September 4, 2011
The Post Office
Whither the Post Office and Its Universal Service Obligation? Posner
Becker is certainly correct that the U.S. Postal Service should be privatized. Although government is probably more efficient at providing some services than private enterprise is, such as the military, national security intelligence, the police, the judiciary, the central bank, and prisons, because the output of these services is so difficult to measure, there is no reason to think it any more efficient at providing postal service than it would be at providing telephone service or airline service. Its origins as a public service reflect government concern with conspiracies (and its desire therefore to be able to read letters in transit), the natural-monopoly character of postal service (multiple postal services would require duplication of delivery trucks, post offices, and sorting stations), and the desire to provide universal service at flat rates in order to improve information flow throughout the entire society (i.e., to achieve network externalities).
Later, when the telegraph and telephone were invented, it became recognized that these desiderata could be achieved without public ownership. AT&T until its breakup in the early 1980s had a de facto monopoly of telephone service, providing universal local service at flat rates subsidized by long-distance service and shielded by regulatory agencies (primarily the Federal Communications Commission) from competition by "cream skimmers" (competitors entering the service markets in which rates were kept artifically high in order to subsidize local service, especially local service in sparsely inhabited areas), but constrained in its ability to obtain monopoly profits by regulatory control of rates.
This could have been the regime for postal service, and an important step in the direction of substituting a government-regulated for a government-owned postal service was the 1971 reform that converted the service from a Cabinet department to an independent agency that was to be self-financing (largely from the sale of stamps) rather than dependent on congressional appropriations. The universal service obligation remained, along with a legal monopoly of first- and third-class mail and of access to post boxes (as distinct from front-door mail slots), and continues to this day.
But just as AT&T was eaten away by cream skimmers owing to liberalized regulation in the 1970s, so that by the beginning of the next decade it was ready to embrace a large measure of deregulation, so the postal service is being destroyed by competition from unregulated services, mainly email and other online services but also fax and Federal Express. Its revenues are plummeting faster than it has been able to cut costs. As a result, according to an article in today's New York Times, "the [postal service] is so low on cash that it will not be able to make a $5.5 billion payment due this month and may have to shut down entirely this winter unless Congress takes emergency action to stabilize its finances." The article discusses various economies, as well as congressional subsidy, that might save the postal service—but does not mention privatization as a possibility.
The postal service is hobbled in competing by its universal service obligation, which requires it to maintain post offices and fleets of delivery trucks in remote areas of the country that generate little in the way of postal revenue, and to pick up and deliver mail six days a week. And since email, fax, and Federal Express service are available everywhere, the case for subsidizing postal service to remote areas is weak.
The federal government could no doubt sell the postal service, just as states are busy selling turnpikes and bridges. If it sold it subject to the buyer's assuming the universal service obligation, it would have to convey along with the postal service's physical assets its monopoly protections against cream skimming—the monopoly of first- and third-class mail and exclusive access to post boxes. But then little would have been achieved by the sale—not nothing, because the buyer would be more strongly motivated than government to seek economies, but not a lot.
A sale without conditions would be different—the results would be radical: a large reduction in post offices and delivery trucks, and correspondingly large reductions in numbers of employees. But then what of the people living in remote areas? Email and fax are not a complete answer, because there is still a demand for letters, magazines, advertising brochures, and other items of snail mail. All these are things that can be delivered by Fed Ex or UPS, but the price for pick up and delivery in remote areas might be quite high. There is no good economic reason to subsidize people who decide to live in remote areas, but there would be political pressures to do so.
As a practical matter, reform of the postal service should I think proceed in three stages over a period of years. In the first stage, the postal service should be allowed to charge double postage for mail to or from designated remote areas and to terminate Saturday mail service to and from those areas. In the second, the postal service should be sold to private enterprise but with the legal restrictions (universal service, in its modified form with double postage and no Saturday delivery in remote areas, and exclusive access to post boxes) intact. And in the third the legal restrictions should be removed and all postal service be open to competition.
In Trouble Once Again: What to do About US Post Office? Becker
The United States postal system has a distinguished history since mail delivery is part of the Constitution, and Benjamin Franklin was the first Postmaster General. But during the past half century it has faced one financial crisis after another. Changing communication technologies may be the underlying source of its difficulties, but the postal system has also been hampered by regulations, and by its own inefficiencies. The solution: completely privatize the postal system, and allow other carriers to make daily mail deliveries using business and residential mailboxes. There are now enough actual and potential competitors, including the Internet, to make delivery of mail a highly competitive industry.
