Are We About to Lose the Postal Service?
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In the next few days we may decide the future of the Post Office. The signs are not auspicious. President Obama has agreed to a plan to cut Saturday delivery. The Post Service’s management wants to close 2500 post offices immediately and up to 16,000 by 2020. Representative Darrell Issa (R-CA) has introduced a bill that could end free door-to-door delivery.
Republicans have been railing at the government post office for many years. But for most of us, it is a “wondrous American creation”.
“Six days a week it delivers an average of 563 million pieces of mail—40 percent of the entire world’s volume”, observes BusinessWeek. “For the price of a 44¢ stamp (the lowest postal rate in the world), you can mail a letter anywhere within the nation’s borders. The service will carry it by pack mule to the Havasupai Indian reservation at the bottom of the Grand Canyon. Mailmen on snowmobiles take it to the wilds of Alaska. If your recipient can no longer be found, the USPS will return it at no extra charge. It may be the greatest bargain on earth.”
For all you Constitutionalists in the audience, the Founding Fathers considered the Post Office so important they included its creation on the short list of powers they bestowed on Congress, along with national defense, taxation, coining money, and regulating commerce
A Public Institution With a Public Mission
From its beginning the Post Office was a public institution with a public mission.
One mission was to promote an informed citizenry. To that end, Congress allowed newspaper printers to send each other newspapers for free, facilitating the flow of information from national and international sources to rural villages. The 1792 law also provided for the mail delivery of newspapers to subscribers at the low rate of 1 cent for up to 100 miles.
In the 1830s Alexis de Tocqueville described the success of these policies, “nothing is easier than to set up a newspaper, as a small number of subscribers suffices to defray the expenses. In America there is scarcely a hamlet that has not its newspaper.”
The special rate for newspapers eventually was extended to other types of materials recognized as having educational and cultural benefits: periodical pamphlets, magazines, nonprofit publications, library materials, and books.
In the 1820s the Post Office stepped in to promote the general welfare by overcoming what in modern parlance might be called a “digital divide”. For a price, private firms began to provide a faster mail service to investors seeking advanced market intelligence. A ship docking in New York might bring news of a rise in cotton prices in Liverpool. Speculators dispatched messengers to southern cotton markets and made a killing purchasing cotton at normal prices in advance of the run up.
The Post Office responded by establishing its own express mail service to equalize access to market information.
Outraged private carriers prompted a government investigation into the propriety of public express mail. The investigation concluded, “the object of the Department was laudable and praiseworthy.” “(T)he Government should not hesitate to adopt means, although of an expensive character, to place the community generally in possession of the same intelligence at as early a period as practicable.”
Early on, the Founding Fathers realized the Post Office would find it difficult if not impossible to achieve its public objectives if private businesses could siphon off the most profitable routes, leaving only money losing routes and services to the Post Office. Thus, the 1792 law also prohibited private postal service “whereby the revenue of the general post-office may be injured.” Private firms found abundant loopholes. In 1843 Senator William D. Merrick expressedhis exasperation at “these private expresses, which had been placed on all the most profitable routes…. (which deprived) the department of the greatest portion of its revenues and thereby disabled it from reducing the rates of postage…and from extending greater facilities to the more remote and sparsely populated sections of the Union.”.
In 1845, Congress closed the loopholes, enabling the Post Office to dramatically lower the price of postage and initiate free door-to-door delivery in cities.
In the 1890s the Post Office extended free door-to-door delivery to the two-thirds of America who lived in rural areas. Postmaster Generals like John Wanamaker, the founder of the Philadelphia department store, knew this would lose money in the short term but the nationwide infrastructure would become the foundation for new services. One of these would be package delivery. A full fledged parcel post would develop profitable routes that compensated for the unprofitable ones found in any system promising universal service.
Wanamaker got his wish when the handful of private companies that dominated package delivery began treating their customers badly. The companies refused to inform their customers about free delivery in areas beyond rail depots, sent shipments by circuitous routes to inflate costs, discriminated among customers, double charged and overcharged.
The post office stepped in. Parcel post began in 1912. Critics predicted the post office would be unable to compete. “(T)he Postal Department as now organized and operated would be utterly unable to compete with express companies upon purely a business basis”, one writer insisted. He was wrong. Tests comparing the private and public services found the government service generally faster. Within a year, express companies stopped competing with parcel post in many small towns.
