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Postal Bankruptcy

The American Spectator

By Doug Bandow on 10.5.10 @ 6:08AM

The U.S. government is effectively bankrupt. This year's deficit is $1.3 trillion,
the national debt is $13.5 trillion, and the unfunded liabilities for Social
Security and Medicare likely exceed $100 trillion.

Unfortunately, the U.S. Postal Service also is effectively bankrupt. The USPS
expects to lose about $7 billion this year. The post office already has
borrowed roughly $13 billion from Uncle Sam.

At the end of 2009 USPS had $33.5 billion in outstanding liabilities and
another $54.8 billion in unfunded retiree health and pension obligations.

In early July the post office, which can hike rates on its own if the increase
doesn't exceed the inflation rate, filed for a special increase of two cents for
first class mail and varying increases for other services with the Postal
Regulatory Commission. The commission rejected the hike in September,
ruling that the Postal Service's problems were structural, rather than a result
of the recession. In any case, raising rates won't save the Postal System.

The USPS is in crisis. It is locked in a declining market. It can only survive


with indirect taxpayer subsidies and a ban on private competition. Instead of
forcing Americans to pay more for less service, Congress should open mail
delivery to all comers.

The Constitution authorizes Congress "To establish Post Offices." But


Congress is not required to institute government mail delivery, let alone a
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public mail monopoly. Today there is competition only in packages and urgent
delivery. For regular mail, you must use the USPS, or else.

In 1844, for instance, the noted libertarian Lysander Spooner set up a low
cost delivery service among Boston, New York, Philadelphia, and Baltimore.
Congress responded by imposing fines on private mail carriers. More recently
the post office threatened to sue Boy Scouts who proposed delivering
Christmas cards during the holidays. When the USPS learned of companies
sending international mail abroad with traveling employees, it demanded
payment for services not rendered.

All the while postal rates steadily rose, more than 50 percent faster than the
rate of inflation. A first class stamp today would cost 27 cents rather than 44
cents had rates merely matched the inflation rate since 1960. In contrast, bulk
mailers enjoy artificially low rates due to the political clout of these
businesses.

The post office also takes care of its own. In September came revelations of
no-bid contracts to former postal executives for "knowledge transfer." One
former vice president received a $260,000 contract to talk to the man who
replaced him.

In short, the post office has a "customer last" philosophy. Americans exist for
the postal service, not the other way around.

Whatever the theoretical arguments for a public mail monopoly in the past,
they have been superseded by a rapidly changing marketplace. Opening the
postal marketplace to competitive innovation would not be as radical as some
might think. Years ago Australia, Germany, Finland, the Netherlands, New
Zealand, and Sweden liberalized their postal regimes. The result, reported
the OECD, was "quality of service improvements, increases in profitability,
increases in employment and real reductions in prices." Since then the
European Union has pushed continent-wide liberalization, especially by
reducing the forms of mail "reserved" to government operations. By the start
of next year most EU members must open their markets to competition;
newer member states have until the end of 2012.

There are almost as many models as countries. New Zealand and Sweden
have competing postal operators. Finland also has dropped the national
monopoly. Spain's Correos y Telegrafos faces private competition in many
areas, including letters within cities. The Netherlands privatized its postal
service in 1994 and fully liberalized its delivery market last year. So has
Germany, though the government remains a significant shareholder in
Deutsche Post. In Great Britain deregulation began in 2000; the Royal Mail
still delivers most mail but the market has been fully opened and private
operators are increasingly providing delivery services.
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Russia dropped its state monopoly in 1996, though Pochta Rossii continues
to handle the bulk of mail. Indonesia officially followed suit last year; private
companies had long ignored state-owned Pos Indonesia's monopoly. Israel
allows competition to Israel Post, though the latter receives government
subsidies. Austria and Belgium have partially privatized their postal
operations; the former also has been reducing categories of mail reserved for
state delivery. Poland similarly has limited the scope of the state monopoly.
Bulgaria, the Czech Republic, Estonia, and Romania all are considering
allowing postal competition. Even Greece plans partial privatization of the
national post.

At the same time, the USPS has run out of options.

In 1970 Congress set the post office on its nominally independent course.
However, the system remained bounded by regulations, cushioned by
subsidies, and protected by its monopoly. In particular, USPS is exempt from
taxes, regulations, and even parking tickets. Nevertheless, since 1971 the
post office has lost money in 24 of 38 years. Starting in 2007 the bottom fell
out of the postal system's finances. Reports the GAO: "Given its financial
problems and outlook, USPS cannot support its current level of service and
operations."

