The U.S. Postal Service is in a growing financial crisis as mail volume continues to plunge. The Government Accountability Office says that a “comprehensive package of actions is needed to improve USPS’s financial viability.”
In House testimony last week, I argued that such a package should include privatizing the USPS and opening postal markets to competition. Background on the USPS is here.
The USPS is being squeezed by rising costs and falling mail volumes. My testimony proposes ways for the USPS to cut costs including closing post offices, reducing delivery from six to five days, and cutting employee retirement benefits.
The chart below shows the falling mail volumes. First-class mail per capita has dropped 53 percent since 2000. First-class mail is the USPS’s most profitable product. It includes personal letters, bills, bank statements, greeting cards, some advertising mail, and other items.
Source: First-class mail volume from here divided by U.S. population.
With the rise of electronic communications, the volume of snail mail has fallen precipitously, and the U.S. Postal Service (USPS) has been losing billions of dollars. The 600,000-worker USPS is an unjustified legal monopoly that is heavily subsidized. It is a bureaucratic dinosaur that Congress should put on the way to extinction.
In April, I highlighted an excellent study by Robert J. Shapiro that described USPS subsidies in detail. The subsidies include: exemption from taxes, low-cost government borrowing, monopoly protections, and other special benefits.
Shapiro completed another study in October, which is a great addition to the postal debate. He details how government-conferred advantages have translated into cross-subsidies from USPS monopoly products to products sold in competitive markets. The USPS uses its monopoly over letters and bulk mail to unfairly compete with FedEx, UPS, and others on express mail and packages.
Shapiro finds that USPS raises prices on its monopoly products, and uses those extra revenues to artificially push down prices on its competitive products. For USPS, this makes sense because consumers are less price sensitive for the monopoly products than for the competitive products. Shapiro concludes, “USPS has strong incentives to cross-subsidize its competitive products with revenues from its monopoly operations,” and it does so by $3 billion or more a year.
For Fed Ex, UPS, and other private firms, this is completely unfair because they have to pay taxes, borrow at market rates, and abide by all the normal business laws and regulations. Fed Ex, for example, had an effective income tax rate in 2015 of 35 percent, per the company’s 10-K. That tax load is money that it could not use for reinvestment to meet the subsidized USPS challenge. Shapiro thinks that “without its subsidies, [the USPS] could probably not compete at all” with its more nimble private competitors.
As Shapiro discusses, Congress and the USPS regulatory agency are familiar with the cross-subsidy problem, but their solutions have been weak. Part of the problem—as we also see with other government businesses like Amtrak—is that USPS is secretive about its accounting, and so the cross-subsidies are hidden.
The solution to all this is privatization and open entry. That would end cross subsidies, increase efficiency, improve transparency, and provide new opportunities for America’s entrepreneurs. Retaining special protections for a centuries-old paper delivery system when 215 billion emails blast around the planet every day is getting pretty silly.
I'm a little behind on my comedy watching, as I get a regular dose just living in Washington DC, but last week comedians John Oliver and Sarah Silverman focused an entire segment on payday lending, which are short-term advances against a future paycheck. Matt Yglesias at Vox has posted the video, as well as making the important point "people end up at payday lenders because stuff happens." Yglesias is correct here: there is an undeniable need for short-term credit products. Even Dodd-Frank recognized this need by creating a government subsidized payday loan product (Section 1205 of Dodd-Frank).
The alternative to payday proposed by Oliver and Silverman? Do anything else but payday. I'm sympathetic to such. A payday loan should never be your first choice. I hope to never have to use a payday lender. But then, I hope my car never breaks down either. Silverman goes as far as suggesting just steal instead. I'd hope she was joking but it seems so many in Washington have already taken that advice to heart.
Yglesias's alternative is at least a little more thoughtful than stealing: he suggests allowing the postal service to offer short term loans, because apparently he believes the USPS could offer payday "without taking nearly as big a cut". Now "big" is subjective but scholars have examined this question. In research reported in 2012 in Regulation, UC-Davis Professor Victor Stango compared the performance of traditional payday loans to those offered by credit unions. Some of his conclusions: "there is little to suggest that credit unions can offer a payday loan with competitive terms. Existing credit union payday loans often have total borrowing costs that are quite close to those on standard payday loans." Maybe the USPS has a better cost structure than the typical credit union, but that seems unlikely as the USPS isn't exactly known for its efficiency.
Professor Stango also reports survey evidence that payday borrowers highly value the convenience of payday lender's hours and locations. Yglesias doesn't address this, but last time I went to a Post Office, the hours were about as convenient (or less so) than that of a traditional bank. And of course USPS isn't exactly known for its consumer friendly approach. In all, it seems highly unlikely that without a major revamp and cultural change that the USPS could be a serious competitor to payday. Perhaps as important, the USPS would likely be viewed as "too big to fail", so that allowing USPS to make high risk payday loans could easily result in a taxpayer bailout. Getting USPS into payday makes about as much sense as getting Fannie Mae into subprime mortgages.
Oh wait, we did that.
The United States Postal Service has run up $4 billion in losses so far this year, on top of last year’s $15.9 billion deficit. Washington should get out of the mail business.