Professor Richard B. Kielbowicz of the University of Washington describes how the financial panics of the late 1800s and early 1900s and the closure of hundreds of banks led the Post Office to promote the general welfare another way, by undertaking “an experiment in a new field of public benefits”: postal savings banks.
The banks fought back. They contended postal banks were unnecessary and would be “mismanaged, inefficient and costly and (would) serve the public less well than privately managed businesses.” The American Bankers Association spent $1 million to defeat the bill. It lost but did get the bill written in a way that severely restricted the ability of the post office to compete. Congress set the interest rate payable on deposits at 2 percent, half what private banks were offering, and set a maximum account balance at $500. Nevertheless, the postal savings system was by all accounts a success. At its peak in 1947 it had over 4 million accounts and deposits exceeding $3.3 billion.
In 1966, Congress voted to discontinue postal banks. With the advent of deposit insurance many argued, “the postal savings system had simply ‘outlived its usefulness’”. Perhaps. But twenty years later, hundreds of the nation’s newly deregulated private savings and loans collapsed, resulting in a $200 billion taxpayer bailout.
The New Postal Service Is Born
Historically Congress set postage rates. One result was that they were totally unrelated to costs. Capital investment shriveled even as mail volume soared. Finally, just before Christmas in 1966 the system collapsed. The Chicago Post Office, the nation’s largest, came to a virtual stop under a logjam of mail.
Congressional hearings ensued. In 1967 President Lyndon Johnson appointed a Commission to reorganize the Post Office on “a business basis”. In 1970 Congress transformed the Cabinet-level Post Office Department into the independent United States Postal Service (USPS). Taxpayer subsidies to the Post Office, which amounted to 25 percent of its budget in 1971 (about $16 billion in current dollars) were phased out.
Freed from some constraints and with a new capacity to borrow, the Post Office made major capital investments. Productivity soared. Today the USPS delivers 139 percent more mail to 89 percent more delivery points with just 2.5 percent more work hours than it did in 1971.
By the 1990s the USPS often generated a profit. As of 2005 it was free of debt.
So how is it that today the Post office is faced with a Sophie’s Choice: defaulting or putting itself in the hands of Darrell Issa, whose goal is to effectively gut it.
A Mess of Our Own Making
How did this happen? Here’s the story. The Post Office pays into several retirement and health funds. Almost everyone agrees that in the past it has vastly overpaid, some estimate by as much as $100 billion. One would think it a simple matter for Congress to allow the USPS to tap into these excess funds to pay current health benefits. One would be wrong.
Several times between 2002 and 2005 Congress did overwhelmingly approve such a strategy. Each time the White House nixed the idea because it would increase the deficit. Welcome to the wonderful world of Washington accounting.
The Post Office is self-supporting. It has overpaid into its health and retirement funds. But it cannot tap these surplus funds because the Congressional Budget Office (CBO) counts the surplus funds as part of the existing budget. Any use of them would therefore increase the deficit.
In 2006, the Post Office finally agreed to buy off the CBO. Budget neutrality over a ten-year period was achieved by requiring the USPS to make ten annual payments of $5.4-5.8 billion.
These payments, the Postal Regulatory Commission (PRC) observes, “transformed what would have been considerable profits into significant losses.”
The 2006 law also prohibited postal rates from rising faster than inflation. The economic collapse produced negative inflation. The law allows an “exigent” rate increase due to “extraordinary or exceptional circumstances”. In 2010, the USPS requested a 5.6 percent increase to raise $3.2 billion, twice as much, incidentally, as ending Saturday delivery will save.
The PRC agreed the Postal Service faces a crisis due in large part to an extraordinary economic contraction as well as the excessive burden of prefunding payments. But it unanimously denied the request, declaring the enormous debt was salutary for the post office!
Ironically, the law also requires mail prices to cover costs. In 2010 the same Postal Regulatory Commission determined that junk mail (standard mail) was being subsidized to the tune of $580 million a year, almost three times what the USPS says it would save from closing thousands of post offices.
The refusal of Congress to alleviate the prefunding burden coupled with the refusal of the PRC to allow a rate increase has led the USPS to embrace strategies that may save money in the short term but will undermine if not destroy the public mission of the post office in the long term.
