Is It Time to Privatize the Postal Service?

A Cato Institute conference on June 14 examined the question, "Postal Service in the 21st Century: Time to Privatize?" Among the speakers were Postmaster General Marvin Runyon; Thomas J. DiLorenzo of Loyola College; Steve Gibson of the Bionomics Institute; Gene Del Polito of the Advertising Mail Marketing Association; Murray Comarow, former executive director of the commission that recommended the transformation of the Post Office into the U.S. Postal Service; financial consultant Bert Ely; Peter Ferrara of the National Center for Policy Analysis; and Thomas M. Lenard of the Progress and Freedom Foundation. Excerpts from their remarks are presented here.

Marvin Runyon: You talk about privatization. Well, we're being "privatized" every day by our competition — letter by letter, package by package. Competition is giving us plenty of incentive to improve. It's making us realize that if we're to be an innovative leader in the communications industry, we've got to get out there and compete for every postal dollar we get.

The only way to do that is to become more like a private company — in effect, to "corporatize" ourselves. And that is exactly what we're doing. When it comes to running a business, I learned a lot in my years at Ford and Nissan. I came to government, first to the Tennessee Valley Authority and then to the Postal Service, because I wanted to prove that the same practices could work in the public sector.

They do. TVA is a customer-driven, top-performing organization. It hasn't had a price increase since 1987 and has pledged to keep prices steady for a full decade, until at least 1997. It's proving that an organization that's part government and part business can be successful and competitive.

The Postal Service is also more businesslike than ever. We got a good start 25 years ago, when the Postal Reorganization Act combined 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 to ones in the private sector, determines our strategic directions and capital investments. And we're self- supporting. Today, when it comes to postage rates, what you see is what you get. There's no longer a 25 percent hidden subsidy in the price of a stamp. No tax dollars fill our coffers. And the real price of a stamp when adjusted for inflation is about the same today as it was back in 1971.

Clearly, it's time to take the next step in postal reform. In recent weeks, as this subject has been discussed around the nation, a broad range of actions has been recommended. You will hear some more today. They've run the gamut from minor legislative changes to selling off the Postal Service lock, stock, and barrel to a private company.

But there is growing consensus that the answer lies between those two extremes. There is agreement that it's not time to get the government out of the business of delivering the mail. It's time to get the Postal Service into business for the American people by freeing it to compete.

Recent surveys affirm that point. A recent Lou Harris poll says that competition is good for the Postal Service. However, the survey results indicate that more than three-quarters of both business executives and consumers feel that, despite some flaws, the Postal Service is "the best way to provide mail delivery for everyone at a reasonable price."

A recent national survey by Opinion Research Corporation also found that the majority of Americans favor government delivery of the mail. Seventy-six percent favored keeping the current organization but making it more flexible. I've heard the same thing from business customers in a variety of sectors and in meetings with members of Congress and representatives of the administration. America doesn't want a different Postal Service — it wants the one it has to be more businesslike and responsive to its needs.

Thomas J. DiLorenzo: There is no evidence at all that at the outset of public utility regulation there existed any such phenomenon as a "natural monopoly." As Harold Demsetz has pointed out,

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 such thing as a "natural" monopoly has ever existed. The history of the so-called public utility concept is that the late 19th and early 20th-century "utilities" competed vigorously, 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 constructed an ex post rationalization for their monopoly power.

That has to be one of the greatest corporate public relations coups of all time. "By a soothing process of rationalization," wrote Horace M. Gray more than 50 years ago, "men are able to oppose monopolies in general but to approve certain types of monopolies. . . . Since these monopolies were 'natural' and since nature is beneficent, it followed that they were 'good' monopolies. . . . Government was therefore justified in establishing 'good' monopolies."

In industry after industry, the natural monopoly concept is eroding. Electric power, cable TV, telephone services, and the mails are all on the verge of being deregulated, either legislatively or de facto, as a result of technological change. Introduced in the United States at about the same time communism was introduced to the former Soviet Union, franchise monopolies are about to become just as defunct. Like all monopolists, franchise monopolists will use every last resource to lobby to maintain their monopolistic privileges, but the potential gains to consumers that free markets provide are just too great to justify monopolies for much longer. The theory of natural monopoly is a 19th-century economic fiction that defends 19th-century (or 18th-century, in the case of the U.S. Postal Service) monopolistic privileges and has no useful place in the 21st-century American economy.

