Postal Blues
With only two weeks left for filing, taxpayers across the nation are poring through the thousands of pages of forms and instructions that comprise the United States tax code. While the complexities and headaches remain, the Internal Revenue Service is promoting new e-filing procedures that may ease the final burden of paying taxes by eliminating a trip to the post office. While such taxpayer friendly improvements are to be praised, not everyone is happy. Tech-savvy improvements in the private sector, the rise of the Internet, and a dynamic marketplace are ringing alarm bells at the United States Postal Service.
It is no secret that the Post Service has been struggling to stay afloat. Since the last major restructuring in 1970, the number of years ending with a loss has outnumbered the profitable years by a margin of two to one. Moreover, since 2000, according to Dr. Charles E. Guy of the Lexington Institute, the Postal Service “has accumulated a deficit of $2.6 billion, a net capital deficiency of $3.0 billion, and an outstanding debt of $11.1 billion.” In response to mounting financial problems, the Postal Service unveiled its “Transformation Plan” last year, and President Bush created a commission to assess the future of the United States Postal Service.
From the Post Service’s perspective, the solution is straightforward: it needs to act more like a business. It wants more flexibility to set prices and the ability to expand into new lines of business in the dynamic marketplace. While these goals sound reasonable for any business, the Postal Service is not any business; it is a quasi-government entity that enjoys both the blessings and burdens of that status. Giving the Postal Service the green light to take on new lines of business and set prices is not likely to resolve its fundamental problems, nor would it serve customers any better or improve competition in the marketplace.
At its core, the Postal Service remains a government-created monopoly, with exclusive access to mailboxes across the country for the purpose of delivering non-urgent mail. As such, it performs differently than do firms in a competitive marketplace. Economists have demonstrated the inefficiencies and costs associated with monopolies, from reduced output and rising costs to the political investments required to maintain their privileged status and fend off competitors. Unfortunately, the Postal Service is plagued by all of these.
Before even considering new lines of business, the Postal Service has serious cost issues it must address. Revenues have risen in the past as the Postal Service expanded, but costs have climbed even faster. Costs continue to rise, despite stagnant demand for mail, and the need to control costs is only growing. For the Postal Service, costs have been a nagging problem, and addressing cost concerns is critical for the future of the Postal Service. By far, the largest cost for the Postal Service is labor, with an 800,000-strong workforce comprising almost 80 percent of total costs. Economist Michael Schulyer, of the Institute for Research on the Economics of Taxation, provides an example of just how costly it is for the Postal Service to operate: “the Postal Service says its costs are 24 cents when it sells one dollar of stamps at a post office counter, but that its expenses drop to 10 cents when the stamps are sold at a contract postal unit, and only 1.6 cents when the stamps are sold at a supermarket.” (IRET Congressional Advisory #147)
Like most monopolies, time and technology have led to the creation of viable substitutes to mail. The introduction of fax machines, the Internet, and other technological advances offer consumers cheap and efficient alternatives to traditional mail service. And a competitive market for advertising through radio, television, and other media continues to put pressure on the direct marketing, or junk mail, that fills many mailboxes. Being a politically created entity, the Postal Service also incurs costs determined through the political process rather than the marketplace. In exchange for the exclusive right to deliver mail, the Postal Service must endure mandates the limit its ability to close or consolidate post offices based on profitability, to reduce the frequency of delivery, and to negotiate labor contracts effectively. The Postal Service is also required to provide uniform rates for service, which generates a cross-subsidy from low-cost customers to higher cost deliveries. When the Postal Service responds more to Washington than to its customers, consumers suffer.
The Postal Service’s transformation plan is an attempt to shed some of these burdens while expanding into more lucrative fields. Unfortunately, this solution ignores the fact that the Postal Service is, indeed, a government protected monopolist. Should the Postal Service want to pursue such an agenda, it should do so in a purely private market, without any of the benefits that accrue to its monopoly status. For example, the Postal Service is seeking more pricing flexibility. But allowing a monopoly to set prices once competition has been eliminated poses a real threat to consumers. The Postal Rate Commission sets prices for the Postal Service because it is a monopoly created by the government. Pricing flexibility is only feasible in a world where the Postal Service has no mandated advantages over its competitors and no captive customers.
In fact, the Postal Service enjoys many competitive advantages beyond the simple monopoly on the delivery of mail, including an exemption from federal, state, and local taxes, and a below-market credit line with the U.S. Treasury that guarantees the organization will not face bankruptcy, all of which provide a strong advantage over any private sector competitors. Any plans to reform the Postal Service must begin by acknowledging these benefits and assessing their impact on the market.
The Postal Service is in a quagmire and views becoming a more dynamic player in the market as its only way out. This might not be so bad if it were just another competitor in the marketplace. But it is not. At its core it remains a monopoly. Unless it is willing to shed its monopoly for a truly competitive marketplace, more prudent reforms would refocus the organization on its core business. First class mail already subsidizes other activities by the Postal Service; expanding into new lines and allowing “pricing flexibility” would force captive consumers to subsidize new business ventures. Historically, the Postal Service’s record with respect to new lines of business has not been stellar and revenues have not been sustained under the current business model. The far more important issue for the Postal Service is to address its escalating costs. A more modest reform package that addresses cost problems and focuses on the core function of mail delivery (first class mail continues to cover most of the fixed costs) may serve the Postal Service better.