Congress created the Post Office in 1792, turning it into an important patronage tool. Legislators also passed the Private Express Statutes, giving the government a monopoly over first class mail.
Washington imposed fines on early competitors, including the famed Lysander Spooner. Uncle Sam continues to rigorously police his monopoly.
The Postal Service boasts that it would rank number 42 on the list of the Fortune 500—but that is only because the other 499 companies on the list, as well as everyone else, are barred from competing to deliver mail. Unfortunately for USPS, government lawyers cannot force people to send letters. The number of pieces of mail delivered dropped from 213 billion in 2006 to 160 billion last year.
In 1971 Congress voted to turn the post office into a quasi-private company. However, Washington preserved the monopoly, retained control over system operations, and preserved a variety of indirect subsidies. For instance, USPS is exempt from taxes, regulations, and even parking tickets.
No matter. As I explain in my latest Forbes online column:
The post office has lost money most years since becoming self-financing. Last year the Postal Service ran a $15.9 billion deficit and maxed out its borrowing authority. Reported the Government Accountability Office: “Given its financial problems and outlook, USPS cannot support its current level of service and operations.
System advocates, most importantly the unions which represent a bloated work force made up of people once called the highest paid semi-skilled workers in America, complain that the post office is forced to prefund its employees’ retirement. Although the practice is common in the commercial world, since most enterprises cannot count on government bail-outs, no other federal agency is forced to set money aside for future obligations. Which is why the latest estimate, released last month, of the national government’s unfunded retirement liability is $761.5 billion, an increase of $139 billion over the previous year. The prefunding provision attempts to protect taxpayers from having to bail out USPS in the future.
Price increases aren’t the answer, since they have increased 50 percent faster than the rate of inflation for years. The system’s principal response to financial crisis is to propose cutting services, especially ending Saturday delivery, closing small post offices, and establishing “cluster box” delivery for neighborhoods.
There are other ideas for cost-cutting, but many would require congressional authority or collective re-bargaining. And there have been some very strange proposals, such as turning post offices into “centers of continuous democracy.” That would not be a sight for the faint-hearted.
Two postal reform measures which emphasize cost-cutting are moving through Congress. But neither offers a long-term solution. Instead, Congress should open the postal marketplace to competition and innovation. Australia, Finland, Germany, Great Britain, Indonesia, Israel, the Netherlands, New Zealand, Russia, Spain, and Sweden all liberalized their postal regimes. The European Union also has forced its members to open their markets. The Organization for Economic Co-operation and Development concluded that such reforms had yielded “quality of service improvements, increases in profitability, increases in employment and real reductions in prices.”
The Postal Service needs money, lots of it. Washington has none to give. Instead, mail delivery should be turned over to market competition.
According to the Hill, policymakers are “scrambling” to do something about the U.S. Postal Service in the current lame-duck session of Congress. The USPS’s recently announced $15.9 billion loss for 2012 apparently inspired policymakers to act.
It’s hardly a surprise that Congress has waited as long as it can to do something about the USPS. Interest in postal issues for most members probably doesn’t go beyond naming post offices and franking. And regardless of whether Congress passes "reform" legislation in the lame-duck or next year, it will end up just kicking the can down the road. (Policy analysts who are frustrated with the inability of Congress to tackle entitlement reform would be wise to stay away from postal policy issue for mental health purposes.)
To get an idea of how absurd the current negotiations are, take this line from the article:
[S]ome liberal lawmakers and postal unions have pushed back against any attempts to limit six-day delivery, saying it would make bad business sense for the Postal Service to give up any competitive advantage as it moves forward.
Competitive advantage? By law, private carriers can’t compete with the USPS on the delivery of first class mail. To the degree that first class mail “competes” with the private sector, it’s with the internet. Going from six-day to five-day delivery won’t change the fact that the demand for the USPS’s flagship monopoly product is in permanent decline as more and more people decide to click “send” instead. What makes “bad business sense” for the USPS is to leave politicians in charge of it.
[See this essay for more on privatizing the U.S. Postal Service.]
While Congress is busy trying to figure out how it’s going to continue screwing up the U.S. Postal Service, postal expert Michael Schuler has been busy analyzing the reasons why it’s so screwed up to begin with. Last week, Michael released a paper on congressional micromanagement of the USPS. A new paper looks at the complicated and controversial topic of postal retiree health benefits.
A common claim made by the postal unions and other defenders of the unsustainable status quo is that the USPS would be a-okay if a 2006 law hadn’t required the postal service to start setting aside money for future retiree health benefits. Here’s the background from Michael:
Before enactment of the Postal Accountability and Enhancement Act of 2006 (PAEA, P.L. 109-435), the U.S. Postal Service had been promising generous retirement health benefits to its workers without setting aside any money to pay the costs it would owe in future years. Because the Service was ignoring a very expensive fringe benefit in its income statement, its reported costs were artificially low and its reported income artificially high. The unfunded retiree health care obligation had mushroomed to $74.8 billion by September 30, 2006.
