Postal Service Privatization

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

While fast, efficient communications are vital for advancedindustrial economies and societies, the United States is poised toenter the 21st century with a postal monopoly established in the18th.

The federal government maintains a monopoly on the transport anddelivery of messages on pieces of paper or other material media. Itis a federal crime for private suppliers to offer these services.Yet problems with the U.S. Postal Service (USPS) are chronic. Moreand more, the defects of the Postal Service stand in contrast tothe successes of the private sector-created telecommunicationsrevolution. Critics compare e-mail with what they call the PostalService's snail mail.

In about a month the Cato Institute will publish a collection ofpapers under the title, The Last Monopoly: Privatizing thePostal Service for the Information Age. This book outlines indetail the problems inherent in the Postal Service, shows howmarkets are undercutting the need for this last monopoly, andoffers approaches to privatization. My written testimony is apreview of the introductory chapter of the book.

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

Composition of the Mail

First, look at the composition of the mail today. Of particularinterest to most consumers is the use of the mails simply to send aletter or card to a friend or relative, that is,household-to-household mail. But in 1991, this mail comprised only8.4 percent of total mail flows (down from 12 percent in 1987).Some 3.3 percent of all mail was correspondence, while 4.9 percentwas greeting cards. The vast majority of mail, 44.3 percent in1991, is composed of businesses-to-household communications, mainlyadvertisements. Mail sent from households to businesses, mostlypayment of bills, comprised 15.4 percent in 1991. The phrase "Thecheck is in the mail," of course, is the euphamism for "Don't blameme, the post office takes forever to deliver the mail, or at leastenough time to allow me to put some money in my account to coverthe mailed check." Mail send from businesses to other businessesconstitutes 31.5 percent of the mail in 1991.

These forms of communications more and more are handled byfaxes, e-mail and private delivery companies such as FederalExpress that are allowed to deliver emergency mail as long as theycharge at least $3 or twice as much as the first-class rate,whichever is more. Most advertisers would welcome competition fortheir business. Greeting cards now can be generated and customizedby computers. With less costly, high quality printers it will beeasier to surprise friends and relatives with hard-copy best wisheswithout resorting to the mail.

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

These facts suggest that few customers would miss the postalmonopoly.

It is impossible to predict for certain the evolution ofcommunications over the next two decades nor the specific role ofmail delivery in the mix. But it is possible to say with certaintythat the evolution will be distorted and retarded if the governmentpostal monopoly continues to exist. Suppliers of innovativeservices always will be slowed by the elements of their servicesdependent on the Postal Service. They will stumble over postalregulations. They will be blocked by the weight of the costly800,000 postal employees. They will fight constant battles againstPostal 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 ofsimilar sectors, suggests that the mail would be delivered withouta postal monopoly.

A cursory look at the complex technological society around usrefutes the claims that only the federal government can provideswift, high-quality, cost-effective mail delivery, and that theprivate sector somehow is not up to the task. Private airlinessafely convey passengers from all parts of the country to disparatedestinations. (The major causes of delays are the government-ownedand operated airports and air traffic control system.) Trucks andtrains transport perishable food, delicate consumer goods, costlyindustrial equipment, and fragile furnishings to customers in everycorner of the country. Why, then, do supporters of the governmentpostal monopoly believe that private entrepreneurs cannotsuccessfully transport messages on paper door to door?

The prices of products and services drop when markets andeconomic freedom force suppliers to become more efficient. Airlineswere deregulated beginning in the late 1970s; as a result, the costof air travel per passenger mile, adjusted for inflation, hasdropped by at least half. Truck transportation was deregulated atabout the same time; the savings in transport costs, passed alongin lower prices for many products being transported, is estimatedas high as $100 billion over a decade. As important, reliableefficient tranportation allowed the development of just-in-timeinventory systems that allowed enterprises to increase theirproductivity.

