The time for postal reform in the United States has come. Both Houses of Congress are now considering bills that would thoroughly reform the U.S. Postal Service. The bills are disappointing in light of the extensive reforms carried out in other developed countries, including privatization and complete de-monopolization. They do contain several proposed improvements over the status quo, however. They would enhance the authority of the Postal Service's regulator, they would clearly separate monopolistic from competitive products, and they would limit the Postal Service's delivery monopoly so that private firms might compete as long as they charged no less than six times the prevailing stamp price.
The need for reform of the U.S. Postal Service is manifest. Mail volume in the Postal Service's core business of first-class mail delivery is dropping at an unprecedented rate while postal liabilities, mainly for employee health care and retirement costs, are rising rapidly. The number of delivery points the Postal Service must serve is also rising, so letter carriers are bringing fewer pieces to each address served. Additional rate increases to cover these costs will only cause consumers to substitute into the numerous electronic alternatives now available. The basic business model under which the Postal Service operates is unsustainable.
For the first time in more than thirty years, the president appointed a commission to study postal reform in the United States. That commission reported to the president on July 31, 2003. The report is a thoughtful, detailed analysis of the Postal Service's current problems. It suggests a number of valuable reforms that would protect universal mail-delivery service while making the Postal Service more efficient and accountable.
Perhaps as a result, the House and the Senate are now considering postal reform legislation. On May 12, 2004, the House Government Reform Committee voted unanimously to approve the Postal Accountability and Enhancement Act, denoted H.R. 4341. The corresponding Senate bill is denoted S. 2468.
Upon reading these bills, however, one is struck by how little they actually move toward liberalization of postal markets in the United States. While other countries have taken bold steps toward true postal liberalization, including elimination of the postal monopoly as well as privatization, with generally positive results, the effect of the U.S. bills could be better described as re-regulation of the Postal Service. Indeed, the legislation appears to be more focused on defining exactly how the Postal Service can compete with private firms than the reverse. The bills do not contemplate any change in the ownership structure of the Postal Service, as undertaken in Germany and the Netherlands. Nor do they institute complete competition, as in Finland, Sweden, and New Zealand.
The bills do not remove the statutory barrier to the closing of underused post offices, as recommended by the president's commission. Some post offices complete as few as ten transactions per day. An independent board, similar to the successful commission that oversaw the closing of underused military bases, would be of great assistance in streamlining postal operations.
There is a consensus in the academic literature that prevailing postal wages significantly exceed the comparability standard mandated in the 1970 Postal Reorganization Act. With labor-related expenditures accounting for about 75 percent of all postal costs, that is an important consideration in cost control. The president's commission recommended that the Postal Service's regulator be granted authority to ensure that the comparability standard be met. The bills under consideration do not address this issue either.
The bills would also leave the Postal Service's monopoly over letter delivery largely intact, introducing only very limited competition. The bills do not allow the Postal Service's new regulator to reduce the scope of the monopoly over time, as recommended by the president's commission.
Finally, the bills would leave unchanged the "mailbox monopoly," an absurd law that makes it a crime for anyone but a U.S. Postal Service carrier--not a private carrier such as a UPS driver, not even your next door neighbor--to use your mailbox, with or without your permission. A private carrier may ring your doorbell and, if no one answers, leave the delivery out on your doorstep, come back another time, or leave a note telling you to drive to the company's nearest depot to take delivery. Or you may erect a second mail receptacle for non-USPS deliveries. The United States is the only nation on earth with a mailbox monopoly, no nation has reported any problems with allowing citizens to control their own mailboxes, and no one has argued that the U.S. policy promotes universal service or any other goal. The mailbox monopoly should be repealed.
Although the bills leave many important problems unaddressed, they would institute some important changes in the way the Postal Service is governed. I review some of the most salient reforms below.
Regulation of the Postal Service
The bills would institute useful changes in the design and authority of the Postal Service's regulator. These changes are important, as the powers of the current regulator are insufficient to achieve its task of controlling the Postal Service. Along with a name change from the Postal Rate Commission to the Postal Regulatory Commission would come several key institutional modifications.
