) said “serious questions need to be asked and answered,” and ranking member Sen. Susan Collins (R-ME) expressed concern that it would send the USPS into “a death spiral.”

The USPS is already in a death spiral due to changes in technology, high labor costs, and costly congressional mandates that have left it facing a projected $238 billion in losses over the next ten years. The USPS says dropping Saturday service would save the USPS $3 billion a year. However, the Postal Regulatory Commission believes the savings would be significantly smaller. Regardless, if the USPS stops Saturday service then private firms should be allowed to provide Saturday mail service.

Better yet, the USPS monopoly should be completely repealed and private firms allowed to deliver mail every day of the week. Interestingly, Postmaster General John Potter’s testimony inadvertently makes a case for privatizing the USPS.

Potter notes that when private businesses are losing money, they sell off assets, close locations, and reduce employment. He cites Sears, L.L. Bean, and Starbucks as recent examples of companies making cost cutting moves in the face of declining revenues. The Government Accountability Office’s testimony noted that the USPS has more retail outlets (36,500) than McDonalds, Starbucks, and Walgreens combined. Yet, its post offices average 600 visits per week, which is only 10 percent of Walgreen’s average weekly traffic.

In his testimony, Potter states:

If the Postal Service were provided with the flexibilities used by businesses in the marketplace to streamline their operations and reduce costs, we would become a more efficient and effective organization. Such a change would also allow us to more quickly adapt to meet the evolving needs, demands, and activities of our customers, now and in the future.

This is precisely why the USPS needs to be privatized and subjected to the demands of the market and not the whims of Congress. Members of congress always raise a fuss when the USPS targets postal outlets for closure in their districts.

Potter wants Congress to suspend a requirement that the USPS pre-fund its retiree health benefits. He argues that the trust fund for these payments has a $35 billion balance, which he says is enough to pay the health premiums for its 500,000 retirees through their lifetimes.

The more fundamental problem is the existence of this generous benefit to begin with. Potter notes that private companies aren’t subject to a pre-funding mandate. But the vast majority of private companies don’t even offer retiree health benefits. The GAO also points out that the USPS retiree benefits are generous even by government standards:

USPS pays a higher percentage of employee health benefit premiums than other federal agencies (80 percent versus 72 percent, respectively). In addition, USPS pays 100 percent of employee life insurance premiums, while other federal agencies pay about 33 percent.

Potter naturally wants more flexibility in dealing with the USPS’s excessive labor costs. The average postal employee receives $83,000 a year in total compensation. Employee pay and benefits constitute 80 percent of the USPS’s cost structure, which despite increased automation has remained the same since the 1960s. But so long as the USPS remains a government enterprise, it’s hard to imagine Congress standing up to the postal unions and giving management the labor flexibility it desires.

Finally, Potter wants the USPS to have more freedom when it comes to pricing and getting into new lines of business:

We also need the ability to expand our products and services, and ensure prices for our Market-Dominant products are based on the demand and cost of each individual product.

“Market-Dominant” is an Orwellian way of saying “Government Granted Monopoly.” Again, if the Postmaster wants mail prices to have an economic rationale, then the USPS needs to be privatized so that the market can efficiently set prices. Further, the USPS has a poor track record when it comes to expanding into services not protected by its monopoly. Plus it would be competing against the private sector on advantageous terms due to its status as a government enterprise.

What Potter wants -- and needs -- is something that only the private sector can provide. If the Senate hearing is any indication, Congress has no present plans to relinquish its control over the dying government monopoly. Instead, the USPS will likely continue to bleed red until policymakers run out of band-aids and are finally confronted with the choice of either privatization or direct taxpayer funding.

March 5, 2010 10:04AM

Smelling Your E‑mail

In response to this week’s news that the beleaguered U.S. Postal Service is facing $238 billion in losses over the coming decade, Washington Post columnist Charles Krauthammer lamented the inevitable demise of the government mail monopoly:

As a conservative who believes in the market, it ought to die, but as a conservative that believes in tradition and stuff that really holds us together, I would subsidize until it dies a natural death in the next generation. But for old guys like me, keep it going for a while.

[As for] the hard-hearted younger generation — well, if you ever got a sweet-smelling love letter at 17, you'd feel otherwise. Of course, I never did, but somebody did.

You can't smell your e-mail.

I did receive sweet-smelling love letters from a girl back home during my first year in college. Fifteen years later, my old college roommate is still making fun of me for it. But I don’t "feel otherwise" about the government mail monopoly. The sooner it disappears and is replaced by private operators unshackled from the unions and government mandates that are speeding the USPS’s demise, the better.