Steve Gibson: The Information Age is upon us, bringing a depth of technological, economic, and societal change not seen since Gutenberg's invention of the printing press and the Industrial Revolution it spawned. Human society is reorganizing itself around knowledge, rather than materials, and the implications for information-handling businesses — of which the U.S. Postal Service is but one — are profound.

During the next decade, computing power is expected to rise 100-fold, and bandwidth (the size of the pipe through which digital information, like e-mail, flows) is expected to increase 1,000-fold. Current fiber optic research suggests that up to 1 trillion bits per second is possible. That speed would allow you to transmit every issue of the Wall Street Journal ever printed in one second. Or a million channels of TV. That's per strand. If you need more, just add another strand. After all, fiber optic strands, not much bigger than human hair, are made of sand. And they're already cheaper (including the switching devices at either end) than copper.

Sooner, not later, technology will force us to abandon our existing bricks-and-mortar, paper-and-boxes paradigm and start thinking in terms of an evolving web of information technology. Electronic mail, 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 the same time, you can be anywhere when you read it. Indeed, the technology exists today to check e-mail from an airplane, or a moving car, or a mountaintop, or even the podium while delivering a presentation to a conference on the Postal Service. Olivetti is developing a system that, through a badge, can track where you are in a building and cause the nearest phone to ring.

In sharp contrast to the post office, electronic communication is erasing the very concept of place. Indeed, the virtual world is one not bounded by any of our traditional anchors; time and space are different, if not absent altogether, in a world of instantaneous global communication. The Information-Age economy is an increasingly seamless web of overlapping communication technologies that don't really care where you are. Unlike the post office's world of paper and mailboxes, Information-Age communication is between people, not places.

The bugaboos of the machine-age post office, time and distance, simply do not matter in a world of instantaneous global communication. The contrast with the early days of postal delivery, when it could take weeks to find out about wars, elections, or other world affairs, could not be more clear. For the record, the decisive turning point may have come on October 3, 1993, at 11:20 p.m. when CNN's Jonathan Mann said, "The attack on the Russian Legislature is about to begin, and we'll have that for you right after this commercial."

The competitive landscape in which the Postal Service operates has evolved dramatically in just the last few years, and the process is accelerating geometrically. The role of traditional paper-based, place-to- place communication will change dramatically. Whether the need for mass paper transport will even exist is the 750,000-employee question. Would we still be building horse-drawn carriages if that business had been a government monopoly when the automobile became a part of American culture?

The challenge for policymakers is first to recognize that the Information Age is here and that it differs fundamentally from the machine age. We must overcome what MIT's Mitchel Resnick calls "the centralized mind-set." Complex results do not have to come about from central control. Witness the Internet. From there, we can best establish the simple rules that will allow the Postal Service to evolve in its own right. Adapt and succeed or fail to compete and fade away, either is preferable to the continued existence of a centralized, machine-age post office in a decentralized Information Age world.

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

While others can introduce new products and services in the market at will, the Postal Service must petition the Postal Rate Commission for permission to introduce innovations. While others can adjust their prices and position their products in the market virtually at will, to attain the same ends, the Postal Service must undergo an expensive and frequently adversarial regulatory process — one that typically is used by its competitors to deny the Postal Service unfettered access to the marketplace.

I can see no way of purging the Postal Service of the root cause of its ills without transforming it from the "protected" enterprise it is today into a more private-sector-like, market-driven "competitive" enterprise.

One way to do that might be to reconstitute the Postal Service along the lines of other government-sponsored enterprises (GSEs) such as Fannie Mae, Freddie Mac, or COMSAT. That is a model that's been used for postal systems elsewhere in the world, and it certainly might be suitable here. To gain the kind of market and regulatory freedoms the postmaster general says he would like, however, would require the Postal Service ultimately to give up its monopoly. Without the monopoly, there would be no need for regulation to serve as a proxy for competition, since competition 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 the option of being the enterprise's sole stockholder, its majority stockholder, or its largest single minority stockholder. As a GSE, the Postal Service would be charged to operate on a truly commercial basis, that is, at a profit, paying taxes and stock dividends, and subject to antitrust and all other laws that apply to commercial enterprises.

