Is It Time to Privatize the Postal Service?

September/​October 1995 • Policy Report

A Cato Institute conference on June 14 examined thequestion, “Postal Service in the 21st Century: Time to Privatize?“Among the speakers were Postmaster General Marvin Runyon; ThomasJ. DiLorenzo of Loyola College; Steve Gibson of the BionomicsInstitute; Gene Del Polito of the Advertising Mail MarketingAssociation; Murray Comarow, former executive director of thecommission that recommended the transformation of the Post Officeinto the U.S. Postal Service; financial consultant Bert Ely;Peter Ferrara of the National Center for Policy Analysis; and ThomasM. Lenard of the Progress and Freedom Foundation. Excerpts fromtheir remarks are presented here.

Marvin Runyon: You talk about privatization. Well,we’re being “privatized” every day by our competition — letterby letter, package by package. Competition is giving us plenty ofincentive to improve. It’s making us realize that if we’re to bean innovative leader in the communications industry, we’ve got toget out there and compete for every postal dollar we get.

The only way to do that is to become more like a privatecompany — in effect, to “corporatize” ourselves. Andthat is exactly what we’re doing. When it comes to running abusiness, I learned a lot in my years at Ford and Nissan. I cameto government, first to the Tennessee Valley Authority and thento the Postal Service, because I wanted to prove that the same practicescould work in the public sector.

They do. TVA is a customer‐​driven, top‐​performingorganization. It hasn’t had a price increase since 1987 and haspledged to keep prices steady for a full decade, until at least1997. It’s proving that an organization that’s part governmentand part business can be successful and competitive.

The Postal Service is also more businesslike than ever. We gota good start 25 years ago, when the Postal Reorganization Actcombined our mission to serve everyone, everywhere, every day,with a mandate to operate like a business. And we’ve delivered.

We’ve become more businesslike as the act envisioned.Political affiliations no longer determine who gets what jobs.Postal management, with help from a board of directors similar toones in the private sector, determines our strategic directionsand capital investments. And we’re self‐ supporting. Today, whenit comes to postage rates, what you see is what you get. There’s nolonger a 25 percent hidden subsidy in the price of a stamp. Notax dollars fill our coffers. And the real price of a stamp when adjustedfor inflation is about the same today as it was back in 1971.

Clearly, it’s time to take the next step in postal reform. Inrecent weeks, as this subject has been discussed around thenation, a broad range of actions has been recommended. You willhear some more today. They’ve run the gamut from minor legislativechanges to selling off the Postal Service lock, stock, and barrelto a private company.

But there is growing consensus that the answer liesbetween those two extremes. There is agreement that it’s not timeto get the government out of the business of deliveringthe mail. It’s time to get the Postal Service into businessfor the American people by freeing it to compete.

Recent surveys affirm that point. A recent Lou Harris pollsays that competition is good for the Postal Service. However,the survey results indicate that more than three‐​quarters of bothbusiness executives and consumers feel that, despite some flaws, thePostal Service is “the best way to provide mail delivery foreveryone at a reasonable price.”

A recent national survey by Opinion Research Corporation alsofound that the majority of Americans favor government delivery ofthe mail. Seventy‐​six percent favored keeping the currentorganization but making it more flexible. I’ve heard the samething from business customers in a variety of sectors and in meetingswith members of Congress and representatives of theadministration. America doesn’t want a different PostalService — it wants the one it has to be morebusinesslike and responsive to its needs.

Thomas J. DiLorenzo: There is no evidence at all thatat the outset of public utility regulation there existed any such phenomenonas a “natural monopoly.” As Harold Demsetz has pointedout,

Six electric light companies were organ‐ ized in the one year of 1887 in New York City. Forty‐​five electric light enterprises had the legal right to operate in Chicago in 1907. Prior to 1895, Duluth, Minnesota, was served by five electric lighting companies, and Scranton, Pennsylvania, had four in 1906.… During the latter part of the nineteenth century, competition was the usual situation in the gas industry in this country. Before 1884, six competing companies were operating in New York City.… Competition was common and especially persistent in the telephone industry.… Baltimore, Chicago, Cleveland, Columbus, Detroit, Kansas City, Minneapolis, Philadelphia, Pittsburgh, and St. Louis, among the larger cities, had at least two telephone services in 1905.