The newest information transmission and processing sector, aresult of private sector innovations, consists of millions ofpersonal computers as well as as main frames connected by theInternet. In 1981 the first personal computers came with 64kilobytes of memory and sold for $3,000, or about $46,000 permegabyte. Today a megabyte of memory in a computer can be had forunder $1. Why, then, has the price for sending first-class mail notgone down? Why have stamp prices risen nine times since 1973, from8 cents to 32 cents today? The Postal Service's chief financialofficer, Michael J. Riley, defends the USPS record: "If we had notautomated [at a cost of over $600 million in the late 1980s] wewould have had an $8 billion price increase, instead of a $5billion 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 USPSsimply is not a significant supplier. Also of interest is the factthat federal law mandates that private-sector prices for theservice must be at least $3 or twice the cost of the first-classmail equivalent. Yet customers pay the price, indicating apreference for the private-sector guarantee of delivery over thegovernment's less-reliable monopoly, even if it costs 10 or 20times more than a stamp.

Public-Private Convergence?

Some of the techniques available to or used by the PostalService to improve quality and contain costs call into question theclaim that a postal monopoly is needed. These techniques are usedin the private sector, thus suggesting that they would be usedwithout a government monopoly. For example, to hold down costs, theUSPS offers discounts for businesses that presort mail going todifferent cities, and allows transportation of such presorted bagsby private trucks to post offices in the cities of destination. TheUSPS also offers discounts on bar-coded mail. In early 1996 thePostal Rate Commission, a government body that must approve pricesfor mail services, endorsed a plan to offer even more substantialdiscounts for large business mailers using such techniques. But whynot contract out all bulk shipments between major distributioncenters, or all mail sorting to private suppliers, or simply allowthe private sector to perform those functions entirely?

The Postal Service used to claim as one of its virtues that itdelivers door to door. Yet in 1978 it decided that no service wouldbe provided to the doors of newly built residences. Roadside boxesare used where appropriate. But increasingly the Postal Servicedelivers to cluster boxes in housing developments. Cluster boxesallow carriers to serve dozens of customers in a fraction of thetime it takes to go door to door. Now individuals must travel asfar as half a mile to retrieve their mail. Private suppliers, ifallowed to deliver mail, might find it profitable to offer deliveryto the door for no extra charge in densely populated areas. Manycustomers might be willing to pay a fee for such convenience.

But the lines between the USPS and the private sector arebecoming blurred. More and more, a trek of a half mile or lessbrings one to private establishments such as Mail Boxes, Etc., thatoffer mailboxes for rent at offices in shopping centers and otherlocations convenient to customers. Even with postal boxes for rentin government post offices, customers often choose private-sectoralternatives. So why not allow private carriers to deliver togovernment cluster boxes in housing developments or to establishtheir own boxes in such locations?

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

Efficiency: Lost in the Mails

The importance of postal privatization is written in the PostalService's roller-coaster record of quality crises followed byimprovement followed by more crises. Each postmaster generalpledges to improve mail services and hold down costs. Some do, fora time. But problems and price hikes always come back.

The country was shocked in recent years by tales of PostalService incompetence. Inspectors at the South Maryland processingfacility found 2.3 million pieces of bulk mail delayed for up tonine days and 800,000 pieces of first-class mail delayed for threedays. [2] The mail was stashed intractor-trailer trucks--apparently because it is not counted inpostal statistics as "delayed" if it is not actually in thefacility. Naturally this calls into question the reliability ofother Postal Service statistics and claims of improved efficiencybased on them. One suburban Washington, D.C., mail carrier wasfound to have bags of mail stored in his apartment with corpses ofanimals.

In Chicago in 1994, 5.9 million pieces of forwarded mail weredelayed for a month. A hundred bags of months-old mail were foundin 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 schoolprincipal found that mail sent to other parts of the city wastaking two weeks to reach their destination. Documents that were 13days in transit to a Manhattan destination a few miles away causedthe school to miss budget deadlines, costing it $7,000. [4]

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

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

But the inherent problems of the Postal Service as manifest inits roller-coaster record on service in many ways this is notsurprising. The average wage and benefit package of clerks andsorters is nearly $43,000, compared to about $35,000 for allprivate sector workers. [7] The PostalRate Commission found recently that "nonproductive time"constitutes 28.4 percent of mail-processing labor costs. There is 1manager for every 10 workers at the USPS, compared with 1 for every15 workers at Federal Express.