Once the constraints imposed by third-party regulation were removed, the Postal Service would have the freedom to conduct its affairs in the same manner as other commercial enterprises. It could organize and position its services in whatever manner best met marketplace needs. It could price its products in closer accord with market-based principles. It could innovate freely and introduce to the market new products and services that made good business sense. It could explore entry into new markets without undue regulatory constraints, and it could exit markets as long as doing so did not compromise its statutorily defined mission. It also could be freed from constraints that are more in keeping with agencies of government, such as the present limits governing the compensation of its executive staff and its board of governors.

Murray Comarow: Ideological arguments about privatization tend to founder on the underlying details — except that they are not, of course, details at all. They constitute public 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-considered action taken under the banner of privatization or its cousins: commercialization, corporatization, deregulation, and devolution. A theological conviction that privatization will reduce rates and improve service is not persuasive. As Eric Sevareid remarked, "The chief cause of problems is solutions." The experience of the last 25 years warrants a new study, preferably by a nonpartisan presidential commission. Privatization, as well as all other issues, should be on the commission's agenda.

Bert Ely: Several realities must be acknowledged when addressing the issue of how to privatize the U.S. Postal Service. First, contracting out various USPS functions does not constitute privatization. Second, as a practical matter, its unionized employees own the USPS. They receive dividends in the form of above-market wages and excessive pension benefits. Third, the threat of privatization to universal mail service is a phony issue. In fact, as United Parcel Service and Federal Express demonstrate daily, universal delivery service is an objective to strive for, not retreat from. Not surprisingly, UPS and FedEx are now prepared to deliver to more homes and businesses than is the USPS.

Given those realities, I would like to make some recommendations for privatizing the USPS. One, give directly to USPS employees or to an employee stock option plan for USPS employees stock of a value that equates to the value of their present equity interest in USPS's real earnings (reported earnings plus excess pay and pension benefits). In return, USPS employees would agree to accept a market rate of compensation, reasonable pension benefits, and elimination of unproductive work rules.

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

Three, abolish the private express statutes within one or two years after the USPS is privatized. A privatized USPS, like UPS, FedEx, and every other delivery service, will operate more efficiently once it is subject to competition for every piece of its business, including first-class mail.

Four, abolish the Postal Rate Commission as of the day the privatized USPS loses its first-class mail monopoly. UPS and FedEx are not subject to government rate regulation; there is no reason why a privatized Postal Service that has no monopoly powers should be subject to rate regulation. Also, as UPS and FedEx have shown, a privatized Postal Service will not engage in excess price differentiation because of the high operating costs associated with administering a complex pricing structure. Therefore, rural residents will not pay higher postage rates than urban residents. In addition, more rural residents will get home delivery than is now the case.

Five, eliminate all restrictions that would prevent a privatized Postal Service from promoting greater usage of the service as an advertising medium. A privatized Postal Service will want to increase its volume of advertising mail (so-called junk mail) so that it can reduced its fixed delivery costs per unit of mail it delivers.

Peter Ferrara: Postmaster General Runyon's concerns about current restrictions on the U.S. Postal Service suggest the possibility of 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 private mail delivery firm by far. Without a guaranteed market that it can retreat to, it will undoubtedly charge back into package and overnight mail delivery in a rigorous and highly competitive way, winning a substantial market share. And it probably will go beyond that, exploiting its comparative advantages.

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

Furthermore, the new free-market Postal Service is likely to move aggressively into offering those complementary services itself. The close complementary nature of those services and the postal business offers great profit potential. At the same time, consumers would enjoy great convenience and cost saving.

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

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

Thomas M. Lenard: A plan to redesign the Postal Service should 1) provide flexibility for the Postal Service to survive and for mailers to have a sufficient array of service alternatives and 2) avoid the service disruptions and taxpayer bailout that are likely if nothing is done. A plan that meets those 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.