The theory of natural monopoly is an economic fiction. No suchthing as a “natural” monopoly has ever existed. Thehistory of the so‐​called public utility concept is that the late19th and early 20th‐​century “utilities” competedvigorously, and, like all other industries, they did not like competition.They first secured government‐​sanctioned monopolies, and then,with the help of a few influential economists, they constructedan ex post rationalization for their monopoly power.

That has to be one of the greatest corporate public relationscoups of all time. “By a soothing process of rationalization,” wroteHorace M. Gray more than 50 years ago, “men are able tooppose monopolies in general but to approve certain types ofmonopolies.… Since these monopolies were ‘natural’ and since natureis beneficent, it followed that they were ‘good’ monopolies…. Government was therefore justified in establishing ‘good’monopolies.”

In industry after industry, the natural monopoly concept iseroding. Electric power, cable TV, telephone services, and the mailsare all on the verge of being deregulated, either legislativelyor de facto, as a result of technological change. Introduced inthe United States at about the same time communism was introducedto the former Soviet Union, franchise monopolies are about tobecome just as defunct. Like all monopolists, franchisemonopolists will use every last resource to lobby to maintain their monopolisticprivileges, but the potential gains to consumers that freemarkets provide are just too great to justify monopolies for muchlonger. The theory of natural monopoly is a 19th‐​century economic fictionthat defends 19th‐​century (or 18th‐​century, in the case of theU.S. Postal Service) monopolistic privileges and has no usefulplace in the 21st‐​century American economy.

Steve Gibson: The Information Age is upon us, bringinga depth of technological, economic, and societal change not seen sinceGutenberg’s invention of the printing press and the IndustrialRevolution it spawned. Human society is reorganizing itself aroundknowledge, rather than materials, and the implications forinformation‐​handling businesses — of which the U.S. Postal Serviceis but one — are profound.

During the next decade, computing power is expected to rise100‐​fold, and bandwidth (the size of the pipe through which digitalinformation, like e‐​mail, flows) is expected to increase1,000-fold. Current fiber optic research suggests that up to 1 trillionbits per second is possible. That speed would allow you totransmit every issue of the Wall Street Journal ever printedin one second. Or a million channels of TV. That’s per strand. Ifyou need more, just add another strand. After all, fiber optic strands,not much bigger than human hair, are made of sand. And they’realready cheaper (including the switching devices at either end)than copper.

Sooner, not later, technology will force us to abandon ourexisting bricks‐​and‐​mortar, paper‐​and‐​boxes paradigm and start thinkingin terms of an evolving web of information technology. Electronicmail, for example, is sent to a virtual, not a real, address.You don’t know where it’s going when you send it. And, at thesame time, you can be anywhere when you read it. Indeed, the technologyexists today to check e‐​mail from an airplane, or a moving car,or a mountaintop, or even the podium while delivering a presentationto a conference on the Postal Service. Olivetti is developing asystem that, through a badge, can track where you are in abuilding and cause the nearest phone to ring.

In sharp contrast to the post office, electronic communicationis erasing the very concept of place. Indeed, the virtual worldis one not bounded by any of our traditional anchors; time andspace are different, if not absent altogether, in a world of instantaneousglobal communication. The Information‐​Age economy is anincreasingly seamless web of overlapping communication technologies thatdon’t really care where you are. Unlike the post office’s worldof paper and mailboxes, Information‐​Age communication is betweenpeople, not places.

The bugaboos of the machine‐​age post office, time anddistance, simply do not matter in a world of instantaneous global communication.The contrast with the early days of postal delivery, when itcould take weeks to find out about wars, elections, or otherworld affairs, could not be more clear. For the record, thedecisive turning point may have come on October 3, 1993, at 11:20p.m. when CNN’s Jonathan Mann said, “The attack on theRussian Legislature is about to begin, and we’ll have that for youright after this commercial.”

The competitive landscape in which the Postal Service operateshas evolved dramatically in just the last few years, and the processis accelerating geometrically. The role of traditionalpaper‐​based, place‐​to‐ place communication will change dramatically.Whether the need for mass paper transport will even exist is the750,000-employee question. Would we still be building horse‐​drawncarriages if that business had been a government monopoly whenthe automobile became a part of American culture?

The challenge for policymakers is first to recognize that theInformation Age is here and that it differs fundamentally fromthe machine age. We must overcome what MIT’s Mitchel Resnickcalls “the centralized mind‐​set.” Complex results donot have to come about from central control. Witness the Internet.From there, we can best establish the simple rules that willallow the Postal Service to evolve in its own right. Adapt andsucceed or fail to compete and fade away, either is preferable tothe continued existence of a centralized, machine‐​age post officein a decentralized Information Age world.