Krauthammer’s comment that “you can’t smell your e-mail” isn’t even true. The technology exists for scents to emit from your computer when you open an e-mail, click on a web advertisement, or play video games.

Krauthammer believes that the government monopoly has helped maintain national cohesiveness:

But, look, anything that is in Article 1 Section 8 of our constitution, anything that Madison had waxed enthusiastic about it in Federalist 42 — the postal roads that have kept us together — as an old-school guy, I don't want to see it die.

If by “kept together” he means that mail enabled people all over the country to communicate with each other, the telecommunications revolution that is undermining the postal service has dramatically enhanced long-distance correspondence. Facebook is a perfect example. Most of my Facebook “friends” are people I would have otherwise lost touch with or rarely communicated with.

Finally, Krauthammer is only somewhat correct when it comes to the issue of privatizing the USPS:

Look, it's very obvious that you can't privatize this. Three studies have looked at the postal service. Because of the new technology there is no entrepreneur in his right mind who would purchase it. So it's going to be on the government dole forever.

The question is, is it completely obsolete? Look, it has one mandate which other private services don't have. It has to reach every tiny hamlet everywhere in the country no matter what. It's got to be universal. So that's a slight handicap that the private companies don't have.

Its main handicap, of course, is the crushing labor union contracts and the new technology, especially e-mail, which makes most of what it does obsolete. So that's why it runs a huge deficit.

It’s true that with the combination of unionism and government mandates the USPS in its current form is nothing private investors would want to touch. But that’s the whole point of postal liberalization and privatization. It’s pretty clear that the USPS is going to be directly supported by taxpayers in the future or it’s going to succumb to market realities. Instead of waxing nostalgic about a socialist enterprise, let’s focus on how the wonderful technologies brought to us by the private sector can better get the job done.

As Fred Smith, founder of FedEx and a Cato supporter, noted in a Cato book on the postal service:

[T]here are many things in American life that have had a great history, for example the cavalry. Yet, we do not do cavalry charges anymore. We must recognize that there are many institutions that long ago passed into history.

December 3, 2009 8:13AM

Not So Intelligent Mail

In 2003, the U.S. Postal Service initiated the Intelligent Mail program, which would integrate thirty different barcode systems used by commercial mailers into a single system. Ideally, the new barcode system would improve efficiency, reduce costs, and improve timeliness of delivery. However, a new report from the Government Accountability Office details numerous problems with the program’s implementation that are all-too-common in government:

  • Delays. The entire program was supposed to have been deployed by January 2009. Now it’s being done in phases, with the second phase completed by the end of November. Key components of the program have been “deferred,” including performance measurement capabilities required by law. Greater automation of the business mail verification process, which was one of the key justifications for the program, has also been left out.
  • Cost Overruns. To incorporate all the components as originally planned, the USPS will need to spend more money on a third phase. However, the GAO says that program managers aren’t sure money will be made available given the USPS’s poor financial condition. The GAO also found that program managers didn’t include all the costs associated with the program, and they therefore “lack an accurate total cost estimate.”
  • Poor Performance. The first phase is already being plagued by operational problems. As of June 2009, 73 issues had been identified by mailers and the USPS.
  • Mismanagement. The GAO sensibly recommended that the USPS define the program’s core requirements and use them as a basis for developing reliable cost estimates. But in a prime example of bureaucratic chutzpah, the USPS responded: “Any attempt to define the ‘entire program’ and the cost associated is a waste of funding and resources.”
  • Fraud. There is no evidence of fraud yet, but the GAO notes that “a conflict of interest exists because the prime contractor for the development of the program also manages program management office activities.”

Let’s rid ourselves of these problems and open mail delivery to competition and eventually privatize the USPS. As President Obama himself said in August, “UPS and FedEx are doing just fine…It’s the Post Office that’s always having problems.”

November 18, 2009 8:11AM

Government Mail Loses $3.8 Billion

The U.S. Postal Service reported that it lost $3.8 billion last fiscal year and that it expects to lose $7.8 billion this year. The loss occurred despite cost-cutting measures and legislation that allowed the USPS to forgo $4 billion in required payments to pre-fund retiree health benefits.

From the Associated Press:

The post office has been struggling to cope with a decline in mail volume caused by the shift to the Internet as well as the recession that resulted in a drop in advertising and other mail. Total mail volume was 177.1 billion pieces, compared to 202.7 billion pieces in 2008, a decline of almost 13 percent. For the fiscal year that ended Sept. 30 the agency had income of $68.1 billion, $6.8 billion less than in 2008. Expenditures were down $5.9 billion to $71.8 billion.