The bills would separate the regulation of services offered by the Postal Service into "market-dominant" and "competitive" products. Although this terminology is objectionable because it incorrectly suggests that the Postal Service is dominant in certain activities because of market forces rather than government-enforced monopoly, the distinction is important. The Postal Service offers some products, such as first-class letters, cards, periodicals, and standard mail, that are protected by the delivery monopoly. It also offers other products, such as priority mail, expedited mail, international mail, and parcel post, that face intense competition. The perennial concern is that, absent total accounting transparency and rigorous regulation, the Postal Service will rationally use revenues from its monopolized activities to cross-subsidize services where it faces competition.
This distinction begs the question of why a government-owned monopoly firm should offer services for which there is intense competition at all, since there is by definition no "market failure" in those activities. The typical answer is, "to subsidize universal mail delivery service." Yet that answer spawns a host of additional, currently unaddressed, questions about competitive offerings by a state-owned postal service, such as, "What is the true cost of universal delivery service?" "Do the competitive activities actually make a contribution?" and "If so, how much?"
The idea that competitive activities will make a contribution to monopolized activities over the long-term (rather than the reverse) flies in the face of basic economic theory. Prices are bid down to marginal cost in a competitive market. How close price is to marginal cost is in fact one way of measuring the degree of market competition. Were price greater than cost, new competitors would enter the market or existing competitors would expand until excess profits were eliminated. Competitive activities offered by the Postal Service are much more likely to require a subsidy from monopolized activities than to create one.
Even if competitive activities did somehow contribute to the universal service mission, a reasonable question is, "Are there less costly ways of funding universal service than through direct competition with the private sector?" Such direct competition is likely to create a range of significant social costs. Universal service could be funded through a number of less costly mechanisms, such as a modest tax on firms in the delivery market.
The simple act of recognizing a clear distinction between monopolized and competitive products may be helpful for several reasons, however. First, it is likely to focus attention on preventing cross-subsidy from monopolized to competitive products, and make the reduction of that cross-subsidy easier. The Postal Regulatory Commission is explicitly directed to prevent such cross-subsidies in the bills. Second, it fosters important questions about the contribution of competitive offerings in assuring universal delivery service, as indicated above. Third, it allows competitive products to be treated differently than monopolized products. The bills envision competitive products as subject to federal income taxation, antitrust laws, and truth-in-advertising laws, for example, which would bring them a step closer to normal business activities. Finally, the separation would hopefully set the stage for reducing Postal Service participation in competitive services, or perhaps spinning off competitive activities into a truly independent, privately owned company.
Another key regulatory change would be in the method of regulation. The bills contemplate a price-cap form of regulation under which rates for monopolized products would rise at an annual rate not greater than some inflation index, such as the Consumer Price Index. The idea is to allow the Postal Service increased pricing flexibility and to reduce the administrative burden of the ratemaking process. There is also hope that price caps will improve incentives for cost minimization and efficiency enhancements. There is evidence that, relative to rate-of-return regulation, price caps are beneficial for private firms. Without the companion reform of privatization, however, there is little reason to believe that price caps will significantly improve efficiency.
Moreover, postage rates have historically increased at about the rate of the CPI, so it is not clear that the proposed price caps will improve matters greatly. Price caps on private firms normally increase at the rate of inflation minus some factor representing productivity improvements, so that consumers can expect real prices to fall over time. Postal consumers should not look forward to any such decrease under these bills.
There are several regulatory changes contemplated in the bills that will improve the Postal Regulatory Commission's ability to regulate the Postal Service. First, the new commission would be given subpoena power. A long-standing problem faced by the current Postal Rate Commission is the inability to obtain detailed, accurate information on Postal Service operations. Subpoena power will clearly improve its information-gathering ability. Second, the bills would ensure that final authority for rate-setting rests with the Postal Regulatory Commission itself. Under existing arrangements, the Board of Governors of the Postal Service can overrule the Postal Rate Commission if the board is unanimous in doing so. This creates a bizarre institutional arrangement under which final authority for rate increases rests with the regulated firm itself rather than with its regulator. The Postal Regulatory Commission has final authority under these bills, as it should.