Of course, the facts that there are 800,000 mostly-unionizedpostal workers, and that the USPS is a protected monopoly, combineto create an economic dynamic that almost ensures periodic cost andquality crises. There are very few hardships for the Postal Serviceif quality suffers, since customers cannot turn to competitors forservices. But it is politically very difficult for the PostalService to cut its work force to hold down costs. One cause of thisdifficulty is the fact that all congressional districts havenumerous post offices and postal workers to remind electedofficials and candidates of their special interests. Another causeis the fact that postal union political action committees makegenerous contributions to political campaigns, $3.27 million forthe 1993-1994 election cycle. [8]

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

Self-Promotion and Power Seeking

The Postal Service has taken steps to polish its tarnishedimage. Like a typical bureaucracy, it is engaging in heavyself-promotion, advertisements not about the services it offers butsimply 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 developa new logo. That should have been no surprise. After all, the USPSis the monopoly that spent $90 million for advertising in the 1992Olympics in Barcelona, Spain, and Albertville, France. [9] It is doubtful that the USPS increased itsbusiness through the ads. After all, Americans, and for that matterSpaniards and French citizens, could hardly induced to switch tothe Postal Service from competing carriers because no competitorsare allowed.

In late 1995 the USPS paid for a series of radio commercialsthat feature actor George C. Scott extolling its virtues. Scottexplains that the price of stamps goes up because the PostalService does not receive government funds and operates solely onreceipts from customers. But this information is misleading. Totalpostal revenues in fiscal 1996 are estimated at $56 billion. Inthat year the federal government will give an estimated $770.9million to the Postal Service, with $625 million of the sum listedas off budget and $145.9 million on budget. Of the on-budgetexpenditures, $109.1 is principally to offset revenues forgone onfederally mandated free or reduced rate mail such as Congress'sfranking privileges. Subsidies to the Postal Service havefluctuated over the past decade, hitting a high of $2.23 billion in1988. (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 GeorgeC. Scott does not mention in the commercials is that thePostal Service has special preferential borrowing privileges withthe federal government. He does not mention that themonopoly power of the Postal Service to jack up stamp priceswithout fear of customers turning to competitors is a kind ofgovernment-backed power to tax. He does not mention thatstamp prices might go down, as do the prices of many other goodsand services, if the Postal Service were subject to competition. Hedoes not mention that the USPS has billions of dollars inunfunded pension liabilities backed by the federal government, thatis, by American taxpayers. He does not mention that,unlike private enterprises, the Postal Service is exempt from mosttaxes.

Why is the quasi-government agency wasting money not onadvertising its services but simply on boosting its image? Perhapspart of the answer is to counteract the embarrassing content of theactual 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 whenthe day after is so much cheaper? Priority Mail. 2-day delivery*within your region, starting at $3." And what does one find at thebottom of the page under the asterisk? "*Average two-dayperformance within the region shown. Delivery measured from postoffice to post office excluding time of delivery to address. Suchperformance is an average, not a guarantee. Delivery outside aregion may take longer." [10]

This is in sharp contrast to ads by the private Federal Expressproclaiming "When it absolutely, positively, must be there," or "Wecan 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 ofadvertisement. It will no longer publicize the results of customersurveys. Apparently the less-than-perfect results do not create theimage the Postal Service is cultivating.

Yet the Postal Service does have time and money to engage inenterprises that have absolutely nothing to do with delivering themails. It has gone into the business of marketing prepaid phonecalling cards for long-distance calls. Provision of the cards ofcourse is not part of mail delivery. The Postal Service uses itsassets and facilities gained from its monopoly position to competewith private-sector suppliers.

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

The Darker Side of Monopoly

Customers standing in long lines at a post office, listening toclerks in back rooms talking and laughing while only one or twoclerks provide service, likely would concede that the USPS isinefficient. But they might be surprised to learn that the monopolythat employs kindly carriers delivering postcards to Grandma alsomaintains its power and control at the expense of civilliberties.

Traditionally, government control over the mails has been usedto silence communications of which political authorities did notapprove. Before the Civil War anti-slavery material in the mailswould be stopped in certain parts of the country. Under theComstock Act of 1873, material deemed "obscene, lewd or lascivious"was banned from the mails. Birth control information was kept outof postal circulation. In 1912 postal officials refused to allowmailings of a newspaper article by feminist Margaret Sangerentitled "What Every Girl Should Know" because it contained thewords "gonorrhea" and "syphilis." [12]Works of literature by authors such as D. H. Lawrence, TheodoreDreiser, and Edmund Wilson were suppressed. In this centurymaterial defined as "obscene" has been targeted by postalinspectors.

