The Last, Best Hope For Postal Reform

The Postal Service is now up that well-known creek, and without a paddle. As the nearby chart shows, first-class mail volumes are now down over 25 percent since their highs in 2001. Just as travelers prefer cars to horse-drawn carriages, these declines are the result of the diversion of communications into cheaper and faster electronic substitutes for mail, such as e-mail, texting, and phone calls.

This is hard on the Postal Service since it makes about three times the amount of profits for each piece of first-class mail that it makes on a piece of advertising, or standard mail. With the economic downturn, however, advertising mail has also been falling. The mail decline reflects the falling value mailers get from physical mail delivery, and there is little the Postal Service can do to reverse it.

But the underlying economics are even worse than the horse and carriage. Mail delivery is often thought to benefit from "economies of scale," or falling unit costs as output rises. There are high initial costs associated with creating a nationwide mail delivery network. As the Postal Service gets bigger, it can spread those costs out over more letters, and thus deliver each letter more cheaply. Of course, economies of scale also work in reverse: as mail volumes decline the cost of delivering each letter rises.

The Postal Service is thus being squeezed between falling revenues and rising unit costs, a classic recipe for fiscal disaster. The result appears in the next figure. The Postal Service reported a $5.1 billion loss for its 2011 fiscal year, and expects to lose over $18 billion annually by 2015 unless something changes. Shockingly, Postmaster General Patrick Donahoe announced that the Service will actually run out of cash by October. If gas prices continue to rise, it could be a lot sooner.

None of this was preordained. Governments around the world saw the internet revolution coming years ago. They allowed, and indeed encouraged, their posts to adjust in myriad ways, including by cutting costs, improving service, and through organizational and in some cases ownership changes.

In the United States, Congressional actions allowing the Postal Service to adjust to the new communications marketplace are way past due. Fortunately, Congress is considering a new bill - "The 21st Century Postal Service Act," S. 1789, which is a big step in the right direction.

One key way for the Postal Service to adjust is by cutting costs. Since 80 percent of postal costs are related to labor, serious reform must allow the Service to reduce those costs. S. 1789 does that in a ingenious and compassionate way.

There is wide agreement that the Service has overpayed into the Federal Employee Retirement System (FERS) by about $7 billion over time. Rather than tapping overburdened taxpayers, the bill would use those overpayments to provide incentives to reduce the Service's workforce by an estimated 100,000, or about 20 percent, over the next three years without layoffs, by offering employee buyouts and early-retirement incentives.

Also, for the first time, the bill would require arbitrators to consider the financial condition of the Postal Service when rendering a binding arbitration decision. The only reasonable reaction to such a provision must be, "why was this not done before?"

The bill would also allow the Service to undertake a number of valuable cost-cutting measures that would have only modest effects on service. For example, it would allow some deliveries to be converted from front door to curbside, which the Postal Service has estimated would save up to $4.5 billion per year. It would also allow the Service to optimize its network by converting some retail outlets to window service inside a nearby drug store, for example, which would reduce the costs of providing those services in separate buildings.

There are many other things to like about S. 1789, such as its overhaul of the entire the Federal Worker's compensation program - which is also way overdue and would save the Service billions. Suffice to say that this important bill may be the last, best hope for reforming the Postal Service before taxpayers are handed the bill for its impending fiscal Armageddon.