Gene Del Polito: The U.S. Postal Service is a closelyregulated entity because it has a statutory monopoly over thecarriage of letter mail. New communications technologies,however, have eroded much of the buffering the monopoly onceprovided, and rate regulation has exacted from the Postal Servicea very high price.

While others can introduce new products and services in themarket at will, the Postal Service must petition thePostal Rate Commission for permission to introduceinnovations. While others can adjust their prices and positiontheir products in the market virtually at will, to attain thesame ends, the Postal Service must undergo an expensive andfrequently adversarial regulatory process — one that typically is usedby its competitors to deny the Postal Service unfettered accessto the marketplace.

I can see no way of purging the Postal Service of the rootcause of its ills without transforming it from the“protected” enterprise it is today into a moreprivate‐​sector‐​like, market‐​driven “competitive” enterprise.

One way to do that might be to reconstitute the Postal Servicealong the lines of other government‐​sponsored enterprises (GSEs)such as Fannie Mae, Freddie Mac, or COMSAT. That is a modelthat’s been used for postal systems elsewhere in the world, andit certainly might be suitable here. To gain the kind of marketand regulatory freedoms the postmaster general says he wouldlike, however, would require the Postal Service ultimately togive up its monopoly. Without the monopoly, there would be noneed for regulation to serve as a proxy for competition, sincecompetition would exist in ample measure in the marketplace.

As a GSE, the Postal Service could be transformed into a true“stock” corporation. Government, then, could have theoption of being the enterprise’s sole stockholder, its majoritystockholder, or its largest single minority stockholder. As aGSE, the Postal Service would be charged to operate on a truly commercialbasis, that is, at a profit, paying taxes and stock dividends, andsubject to antitrust and all other laws that apply to commercialenterprises.

Once the constraints imposed by third‐​party regulation wereremoved, the Postal Service would have the freedom to conduct itsaffairs in the same manner as other commercial enterprises. Itcould organize and position its services in whatever manner bestmet marketplace needs. It could price its products in closeraccord with market‐​based principles. It could innovate freely andintroduce to the market new products and services that made goodbusiness sense. It could explore entry into new markets without undueregulatory constraints, and it could exit markets as long asdoing so did not compromise its statutorily defined mission. Italso could be freed from constraints that are more in keepingwith agencies of government, such as the present limits governingthe compensation of its executive staff and its board ofgovernors.

Murray Comarow: Ideological arguments aboutprivatization tend to founder on the underlying details — exceptthat they are not, of course, details at all. They constitutepublic policy and economic issues that need patient analysis.Here are some of them.

  • Should there be a board of governors? If so, how would we get the right people on it?
  • Is there any way to keep Congress from micromanaging and from using postal customers’ money for nonpostal purposes?
  • How should rates be set?
  • How should wages be set?
  • Should postal employees have the right to strike? If so, should postal management have the right of lockout?
  • Should the Postal Service be permitted to bid against competitors such as Federal Express and United Parcel Service for major contracts?
  • Should the letter‐​mail monopoly be terminated? If so, would other deliverers have access to mailboxes?
  • Should the Postal Service be authorized to close unprofitable outlets?
  • Should it cost more to send letters to distant places?
  • Finally, should the Postal Service become a private corporation? If so, how would mail be forwarded for the 40 million Americans who move each year? Who would assume the responsibilities of the Postal Inspection Service? The FBI? Local police?

I am deeply concerned with the prospect of ill‐​consideredaction taken under the banner of privatization or its cousins: commercialization,corporatization, deregulation, and devolution. A theologicalconviction that privatization will reduce rates and improveservice is not persuasive. As Eric Sevareid remarked, “Thechief cause of problems is solutions.” The experience of thelast 25 years warrants a new study, preferably by a nonpartisanpresidential commission. Privatization, as well as all otherissues, should be on the commission’s agenda.

Bert Ely: Several realities must be acknowledged whenaddressing the issue of how to privatize the U.S. Postal Service. First,contracting out various USPS functions does not constituteprivatization. Second, as a practical matter, its unionized employeesown the USPS. They receive dividends in the form of above‐​marketwages and excessive pension benefits. Third, the threat ofprivatization to universal mail service is a phony issue. Infact, as United Parcel Service and Federal Express demonstratedaily, universal delivery service is an objective to strive for,not retreat from. Not surprisingly, UPS and FedEx are nowprepared to deliver to more homes and businesses than is the USPS.

