Return to Sender: Reforms for the Failing Postal Service

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Introduction

The U.S. Postal Service is facing a fiscal crisis. The demand for its core activity of mail delivery has collapsed, and further declines are likely. Mail has fallen over 20 percent since its 2006 high, a drop not seen since the Great Depression. First-class mail - by far the Postal Service's most profitable - is down almost 25 percent since its 2001 peak, and declines are accelerating. As a result, revenue in real dollar terms has fallen over 15 percent since peaking in 2007. Increasing use of substitutes for physical mail, including email, cell phones, electronic document delivery, e-bill pay, online banking, and internet advertising, are all eating away at traditional mail volumes.

"The Postal Service has exhausted all of its $15 billion borrowing capacity from the U.S. Treasury, and is expected to run out of cash in the middle of 2012."--R. Richard Geddes

In the face of weak demand from such a powerful alternative, a typical business would rapidly downsize and reduce costs in a bid to maintain profitability. Indeed, the Postal Service has made progress in reducing the total number of employees over the past decade, which is critical as labor accounts for about 80 percent of its overall costs. However, since 2006 those reductions have not been sufficient to allow the Postal Service to meet its legally required break-even constraint. Although it announced its desire to reduce delivery days, streamline its far-flung sorting and transportation network, and close under-utilized post offices to further reduce costs, it has been hobbled by political opposition to downsizing. As a result, the Service expects to lose between $9 and $10 billion for its 2011 fiscal year, on top of losses of $8.4 billion in 2010. It was unable to meet a $5.5 billion payment to the U.S. Treasury due on September 30th, which Congress deferred until November 18th. The Postal Service has exhausted all of its $15 billion borrowing capacity from the U.S. Treasury, and is expected to run out of cash in the middle of 2012.

Washington's refusal to allow the necessary cost-side adjustments to demand-driven market realities is at the core of the Postal Service's problems. However, as long as the fundamental government-owned, legally enforced monopoly structure remains, there is no credible way of eliminating, or even substantially reducing, governmental interference with postal managerial decisions. The current independent government agency structure of the Postal Service was, in part, designed to reduce political interference, such as in the selection of postmasters. As long as the Postal Service receives governmentally bestowed benefits and protections (e.g. exemption from paying corporate or property taxes) Congress will attempt to realize a return on those benefits by interfering with decisions about delivery days per week, sorting center closure, contracting of window services, and many others. Even if a (still) more "independent" structure could be designed for a government-owned postal service, its business decisions would likely become politicized over time.

Given the Postal Service's fiscal crisis, and the need to adjust to market realities, it is time to put the Service on a course toward meaningful structural change that will give it the ability to adjust to demand for its core activity of delivering physical mail. In this Policy Brief, I lay out a plan for the development of a truly de-politicized Postal Service through de-monopolization, corporatization, and eventual privatization. I borrow from lessons learned in other countries that have reformed their postal services. I also describe how one of the most salutary and powerful economic forces - competition - can be brought to bear in subsidizing physical mail delivery on certain routes, should Congress decide that such subsidies are socially desirable. This approach will ensure that such subsidies are transparent and provided at least cost. Before addressing those issues, however, I discuss the Postal Service's fiscal challenges in more detail.

R. Richard Geddes is an adjunct scholar at AEI