Over the past several decades, economists have come to appreciate that market competition is socially beneficial, even in industries characterized by a "network" structure, that is, those using systems of lines, pipes, or routes with strong physical interconnections among component parts. In the United States, competition has been introduced in the trucking, airline, railroad, and natural gas industries, with substantial welfare gains to society.
Similarly, other countries have introduced competition in their postal services. Finland, Sweden, and New Zealand have completely repealed their postal monopolies. The European Union has limited the monopoly in member countries to three times the prevailing basic stamp price, meaning that competitors may enter as long as they do not charge less than that amount.
The postal reform bills under consideration would limit the letter delivery monopoly to six times the stamp price for letters under 12.5 ounces, as recommended by the president's commission. That would not allow for much direct competition, but would be likely to have some salutary effects over the long term. First, it clearly defines the scope of the Postal Service's delivery monopoly, which has changed over time and been the subject of some confusion. Second, it would set the stage for expanding the degree of competition over time. Competition could be increased simply by reducing the stamp price multiple from six to five to four and so on, as confidence in the ability of competitive forces to provide affordable postal services increased. Certainly consumers could have hoped for more, but this is a start.
Universal Delivery Service
The putative reason for having a delivery monopoly at all is to fund universal mail service. The meaning of universal delivery service has, however, changed dramatically over time and varies within and across regions. Universal service may mean delivery to your door in New York City but to a remote cluster box in a rural area. The bills therefore wisely require study of the meaning of universal mail delivery service. They also require estimates of the costs attributable to the provision of universal service. The Senate bill is better here because it explicitly links the retention of the delivery monopoly to universal service and requires
an analysis of the likely benefit of the current postal monopoly to the ability of the Postal Service to sustain the current scope and standards of universal service, including estimates of the financial benefit of the postal monopoly to the extent practicable, under current law.
Such an analysis would help to make the cost of universal service explicit, and would focus attention on the rationale for the monopoly in facilitating universal service. That, in turn, would promote a public, rigorous cost-benefit analysis of the postal monopoly in the United States, which is long overdue. It would have been wiser here, however, to adopt the recommendation of the president's commission and give the Postal Regulatory Commission authority to review the efficacy of the monopoly in promoting universal service and contract it as necessary.
The quality of financial information gathered and released by the Postal Service is an ongoing concern. Given the recent corporate governance scandals one might suspect the bills to feature reforms providing for enhanced financial transparency. Both bills do. The House bill, for example, states:
As an establishment that provides both market-dominant and competitive products, the Postal Service shall be subject to a high degree of transparency, including in its finances and operations, to ensure fair treatment of customers of the Postal Service's market-dominant products and companies competing with the Postal Service's competitive products.
This laudatory goal, if achieved, will improve the regulator's ability to deliberate on rates and prevent cross-subsidy. One concern, however, is that the bills appear to give the Postal Service unchecked authority to classify certain data as confidential, which it does not currently possess. In that event, the Postal Regulatory Commission would have access to the data but the general public would not. This would obviously limit the ability of the public to bring complaints to the commission about Postal Service conduct and would attenuate the monitoring of Postal Service activities by those means.
The ability of the Postal Service to offer "nonpostal" services is a particularly contentious area of postal reform. The Postal Service has recently expanded into a variety of activities outside of its core function of delivering mail, including retail sales of mugs, tee shirts, phone cards, Direct Mail services, passport photos, and a variety of e-commerce services such as eBill Pay, NetPost Cardstore, digital stamps, and NetPost Certified Mail. Those postal ventures often cause great harm since they compete directly with small, private firms that do not enjoy the government-bestowed benefits of the Postal Service.
The bills address this issue. Consistent with the recommendation of the president's commission to focus the Postal Service on its core activity of physical mail delivery, the Senate version would end all nonpostal activities altogether, while the House bill would limit the Postal Service to currently existing nonpostal activities.