The 2006 law addressed the unfunded liability by requiring the USPS to annually set-aside an average of $5.6 billion from 2007 to 2016. However, USPS revenues began plummeting shortly after the PAEA’s enactment. The annual “prefunding” payments have been exacerbating the USPS’s financial woes. Naturally, postal management and the unions would like Congress to make the payments disappear. The problem is, eliminating the payments won’t put the USPS in the black, and it would merely set the stage for a major taxpayer bailout down the road. As Michael explains, moving to pay-as-you-go financing for retiree health benefits is a bad idea:
First, prefunding is always more transparent than pay-as-you-go. Prefunding shows the costs of commitments when they are made instead of ignoring the costs until years later. Second, pay-as-you-go with regard to deferred postal compensation is unfair because it transfers costs incurred for today’s mail service to future mail users or taxpayers. Third, pay-as-you-go is extremely risky for an organization like the Postal Service where the future obligations are huge while income is stagnating or declining. (It would not be dangerous if future obligations were small or if income were growing rapidly enough to easily pay future bills.) Fourth, a sometimes overlooked hazard of the pay-as-you-go method is that costs can appear deceptively low for many years and then suddenly climb as more workers retire and as retirees, with increasing age, need more medical care. In that vein, OPM estimated that if retiree health care financing had reverted to pay-as-you-go in 2010, the Postal Service’s pay-as-you-go expense would have been only $2.3 billion in 2010 but almost tripled to $6.4 billion by 2020. If PAEA had not moved toward prefunding, insolvency and the need for a massive taxpayer bailout would be virtually inevitable for USPS, although that might not have become clear to the public for several more years because of pay-as-you-go’s lack of transparency.
Michael says that the prefunding payment schedule should be stretched out given the USPS’s financial woes. However, the extended schedule should come with reforms that would “lower the extraordinary cost of USPS’s health care fringe benefit.” I think a common sense reform would be to eliminate retiree health care benefits for new employees. As I noted in an essay on the U.S. Postal Service, the health benefit is something that a decreasing number of private sector workers receive:
Opponents of pre-funding USPS retiree health benefits argue that private companies and the rest of the federal government are not legally required to do so. That is largely irrelevant. Retiree health care coverage is an increasingly rare perk in the private sector, and the federal government’s financial management is nothing to emulate. In 2008, only 17 percent of private sector workers were employed at a business that offered health benefits to Medicare-eligible retirees, down from 28 percent in 1997.
The U.S. Postal Service has released a new five-year plan for congressional consideration that it says would get the beleaguered government mail monopoly on sounder financial footing and thus avoid a taxpayer bailout. The plan repeats previous suggestions (i.e., workforce reductions, postal network consolidations, elimination of Saturday delivery, elimination of the retiree healthcare benefit funding requirement) and proposes an increase in the price of a first-class stamp from forty-five to fifty cents.
Whether or not it would achieve what the USPS hopes, it probably doesn’t matter given that asking Congress for greater operational flexibility is like asking a two year old to stop playing with their food. That’s why the focus should be on completely transitioning the USPS from a government-run business to a privately-run business (or perhaps businesses).
Over at the Courier Express and Postal Observer blog, Alan Robinson says that “just like all plans that came before, [the new USPS plan] started with the assumption that the Postal Service remains a quasi-governmental entity.” As a result, Robinson notes that the plan is missing two key ingredients for success that foreign posts have utilized: private capital and an expanded range of products and services.
In an essay on the U.S. Postal Service, I discuss how liberalization in other countries has enabled foreign mailers to diversify into non-postal activities:
Consultants at Accenture have found that diversification not only has a measurable impact on the performance of international posts, but that it is what ultimately distinguishes high performers from low performers. America’s relatively dynamic economy is particularly suited for the diversification opportunities that would arise under postal liberalization.
Germany’s former postal monopoly, Deutsche Post, illustrates the type of transformation possible by liberalization. Today, the private Deutsche Post World Net has changed its compensation structure, imported managers from other industries, modernized the mail and parcels network within Germany, and developed new products such as hybrid mail and e-commerce. The company now has interests in not only the traditional mail and parcels business but also express mail logistics, banking, and more.
Given that the USPS’s plan is going to be unpopular with various postal stakeholders (i.e., special interests), Alan says that they should consider the advantages of privatization:
It is clear that the business plan that the Postal Service has chosen is not the one that has worked in other countries. The plan avoids talking about either private capital or expanding the breadth of service offerings as neither is on the legislative table. Introducing thinking about how private capital could be introduced and the product offerings could be expanded forces stakeholders to think about privatization, an idea that is nearly as unpopular as the changes that the proposed business model introduced. However, as this brief post notes, privatization offers significant financial advantages that could reduce the operating and price changes envisions by the Postal Service’s business plan. Therefore, those who see the greatest harm from this plan need to see if the advantages of privatization could benefit their interests sufficiently to overcome long-held objections to the idea.
I think Robinson is right, but I suspect that the “stakeholders” believe there’s a good chance that Congress will ultimately come to their aid with some sort of taxpayer bailout. Therefore, it’s possible that they believe that it is in their best interest to continue fighting for the status quo. Unfortunately, the recent bipartisan federal bailouts of the financial industry and the automakers suggest that they could be correct.