Donald J. Devine

POSTAL REFORM CHANCE
April 22, 2003

The critical meeting of the President's Commission on the United States Postal Service is expected to take place at the end of the month. It might be the last opportunity to reform the oldest and largest government agency. Everyone knows the Postal Service is in trouble and will require radical surgery to remain viable. First class mail volume has declined almost ten percent since 1998, provoking never-ending deficits over the coming years. Business to business mail has dropped even more.

The USPS recognizes the problem and has proposed a "transformation plan," which is already in effect as far as cost-savings measures and management reforms are concerned. But short-term solutions such
as capital spending freezes cannot solve the fundamental problem. The essence of the proposed long-term solution is to grant the USPS greater flexibility, including to set its own rates for its products, to enter new
lines of business and to raise capital in new ways. Their solution is, "treat us as a business and we can compete."

The problem is that the USPS is not willing to treat itself as a true business. It is a government-created and subsidized legal monopoly worth $67 billion and with almost 900,000 employees, 38,000 post offices,
240,000 delivery routes, 138 million delivery address boxes, 215,000 vehicles, land and infrastructure of uncounted value, and even its own police force. These enforce a legal monopoly on first class letter
delivery, monopoly use of the hundreds of millions of letter-boxes nationally, exemption from state and local taxes, and freedom from gross receipts, income and sales taxes. This giant wants to keep its monopoly and leverage its resources to compete against private firms that have none of these advantages.

Even its monopoly power by itself would not be so bad if the USPS did not use its monopoly business to subsidize is competition against private firms. USPS's system-wide markup is about 50 percent above costs. However, its mark up for first class mail is a bit over 80 percent, compared to only one-third for more competitive priority and express mail and only five percent for the very competitive parcel post business. This cross-subsidy obviously comes not only at the expense of the private firms but mainly at the expense of first class mail users, who are paying much more than they should.

In fact, the USPS's transformational plan is the worst solution of all. It keeps the monopoly, retains the advantage of the good name of the U.S. government and the consequent lower borrowing costs, subsidizes competition with private firms that pay taxes, and would allow it to set its own rates without prior review. Having the Postal Rate Commission review rate increases beforehand is not exactly a free market solution but this is not a private firm. The Commission at least gives some oversight before
rates become a fait accompli to what otherwise would be an institution responsible to no one.

What should be done? The best solution would be to set the USPS free and eliminate its monopoly and subsidies and let it run its business the way it wants. That will not happen because of the political power of the postal unions. Second best would be to privatize the organization, eliminate the monopoly but directly subsidize the services Congress and the President deem essential as a national welfare responsibility, with good oversight of accounting to avoid cross-subsidies. The Commission could help by defining what are those core functions and what are the actual costs of each. The third best would be to keep the present system and try to reform it piecemeal.

The USPS is in trouble but there is no reason to solve its problems by making first class users pay for it and distorting the other markets. The President's Commission has a unique opportunity to reform the Postal Service by beginning to privatize the whole anachronism and end the postal monopoly. If it cannot do that, it should at least not make things worse by adopting the "transformational plan." As bad as the system is it
could get worse. Just ask the French--if we are still speaking to them.