The recession and the rise in electronic communications are generating huge financial problems for the lumbering government monopoly. Despite its efforts to reduce headcount, the USPS remains overburdened by a costly and heavily unionized workforce. As I noted previously:

The average USPS worker earns $83,000 per year in compensation, which is considerably more than the average U.S. worker. And the Government Accountability Office recently noted that ‘compensation and benefits constitute close to 80 percent of USPS's costs — a percentage that has remained similar over the years despite major advances in technology and the automation of postal operations.’

Radical reform is needed, but I suspect that Congress will just paper over the problems for now and also continue allowing the agency to defer funding its retirement obligations:

The post office is required to make an annual contribution of about $5 billion to pay in advance for medical benefits for future retirees. Congress reduced that by $4 billion for 2009, but that change was for one year only. The agency's independent auditor, Ernst & Young, questioned whether the post office would have enough money to make the next payment on Sept. 30, 2010, when $5.5 billion will be due.

This will just kick the can down the road. It shows that even when Congress gets something right -- as it did with making the USPS pre-fund its retiree health benefits -- it lacks the will to see it through when the going gets tough. Meanwhile, the Europeans continue to make progress toward deregulating their national postal services and allowing for competition. Unfortunately, it seems that Congress only looks to Europe for guidance on expanding the welfare state.

November 6, 2009 1:23PM

Government of Continual Failure

The Washington Post is full of so many stories about government failure these days, it's hard to keep up.

Today, on page A19 we learn about a Small Business Administration subsidy program that has a 60-percent default rate. On the same page, we learn that the U.S. Postal Service will lose $7 billion this year.

Flipping over to page A20, we learn that former New York City Police Commissioner Bernard Kerik is a liar, a tax cheat, and thoroughly corrupt.

Then flip back to A15, and columnist Steve Pearlstein rightly lambastes the latest stimulus scheme from Congress: "This $10 billion boondoggle is nothing more than a giveaway to the real estate industrial complex."

Finally, on A14, we've got government-owned Fannie Mae losing a colossal $19 billion this year and asking the Treasury for another $15 billion taxpayer hand-out.

The federal government is a mess. Policymakers have no idea what the effects will be when they spend billions on scheme after scheme. Most of them don't read the legislation, they don't understand economics, and they never admit mistakes when their schemes almost inevitably fail. Fully 40 percent of the vast federal budget will be debt-fueled this year, but few policymakers seem to care. And public corruption seems never-ending. 

Isn't it time to give libertarianism a chance?

June 23, 2009 9:06AM

Privatize the Post Office

Another day, another story on financial troubles at the federal government's mail monopolist.  We don't expect the government to make our blue jeans, transport fruits and veggies from the farm to the market, build computers and IPods, or manage the manufacturing of automobiles, so why must it continue to deliver first-class mail?  The quality of the USPS's "services" has been a punchline in my family since I learned to walk.  But with technology rendering it's clunky business model increasingly moot, Government Mail's bottom line is looking uglier and uglier. It would cost me 44 cents to mail a letter to California, and it would cost me the same amount to mail that letter to the next town over.  What sense does that make?

As today's editorial in the Washington Post leads off:

THE POST office may be the next too-big thing. If it continues on its present course, the U.S. Postal Service stands to post $6 billion to $12 billion in losses by the end of the fiscal year. By the end of the second quarter of fiscal 2009, it had racked up an operating loss of more than $2 billion, almost equal to its total losses last year. So far, the Postal Service has depended on loans from the Federal Financing Bank, a federal borrowing agency, to help make up the difference, but it is fast approaching its $15 billion credit limit. Something has to give.

Kudos to the Washington Post for proceeding to acknowledge that the rest of the western world has been trending toward privatization of it's government mail monopolies for years.  My colleague Chris Edwards recently touched on the issue of privatizing the USPS as part of a larger piece on privatizing a plethora of federal operations:

The mammoth 685,000-person U.S. Postal Service is facing declining mail volume and rising costs. The way ahead is to privatize the USPS and repeal the company's legal monopoly over first-class mail. Reforms in other countries show that there is no good reason for the current mail monopoly. Since 1998, New Zealand's postal market has been open to private competition, with the result that postage rates have fallen and labor productivity at New Zealand Post has risen. Germany's Deutsche Post was partly privatized in 2000, and the company has improved productivity and expanded into new businesses. Postal services have also been privatized or opened to competition in Belgium, Britain, Denmark, Finland, the Netherlands, and Sweden. Japan is moving ahead with postal service privatization, and the European Union is planning to open postal services to competition in all its 27 member nations.