Retiree health costs continue to rise, but that problem afflicts many
companies. More important, notes economist William F. Shughart, are
"[g]enerous salaries for Postal Service employees, restrictive work rules
negotiated by the labor unions that represent them, the continued operation
of thousands of obsolete, small-town post offices and failure to adapt to a
world in which people communicate by email rather than by first-class mail
and pay their bills online.…"

Roughly 80 percent of the agency's costs go to its workforce of more than


700,000, which trails only Wal-Mart in numbers. Postal employees enjoy
staffing levels and wages set by a politically potent union rather than
productivity in a competitive marketplace. Union contracts bar or restrict
outsourcing, layoffs, part-time and contract work, and employee assignment
outside of narrowly defined crafts. Hence an estimated wage premium of 30
percent. The average USPS salary is $83,500, which makes postal
employees among the highest paid semi-skilled workers around. The problem
may grow even worse as postal contracts with the four largest unions come
up for renewal over the next two years.

There are 36,500 post offices in America, more than the combined number of
Starbucks, McDonald's, and Walgreens. Yet the average number of weekly
postal customer visits was 600, one-tenth the average at Walgreens.
Consequently roughly 26,000 of the post offices lose money.
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Yet mail demand appears to be locked in a permanent decline. America's
population continues to rise, but the number of pieces of mail delivered was
down 17 percent from 213 billion in 2006 to 177 billion in 2009. That number
is expected to drop to 167 billion this year, the lowest since 1992, and 150
billion by 2020.

The USPS lost $1.4 billion last year. The red ink will be five times as great
this year. And over the next decade Postmaster General John Potter predicts
losses of $238 billion. The post office can't borrow its way even out of
immediate trouble, unless Congress lifts the current $15 billion loan limit,
which will leave only about $2 billion in borrowing authority next year.

In short, warned a recent Government Accountability Office report: "USPS's


business model is not viable."

IN MARCH THE USPS proposed ending Saturday delivery. But Ruth


Goldway, chairman of the Postal Regulatory Commission, doubts that "they're
going to save as much money as they think they are." Saturday delivery is
one of the USPS's "strategic advantages," she opines, which means dropping
that service might reduce mail volume. Yet one consultant hired by the post
office proposed cutting mail delivery in half, from six to just three days a
week.

USPS also wants Congress to eliminate the requirement to prefund retiree


health care benefits. Most companies don't even offer coverage for retirees,
and virtually none provide such lavish benefits. Dropping the prefunding
mandate likely would leave taxpayers paying the bill.

The postmaster general has come up with a number of other cost-saving


ideas, but none would confront the government's postal monopoly. And it is
hard to know which steps make the most sense absent competition. Argued
Dan Ortwerth, an analyst at Edward Jones: "If FedEx and UPS's
management team took over the Postal Service and were truly given free
rein, man, I think they could probably do a lot to whip it into shape and take
advantage of the Postal Service's unique internal strength. But that is not how
it is."

Freer USPS management is not enough, however. The entire postal market
should be set free.

Although most postal employees are horrified by the idea of shifting to market
mail services, former postmaster general William Henderson disagrees:
"Privatization may seem far-fetched, but it's not."

Admittedly, privatization still wouldn't be easy given legacy costs and labor
contracts. Nevertheless, this is the only realistic option. Observed the
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Washington Post: "If Congress gives management the tools it needs to meet
the crisis, and if management uses them effectively -- two big ifs, we admit --
the Postal Service will have a chance to get its house in order and one day
attract private capital, as European postal services have done."

Despite its manifold failures, the postal system has its loyal defenders. The
New York Times asserted: "all Americans should not have to rely solely on
private businesses for anything as fundamental as mail delivery." But why
should they be forced to rely on the post office, which loses money while
performing badly?

Indeed, in attempting to defend his health care "reform" proposal, President


Barack Obama noted that "UPS and FedEx are doing just fine." In contrast,
"it's the post office that's always having problems." So why preserve the
latter's monopoly?

"We intend to be around for decades and centuries to come," Postmaster


General Potter announced in March. Not likely, at least in the postal service's
current form. My Cato Institute colleague Tad DeHaven warned that "the
USPS will likely continue to bleed red until policymakers run out of band-aids
and are finally confronted with the choice of either privatization or direct
taxpayer funding."

But bankrupt Uncle Sam has no money for a postal bail-out. Only privatization
is a realistic option. We need real change that we can believe in.

Doug Bandow is a senior fellow at the Cato Institute. A former Special


Assistant to President Ronald Reagan, he is the author and editor of several
books, including The Politics of Plunder: Misgovernment in Washington
(Transaction).

Copyright 2008, The American Spectator

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