Reforming the Postal Service For the Internet Age

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Washington's antiquated policies, combined with rising internet use, are killing the U.S. Postal Service. Mail volumes are down over 20 percent since their highs in 2006, declines not seen since the Great Depression. First-class mail - by far the Postal Service's most profitable class - is down almost 25 percent since its 2001 peak. The Postal Service expects to lose between $9 and $10 billion this year, and was unable to meet a $5.5 billion payment to the U.S. Treasury due on September 30th, which Congress deferred until November 18th.

Moreover, the composition of the mail has changed dramatically. About 90 percent of all mail is now business-originated commercial material. The Post Office's original public mission of "binding the nation together" is patently obsolete when people around the world can communicate instantly via the internet, and receive only catalogs and advertisements by mail.

The decline in physical mail, and the growth in low-profit advertising content, is likely to continue. "Kicking the can down the road" through incremental reform and accounting gimmicks are no longer sufficient to avoid a massive taxpayer-funded bailout. The time has come for meaningful reform that will protect taxpayers and create a sustainable Postal Service.

The Postal Service needs to be converted into a regular business, facing market competition and disciplined by active, focused shareholders. It must be permitted to reduce its high and rigid costs, and to adjust to the realities of a new communications marketplace. This should be done through de-monopolization, corporatization, and eventual privatization, as has been done in many other countries.

The Obama Administration has proposed a timid, ineffective plan. It provides only temporary fixes by returning to the Postal Service some $7 billion in overpayments it made to the Federal Employees Retirement System since 1971, deferring for two years a required annual $5.5 billion payment due to U.S. taxpayers, and allowing postage rates to increase by 2 cents. The plan would do nothing to address the underlying, inexorable problem of adjusting to a new communications marketplace. In short, such changes would only push off -- and make more costly -- the day of reckoning when real reforms become inevitable.

Congress must answer two questions in light of widespread electronic communications and increasingly commercial mail. First, what level (such as days per week) of government-guaranteed mail delivery is appropriate in such a world? Second - assuming that Congress decides that some routes are worthy of a direct taxpayer subsidy - what is the cheapest and most transparent way to pay that subsidy? Taxpayers have a right to know exactly how much guaranteed mail service is costing them, as well as assurances that they are paying the minimum amount necessary for such service.

Even if Congress decides that direct taxpayer subsidies are warranted -- and increasingly commercialized mail suggests that they are not -- the Postal Service should nevertheless be put on a course toward de-monopolization and privatization.

A government-enforced monopoly is not necessary to subsidize some delivery routes. If some routes lose service in a competitive marketplace, then bids can be solicited from a variety of companies (including the Postal Service) based on which one will provide that service for the lowest possible subsidy. The Postal Service would benefit from the competitive pressures of the marketplace and from better corporate governance, the latter of which is currently very weak.

The federal government already has a body in place that could conduct such bidding: the Postal Regulatory Commission. The Commission is currently the Postal Service's regulator, overseeing rate increases and service standards. The Commission's new task would be to ensure that bidding on routes was fair and transparent.

This approach would free up the Postal Service to evolve into a typical private corporation, and to bid itself on those routes it refused to serve without subsidies. The Postal Service would also be free to set its rates as it wished.

The greatest benefit of this approach, however, is that it would lead to privatization. This would avoid a taxpayer bailout by allowing the enormous latent value in the Postal Service's network to be realized by the taxpayers who own it. That network is valuable both because of its real estate and - freed of political constraints - it would have huge value as a going concern.

U.S. taxpayers, through the Postal Service, own prized real estate in many downtown locations, including its headquarters in L'Enfant Plaza in Washington, its Boston Processing Center, and its massive James A. Farley Building in Manhattan. Postal real estate is certainly worth many times its value as recorded at purchase price in Postal Service accounts, which is about $15 billion. Much of that real estate could be sold to reduce taxpayer liabilities that are currently unfunded. This is appropriate: taxpayers own the Postal Service.

If the Postal Service were allowed to operate like a typical business and make normal business decisions, such as where and how large it's network will be, it would likely be valuable purely as a broadcast advertising medium. It could sell its vast sorting centers, and replace many post offices by contracting with local drug and convenience stores. Even though mail volumes are declining, it still receives about $65 billion in annual revenue, paid mostly by advertisers. With aggressive and tough-minded changes, the Postal Service could again be profitable.

Privatization - a postal IPO - combined with de-monopolization and proper oversight, would allow taxpayers to realize that vast market value. The proceeds would likely be sufficient to retire the huge unfunded taxpayer liabilities generated by the Postal Service since its creation in 1970.

Postal privatization is no longer novel. The German mail authority Deutsche Bundespost was privatized in 1995, and now maintains only a few post offices of its own, including one in the German Parliament Building. In Britain, the Postal Services Act of 2011 allows the government to privatize up to 90 percent of Royal Mail, with 10 percent being held by Royal Mail employees. Royal Mail has already closed about 95 percent of its post offices, and offers many of the same services by contracting with drug stores and other outlets.

De-monopolization and privatization are the only sustainable alternative to endless taxpayer subsidies and ever-greater taxpayer liabilities, which are unthinkable in an era of looming downgrades of U.S. debt. Taxpayer value embedded in the U.S. Postal Service is vast. Given the Postal Service's current fiscal crisis, the time has never been better to liberate that value.



Rick Geddes is an Associate Professor at Cornell University, and a Visiting Scholar at the American Enterprise Institute.  He is author of Saving the Mail: How to Solve the Problems Of the U.S. Postal Service (AEI Press: 2003).

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