Dimensions: 6'' x 9'' 152 pages AEI Press  (Washington) Publication Date: March 2003 Paperback ISBN: 0-8447-4180-9 Price: $ 20.00 Add to Cart   Examination Copies

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February 2003
Saving the Mail: How to Solve the Problems of the U.S. Postal Service
By Rick Geddes

The U.S. Postal Service, built on a structure laid out in 1970, is sorely in need of reform to reflect the technological changes over the past three decades, the reorganization of industries with similar economic structures, and the transformation other postal services have undergone.

Rick Geddes, an assistant professor in the Department of Policy Analysis and Management at Cornell University and an adjunct scholar at AEI, identifies the types of reform that the Postal Service needs and outlines policy measures to implement them.

Key points and a press release about the book are available. The following is a summary of Saving the Mail.

The U.S. Postal Service is America's largest public enterprise. In 2001 it earned revenues of over $65 billion and processed over 207 billion pieces of mail. It handled about 40 percent of the world's mail. Its total employment was 892,000, which is larger than the population of Delaware. The Postal Service also plays an important civic role, since it is the only federal agency with which a majority of Americans interact on a daily basis.

The Postal Reorganization Act of 1970 created the modern U.S. Postal Service in perhaps the most extensive reorganization ever of a federal agency. Although the act had several goals, its main focus was independence for the new postal entity, both financially and managerially. The act indeed created an independent government-owned entity, but one that retains a monopoly in its core activity of letter delivery. Among the powers granted by the act, the Postal Service can negotiate wages, set prices with regulatory oversight, borrow from the Treasury, and independently sue and be sued. It pays no federal or state income taxes, and has the power of eminent domain. The postal system was to be financially self-sufficient.

The Need for Reform

There are several reasons why the structure created in 1970 is inappropriate today, and why postal reform in the United States is desirable and timely. First, technological developments since 1970 have radically altered the communications marketplace. The growth of substitutes for letter mail, in the form of telephones, facsimiles, and electronic mail, implies that postal revenues cannot be maintained at current levels without substantial rate hikes. Additional rate increases will only invite further substitution into those alternatives. Barring a return to the large annual deficits of the 1960s, and the accompanying direct taxpayer subsidies, the Postal Service is unlikely to remain viable for long in its present form. It lost $1.7 billion in its 2001 fiscal year and $1.2 billion in its 2002 fiscal year. The Postal Service's structure should be better adapted to this new communications marketplace.

Second, technological change has radically weakened traditional justifications for the Postal Service's organizational structure, which inevitably rely on subsidized mail delivery to rural areas. Given the array of technologies that allow instant communications, personal letters are probably not rural citizens' first choice for remaining connected to the wider community. Moreover, recent studies suggest that the cost of serving rural and urban customers is now quite similar, so that concerns about rural customers paying dramatically more for mail delivery in a competitive market are unwarranted.

Third, industries with economic structures similar to postal services have undergone successful organizational reform, both in the United States and internationally. These industries share a common "network" structure with postal services in that they use a distribution system of lines, pipes, or routes requiring the use of public rights-of-way, typically with strong physical linkages between component parts. Network industries in the United States including airlines, telecommunications, oil, natural gas, electricity, trucking, cable television, and railroads, among others, have undergone meaningful regulatory reform since the mid-1970s. Many of those industries must fund substantially higher fixed costs and more extensive infrastructure than postal services, and are thus thought to possess more "natural monopoly" characteristics. Such reform has generally been favorable to both consumers and producers.

Fourth, other governments have significantly altered the market structure of their postal services or have plans to do so. For example, New Zealand, Sweden, and Finland have abolished their postal monopolies. Australia's monopoly is currently limited to only four times the stamp price. That is, private firms may compete if they do not charge less than that. Canada's monopoly is three times the stamp price. The European Union has limited all European postal monopolies to five times the stamp price.

Many postal services are also moving toward privatization. For example, a majority of shares in the Dutch post are privately held. Germany's immense postal service, Deutsche Post, was partially privatized on November 20, 2000, in that country's largest public offering of the year. About 29 percent of the firm was offered publicly, raising $5.6 billion, with investors applying for eight times the number of shares available. The German government has cleared the way for majority private ownership in Deutsche Post.

Policy Recommendations

After a review of the performance of the U.S. Postal Service since the act, and of reform efforts in other countries, Geddes concludes that significant reform of postal services in the United States is warranted. Geddes finds that the Postal Reorganization Act was successful in reducing congressional control over postal operations, but that it did not replace that political control with effective market control. He therefore proposes a reform process that would extend the work of the 1970 act.

The property rights to the net cash flows of the Postal Service, or its residual claims, are poorly defined and are not transferable. That has been one of the main causes of its recurring problems. The creation of well-defined, transferable ownership claims should be a first priority. Postal managers and workers, who may otherwise oppose reform, could then be given an ownership stake in the new entity. The creation of a market for postal shares would generate prices for those shares, which would have numerous social benefits.

Second, the government should continue to guarantee nationwide delivery of letter mail. However, as in Germany and Sweden, guaranteeing universal service should become the responsibility of the legislature, rather than of the Postal Service. The Postal Service would thus be freed of its duty to provide universal service, and the government could meet that responsibility the best way it sees fit.

Third, the powers of the Postal Rate Commission should be increased to more closely reflect those of a public utility commission. Geddes presents several reasons why the powers of the commission are currently inadequate to regulate the Postal Service properly. With the creation of transferable ownership shares, those powers should be enhanced strongly.

Fourth, the Postal Service should be given additional commercial freedom. It should be able to close unprofitable post offices and replace them with contract service. It should also be able to divest itself of certain activities and make acquisitions. At the same time, all special privileges and immunities currently enjoyed by the Postal Service should be eliminated, including exemption from taxation and antitrust law, among others.

Finally, the Postal Service's letter delivery monopoly should be more clearly circumscribed, and then reduced. The current delivery monopoly is vaguely defined. Borrowing from experience with reform in other countries, the monopoly should be defined as a certain multiple of the stamp price, and competition allowed to the extent that competitors do not charge less than that multiple. Reductions in the monopoly over time should be agreed upon at the time of reform, and can be achieved by reducing the multiple. Complete competition is realized by eliminating the multiple, which would subject the Postal Service to full regulation by the market. The proper institutional structure for the Postal Service is a privately owned firm subject to market competition, and these reforms would achieve that goal.

 This summary is available in Adobe Acrobat PDF format.