The U.S. Postal Service Can Get Real, or Go The Way of Hostess

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At some point in each academic year over the past twenty, I have asked my introductory economics students the following question: "If you wanted to communicate with a friend, how many of you would send a letter?" In past years several hands would float up, but this year my question was greeted with howls of laughter. Although that may seem amusing, it should be taken very seriously by the new Congress when it forms in a few weeks.

Indeed, the problems that new communication technologies create for the U.S. Postal Service should be Congress's top priority. The window for comprehensive, sustainable postal reform in the United States is rapidly closing. First-class mail - by far the Service's most profitable - is down a third since its high in 2001 (as shown in the figure nearby), while overall mail volume is down 26 percent. Such declines have not been seen since the Great Depression, and they are devouring the Service's bottom line. It lost almost $16 billion in its 2012 fiscal year, hit its $15 billion borrowing limit with the U.S. Treasury, and has only enough cash left for a few weeks of operation. There is no improvement in sight under current postal policy.

Two relentless, intertwined economic forces are at work: the rapid growth of cheap, instantaneous electronic communications and mail that is increasingly commercial in nature. Sustainable postal policy must adapt to those twin realities. The good news is that experience in other countries shows that postal services, if they are allowed to commercialize and to access fresh sources of capital, are sustainable even in a new world of widespread electronic communications.

Many countries have privatized their posts, and all twenty-seven European Union countries are eliminating their mail monopolies. They will become more commercial entities. The U.S. Postal Service, however, remains a government-owned enterprise with two monopolies, one over letter delivery and another over the use of the mailbox. Continuing government involvement in postal services is justified on the basis of "preserving universal service," which reflects a concern that rural areas might receive inadequate mail delivery if government didn't intervene.

Congress must now address two key questions. First, what is the proper role of universal physical mail delivery in the new communications marketplace? This boils down to the question of the minimum number of days per week that mail delivery should be guaranteed, and to which areas. Second, if a minimum number of days are to be guaranteed, how will Congress pay for it? Congress is today effectively guaranteeing universal service by asking the Postal Service to do the impossible: to deliver to all addresses six days per week in the face of rapidly declining demand while saddled with high and rigid costs. If Congress wants to subsidize physical mail delivery, such subsidies should be fully justified and transparent. They should also be delivered at least cost, meaning that taxpayers obtain the most "bang for the buck" from the subsidy.

The Postal Service must also be allowed to adapt. But to realize more commercial freedom, its delivery monopoly must be phased out. Increased commercial freedom would allow the Service to utilize its core assets - its vast system of mail sortation and "last mile" of delivery to every address - in new and creative ways to enhance its revenue. Subject to any minimum set by Congress, the Service may do best by providing six-day-per-week delivery on some routes, three days on others, and by changing delivery frequency on a given route over time. Commercialization would also allow the Service to explore innovative partnerships with private delivery companies, as many foreign posts have done.

This is no pipe dream. Studies of Eastern European economies transitioning out of socialism show that the largest gains come from better entrepreneurship rather than from massive cost cutting. That is, by utilizing existing assets more effectively to generate additional revenue.

The Postal Service, however, also suffers from severe problems associated with its state-owned enterprise structure that stunt its ability to innovate. To address this, it should adopt a standard corporate legal structure that subjects it to the panoply of rules and norms associated with the publicly traded, but privately owned, corporation. This is corporatization. This follows the successful model of New Zealand Post. These changes would also help the Service to raise much-needed capital to enhance its revenues. It currently lacks sufficient cash to undertake even basic market research.

Through thoughtful policies, the Postal Service can be placed on the path to sustainable, even profitable, operations. Or it can go the way of Hostess. Congress can choose between piecemeal, ineffective policies, or lasting institutional reform. If it chooses the former, this ancient and honorable U.S. institution - which predates the United States itself - will suffer through slow, agonizing, embarrassing taxpayer bailouts and decline.

Perhaps Congress should here recall the one-word admonishment that Dr. Seuss's Lorax left for the Once-ler: "Unless."


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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