Given those realities, I would like to make somerecommendations for privatizing the USPS. One, give directly toUSPS employees or to an employee stock option plan for USPSemployees stock of a value that equates to the value of their presentequity interest in USPS’s real earnings (reported earnings plus excesspay and pension benefits). In return, USPS employees would agreeto accept a market rate of compensation, reasonable pensionbenefits, and elimination of unproductive work rules.

Two, sell stock in the USPS to the general public to raise thecapital needed to improve the productivity and delivery reliabilityof a privatized Postal Service.

Three, abolish the private express statutes within one or twoyears after the USPS is privatized. A privatized USPS, like UPS,FedEx, and every other delivery service, will operate moreefficiently once it is subject to competition for every piece of itsbusiness, including first‐​class mail.

Four, abolish the Postal Rate Commission as of the day theprivatized USPS loses its first‐​class mail monopoly. UPS and FedExare not subject to government rate regulation; there is no reasonwhy a privatized Postal Service that has no monopoly powersshould be subject to rate regulation. Also, as UPS and FedEx haveshown, a privatized Postal Service will not engage in excessprice differentiation because of the high operating costsassociated with administering a complex pricing structure. Therefore,rural residents will not pay higher postage rates than urbanresidents. In addition, more rural residents will get home deliverythan is now the case.

Five, eliminate all restrictions that would prevent aprivatized Postal Service from promoting greater usage of theservice as an advertising medium. A privatized Postal Servicewill want to increase its volume of advertising mail (so‐​calledjunk mail) so that it can reduced its fixed delivery costs perunit of mail it delivers.

Peter Ferrara: Postmaster General Runyon’s concernsabout current restrictions on the U.S. Postal Service suggest the possibilityof an emerging deal.

  • The Postal Service would be given the free‐​market flexibility Runyon wants; restrictions on financing, innovation, and price flexibility would be removed.
  • Ownership of the Postal Service would be moved to the private sector by issuing stock, with at least some if not all ownership granted to the employees.
  • In return, the remaining postal monopoly would be removed, allowing private‐​sector competitors to enter the market.

The new Postal Service is likely to be the largest privatemail delivery firm by far. Without a guaranteed market that itcan retreat to, it will undoubtedly charge back into package andovernight mail delivery in a rigorous and highly competitive way, winninga substantial market share. And it probably will go beyond that,exploiting its comparative advantages.

One of those advantages is that the Postal Service isAmerica’s biggest landlord, with 40,000 properties nationwide.With new market incentives, the new service will move rigorouslyto put those properties to best use. Some can be sold at great profit,having been purchased for relatively little many years ago. Otherscan be rented out for maximum use. But probably the greatestpotential is to rent out space in every postal facility tocomplementary vendors — selling packaging and envelopes, copyingservices, printing, faxes, even letter stuffing.

Furthermore, the new free‐​market Postal Service is likely tomove aggressively into offering those complementary services itself.The close complementary nature of those services and the postal businessoffers great profit potential. At the same time, consumers wouldenjoy great convenience and cost saving.

And that doesn’t even begin to explore what complementaryservices can be offered on the delivery side of the business. Whatelse can mail carriers do while they are delivering the mail? Canthey deliver other goods and services? Can they carry advertisingon their trucks? Can stamps carry advertising messages?

Indeed, in a market environment, the Postal Service is likelyto see innovations we cannot even imagine yet. Only a decentralizedcompetitive market offers the full opportunity for those withlocal practical knowledge to experiment and bring forth winners.

Thomas M. Lenard: A plan to redesign the Postal Serviceshould 1) provide flexibility for the Postal Service to surviveand for mailers to have a sufficient array of servicealternatives and 2) avoid the service disruptions and taxpayerbailout that are likely if nothing is done. A plan that meetsthose objectives should be based on the following premises:

  • The government’s monopoly over the carriage and delivery of mail should be abolished. There is no benefit to mailers in being forced to rely on a high‐​cost provider of service, even if those high costs are to some extent mitigated by the presence of economies of scale or scope. The monopoly deprives mailers of needed alternatives and the USPS itself of the freedom and flexibility it needs to adapt to the nation’s changing mail service and communications needs.
  • The Postal Service should be able to compete in new markets on a level playing field, enjoying no explicit or implicit advantages relative to its private competitors.
  • Whatever the exact nature of the organ‐​ization, that implies that a new Postal Service should have transferable ownership shares, because that type of organization promotes efficiency. The government could, however, retain a partial ownership share.