After running up billions of dollars in losses subsidized by the federal government from 1942-71, the postal service was made a quasi-independent non-profit enterprise (the United States Postal Service, or USPS) that no longer receives any direct government subsidy. Financially, USPS held its own until 2007, but since then cumulative losses have amounted to about $20 billion, and it is expected to lose another $8 billion this fiscal year. Obviously, this cannot continue much longer without a resumption of government subsidies, so this is an excellent time to consider major changes in the postal service and the economic environment in which it operates.
The most important factor behind its worsening financial fortunes is the sizable drop during recent years in the total volume of mail delivered. First class mail alone, although protected by a legal monopoly, fell by about 30% from 1998-2008, and has continued to fall rapidly during the past 3 years. The Great Recession is responsible for part of the decline in mail deliveries in recent years, but most of the fall has been due to the growing use of the Internet to pay bills, and to deliver newspapers, magazines, and books. The recession will end, but Internet use will only get more widespread, so the challenges facing USPS will continue to grow.
Defenders of the postal service correctly point out that part of its troubles is due to regulations that significantly raise its costs of operation. These include the requirements to deliver first class and some other mail 6 days a week at uniform prices to about 150 million residences, mailboxes, and businesses, including very remote locations that are costly to serve. Most mail prices can only be raised according to a formula fixed in 2006, and the USPS is restricted from entering new businesses.
The postal system would like to reduce costs by eliminating regular delivery of mail on Saturday, and by closing about 10% of it's over 30,000 post offices. It would also like greater freedom in setting prices of first class and other mail delivery. The postal system should be given these and other requests to operate more freely. Regular Saturday delivery of mail is an expensive luxury that is no longer needed, and the cost of operating post offices in remote areas cannot be justified, especially given the growing use of the Internet to pay bills and receive news and advertising.
However, greater freedom for the USPS should be part of a sweeping reform of the environment in which the postal service operates. Certain major advantages given to the USPS should also be removed. The post office has had a monopoly for over 100 years on the daily delivery of first class letters and other mail, a monopoly that includes exclusive access to customer mailboxes. Eliminating this monopoly, and allowing the postal service to operate as a private for-profit company, would force the USPS to try to compete more fully against Fed Ex, UPS, and perhaps new companies that would enter the mail business.
Competition would do wonders for mail delivery in the United States since it would make the USPS improve its operations if it wants to survive against competitors. We have seen how the 1971 law that required the postal service to be financially self-sufficient forced the postal service to eliminate losses. It did this by cutting costs through large reductions in the number of postal workers, and by closing many small and uneconomical post offices.
Nevertheless, the efficiency of the postal service still lags far behind that of Fed Ex and UPS. Part of this lag is due to regulatory restrictions, but some is due to its own mismanagement. As in prior discussions on our blog I refer again to the small town on Cape Cod where I have a summer home. Since its population expands 8-10 times during the summer, first class and other mail rises enormously during the summer. Fed Ex adjusts to this peak load problem in many ways, including renting trucks from Enterprise rental, delivering packages during longer hours, and shifting some employees from other locations. The local post office, by contrast, hardly adjusts at all. It has exactly the same hours as during the low volume winter months, which includes closing from 12-1 on weekdays, and only being open until noon on Saturdays. Since there is no mail delivery in this small town, most residents have mailboxes at the post office. Even though these boxes are in a separate room, which could be kept open when there is no other mail service, this room is closed too at about the same times when other mail service at the post office is closed.
Government enterprises, even quasi-independent ones like the USPS, are notoriously inefficient because of political and regulatory inefficiencies (see my op- ed of September 2 in Wall Street Journal on "government failure"). Sometimes, as with the military, there is no good substitute for a government enterprise. Fortunately, that is not the case with mail delivery since competition could be easily introduced by taking away the legal monopoly given to the USPS, eliminating the many restrictions imposed politically on its operations, and forcing it to operate like a for-profit company.
These changes will not be easy politically, although New Zealand and many European countries have either privatized or greatly liberalized their postal systems. But radical changes in competition and the regulatory environment are the only way to improve efficiency in mail delivery while trying to meet the major challenges posed by the Internet.