In 1993 the Postal Service stepped up efforts against businessesthat "misused" overnight couriers such as Federal Express. Itclaimed that some enterprises were illegally bypassing the PostalService by using private providers for communications not deemed"urgent."

How does the USPS know of these "misuses"? A businesspersonseals a document in a FedEx envelope, FedEx accepts the envelopeand transports it to its destination, and the recipient opens it.Does the government place spies in the mailroom in the sender'soffice or do federal agents pose as secretaries working for therecipient? In fact, armed postal agents have conducted inspectionsand audits of records in private firms and, over a three-yearperiod, levied half a million dollars in fines. Postal inspectorsalso conduct surveillance, with binoculars and telescopes, ofshipments and delivery trucks to collect evidence or count thevolume of "misuse" of couriers.

Another case of abuse concerned a direct mail marketer, BenjaminSuarez, who distributes sweepstakes-type promotionals similar tothose of Publishers Clearinghouse. In December 1994 the PostalService obtained a Temporary Detention Order against Suarez'sbusiness, claiming that four promotionals were fraudulent. Thismeant that during the busy Christmas season, the USPS seized andheld all mail addressed to Suarez' enterprise, with no explanationsent to customers, and with no way for the enterprise to informcustomers what had happened to their money and requests.

A hearing was held in February 1995 before a federal judge onwhether to make the Temporary Detention Order "preliminary," thatis, to keep it in effect until the case could be resolved,potentially for months or even years. Such preliminary injunctionsare routinely granted. But at the hearing, part of the PostalService's concerns about Suarez became clear. In the materials thatthe postal inspector submitted to the judge were pages fromSuarez's book, Seven Steps to Freedom II, that wereextremely critical of the Postal Service, as well as sectionscritical of federal judges. Excerpts included "The laws under whichthe U.S. Postal Service operates are unconstitutional andconstitute mock justice," and "The USPS administrative court isrigged." Suarez further wrote:

The U.S. Federal Court System is also rigged in the USPS'sfavor--the USPS wins virtually 100% of the time in temporaryrestraining orders (TROs), injunctions and appeal suits on USPSadministrative court decisions.

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

Fortunately, Suarez's description of federal courts ultimatelyproved wrong in his own case. One judge refused to hear the case.Another told the Postal Service to work out a consent agreementwith Suarez and return his mail to him. But the Postal Serviceapparently continues to seek ways to punish Suarez for his opinionsand for beating it in court. In July 1995 a meeting was heldbetween postal officials and representatives from the FederalBureau 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 inthe future. Whenever government power is mixed with freeinstitutions, the free institutions suffer. For example, printedmaterial such as books and newspapers enjoy First Amendmentfree-speech protections. So do telephone conversations.Unfortunately, television and radio broadcasts are subject tocensorship.

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

The more the Postal Service attempts to integrate its activitieswith those of the private sector or with electronic forms ofcommunications, the greater the danger that it will get its wishfrom 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 postalmonopoly. The correct question to ask, then, is not "Should thePostal Service be privatized?" Rather, is "Is there any compellingreason for maintaining the postal monopoly?" The answer is a loudand ringing "No!"

The Postal Service survives through sheer political power, notthrough its ability to satisfy customers. As the country moves intothe 21st century, and as policymakers attempt to restore economicliberty, those policymakers should show the courage to abolish thelast monopoly and privatize the U.S. Postal Service.

Notes

[1]Quoted in MarkLewyn, "The Check's Still Not in the Mail," Business Week(March 18, 1994), p. 38.

[2]Bill McAllister,"Millions of Letters Undelivered," Washington Post (July20, 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 BillMcAllister, "Postal Service Better, Especially in Maryland,"Washington Post (December 20, 1995), p. A23.

[7]Cited in JohnMerline, "Can the Postal Service Deliver?" Investors BusinessDaily (October 28, 1994), p. 2.

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

[9]Alvin Snyder, "ThePost Office Is an Ad Agency's Dream," San FranciscoChronicle (March 10, 1994).

[10]WashingtonTimes (August 10, 1995).

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

[12]Cited in NadineStrossen, Defending Pornography: Free Speech, Sex, and theFight for Women's Rights (New York: Scribner, 1995), pp.226-227.

Subcomittee on Treasury, Postal Service, and General Government
Committee on Appropriations
United States House of Representatives