The Senate version is clearly preferable. Available evidence suggests that the Postal Service actually loses money in its nonpostal ventures, thus reducing resources available to fulfill its mission as a provider of universal delivery service, and causing a transfer from captive first-class mailers to nonpostal activities. Even if that evidence is incorrect and the ventures are profitable, it remains unclear that earning profit in nonpostal ventures is a fair and efficient way to fund universal delivery service. The cost of that revenue raising mechanism is likely to fall disproportionately on small business owners, causing a range of social welfare losses to affect the transfer. The Postal Service should be barred from entering nonpostal activities altogether, and required to focus on its core mission.
Half a Loaf
The above discussion highlights a few of the positive aspects of postal reform now in Congress. Although the bills do not address many important issues, they would improve the process under which the Postal Service is regulated, define clearly the delivery monopoly, enhance the transparency of the Postal Service, and help restrict it to its core mission of providing universal delivery service. Rather than tackling the really big issues facing the Postal Service, this legislation would instead set the stage for additional future reforms.
The bills would institute some improvements relative to the current system. But what is the price tag to the American public? The Postal Service would be relieved of its obligation to pay pension benefits to retirees for prior military service, shifting the responsibility to the Treasury. The tab to the U.S. taxpayer is an estimated $27 billion over several decades. That is a rather high price for the modest reforms in these bills.
Given the rapid progress in other countries, Americans could have justifiably expected Congress to deliver more constructive, effective postal reform. Postal reform, however, is a notoriously difficult political proposition, and another opportunity to institute change may not arrive for some time. Half a loaf may indeed be better than none.
1. For a detailed discussion of the need for postal reform in the United States, see Rick Geddes, "Why We Need Postal Reform and What It Should Entail," AEI Postal Reform Paper No. 1 (March 2003).
2. Embracing the Future: Making the Tough Choices to Preserve Universal Mail Service, Report of the President's Commission on the United States Postal Service (2003). For an analysis of the commission's recommendations, see Rick Geddes, "The President's Commission on the Postal Service: An Assessment," AEI Postal Reform Paper No. 4 (August 2003).
3. The Postal Reorganization Act mandated that the Postal Service "maintain compensation and benefits for all officers and employees on a standard of comparability to the compensation and benefits paid for comparable levels of work in the private sector of the economy." Postal Reorganization Act, 39 U.S.C. Section 1003.
4. The commission suggested that "This process of continual review of the costs and benefits of the postal monopoly is important, but it is best carried out by an independent entity. The Postal Regulatory Board should therefore be vested with authority to modernize the law by narrowing the postal monopoly if and when the evidence shows that suppression of competition is not necessary to the protection of universal service without undue risk to the taxpayer." Embracing the Future, Report of the President's Commission, 65.
5. For a detailed discussion of the regulator's current power, see Rick Geddes, Saving the Mail: How to Solve the Problems of the U.S. Postal Service (Washington, D.C.: AEI Press, 2003), 35-40.
6. For a discussion of the incentives of state-owned enterprises to engage in such cross-subsidization, see chapter 1 in R. Richard Geddes, ed., Competing with the Government: Anticompetitive Competitive Behavior and Public Enterprises (Stanford, Calif.: Hoover Institution Press, 2004).
7. See Michael A. Crew and Paul R. Kleindorfer, "Privatizing the U.S. Postal Service," in Mail @ the Millennium, Edward L. Hudgins, ed. (Washington, D.C.: Cato Institute, 2000), which discusses in detail reasons for the failure of price caps in the absence of privatization.
8. For an excellent survey of the effects of deregulation of U.S. network industries, see Clifford Winston, "Economic Deregulation: Days of Reckoning for Microeconomists," Journal of Economic Literature 31 (September 1993): 1263-1289.
9. S. 2468, Section 702 (b)(2).
10. H.R. 4341, Section 103 (d).
11. For a detailed discussion if this issue, see Rick Geddes, "Opportunities for Anticompetitive Behavior in Postal Services," AEI Postal Reform Paper No. 3 (June 2003).
Rick Geddes is associate professor in the Department of Policy Analysis and Management at Cornell University and the author of Saving the Mail: How to Solve the Problems of the U.S. Postal Service (AEI Press, 2003). He is a research fellow at the Hoover Institution and an adjunct scholar at AEI.