The Folly of Closing Post Offices
Consider plans to close about 2500 post offices. Dean Granholm, vice president of delivery and post office operationsmaintains, “We’re not the only ones going through this trend. All sorts of retailers are trying to find ways to do this.” But the post office is not Starbucks or McDonalds or Walmart. It provides a public service and a significant part of that service is the ubiquity of the post office itself.
The closing of several thousand post offices, according to the USPS itself, would save the post office a paltry $200 million out of a budget of $55 billion, while costing thousands of communities and millions of people far, far more.
The USPS determines which post offices to shut using a cost-benefit methodology similar to that used by Starbucks and McDonalds and Walmart. It only includes half of the equation, the savings to USPS but not the costs to the community.
According to the post office economic model Marquette County, Wisconsin, population 15,000 and home to 7 post offices is significantly overserviced. Students at the University of Wisconsin undertook a proper cost-benefit analysis to determine if this were true. They chose to evaluate a post office that clearly would fail the post office cost-benefit test. They found that closing the Packwaukee post office would save about half a million dollars while costing the community, in increased travel time and related expenses, more than $700,000.
The Wall Street Journal carried an instructive story about the enormous unquantifiable impacts on Prairie City, South Dakota when its post office was closed. The closure saved the Postal Service $19,000 a year.
Prairie City postal clerks kept a pot of coffee brewing and posted birth and death notices. “That was the gathering place for people to come in the mornings, have a cup of coffee or a can of pop, and visit, but we don’t have that no more,” says Daniel Beckman, a recently widowed farmer. “All that’s left in the town now is just a church; it’s totally depressing.”
The area’s only major hospital and pharmacy is in Hettinger, N.D., 40 miles away and over the state line from Prairie City. Before, when an elderly person or farmer in Prairie City quickly needed an antibiotic or other medication, a pharmacist in Hettinger would rush prescriptions to the Hettinger post office, catching the mail carrier who each day traveled from Hettinger to the Prairie City post office. The closing eliminated that direct route, and now Prairie City mail is sorted and delivered on a rural route out of Bison, S.D., delaying the delivery of medicine from Hettinger by two or three days, says Dr. Brian Willoughby, of West River Health Services in Hettinger. “When they cut these services, there are multiple spinoff consequences for these older people out there in the middle of nowhere, but the bureaucrats sort of forget about that…
Eliminating Saturday delivery would save more money, $1.5-$3 billion a year, although one would hope that cutting service by 17 percent (one day) to reduce costs by 2-4 percent and eliminating some 50,000 full time, middle class jobs at a time when Washington sees as its primary mission the creation of such jobs, would seem to a nonstarter. Moreover, the strategy would slow delivery by two days for perhaps 25 percent of the mail and open the door to private firms to step in.
Unleashing the Post Office
Rather than cut back services, the USPS might revisit John Wanamaker’s strategy. Take advantage of its vast retail capacity. This has already begun. In 2010 it processed 6.7 million passport applications and issued over 120 million money orders. To these could be add all kinds of government services: state fishing licenses, renewing car registrations, applying for Medicare, voting registration.
Tragically, but not surprisingly, the 2006 law hobbles the ability of the USPS to offer new products. For example, it cannot offer a product that would “create an unfair or otherwise inappropriate competitive advantage for the Postal Service…”!
“The contradiction in the law is part of a pattern in effect ever since the USPS stopped receiving appropriations – Congress wants it to be self-sufficient but doesn’t want it to make money”, observes Elaine C. Kamarck of Harvard Kennedy School of Government.
For example, in the mid-1970s the post office was told to remove copy machines from post offices under pressure from lobbyists representing office equipment stores who feared that USPS was taking away its business. Later when the USPS initiated a “Pack and Send” service, the outcry from Mailboxes Etc. and other private packing stores successfully challenged the service. Years later, when Internet shopping took off, the delivery of packages to individual households should have resulted in a dramatic increase in USPS business. But parcel shipments were generated by large organizations and the USPS was not allowed to negotiate discounts and thus lost business. It was forbidden by law from lowering prices to get more business. This resulted in the entirely incredible situation in the 1990s where the United States Government negotiated an agreement for the delivery of U.S. government package services with Fed Ex because the USPS was not allowed to negotiate for lower prices!
The Republican strategy is clear. Reduce the post office’s presence in thousands of communities. Reduce the number of personal interactions with one’s letter carrier. Reduce service. Remove the post office from our everyday lives sufficiently so we will agree to its conversion to a private service supplied by profit making firms. What is the strategy for the rest of us?