Should Congress Save the Post Office?

Posted in: Government

Absent action by Congress, the United States Postal Service (USPS) will soon have insufficient funds to pay its obligations.  Should Congress bail out the Post Office and if so, what form should the bailout take?  And, more broadly, why do we even need the federal government to operate a Post Office at all, when private companies like United Parcel Service (UPS) and Federal Express (FedEx) also deliver packages and letters?

In this column, I shall discuss the causes of the Post Office’s financial woes and a number of possible solutions.

The Causes of the Post Office’s Problems

In some important respects, the problems facing the USPS mirror those of private firms in sectors affected by technological change.  The rise of email, instant messaging, online bill-payment, and other forms of electronic communication have dramatically reduced demand for the Post Office’s core business—the transportation of letters.

Yet technological change alone does not account for the Post Office’s financial woes.  After all, in other ways, the Internet revolution has been very good for delivery businesses.  As consumers shift an increasing proportion of their purchases from brick-and-mortar stores to online shopping, demand for parcel delivery service goes up, not down.  The continued profitability of UPS and FedEx shows that market forces alone do not account for the Post Office’s difficulties.

Indeed, last week, Postmaster General Patrick Donahoe told a Senate committee that he would like to run the Post Office more like the way its private competitors are run, but that current federal law and policy prevent him from doing so.  For example, Congress has mandated that the USPS must annually prepay $5.5 billion in health retirement benefits, and has otherwise imposed obligations to employees that go beyond the laws and regulations that are applicable to private firms.

More fundamentally, Congress has virtually mandated that some aspects of the USPS’s business must be run at a loss.  A federal statute sets out, as a matter of basic policy, the obligation of the USPS to keep open post office branches that are running at a deficit in order to ensure “effective postal services . . . to residents of both urban and rural communities.”

On one hand, Congress provides the Post Office with no subsidy, demanding that it fund its operations in the way that a private firm would, from fees for the services and goods it provides.  On the other hand, Congress also imposes mandates on the Post Office that it does not impose on competing private firms.  In light of these contradictory requirements, it is no wonder that Postmaster General Donahoe feels hamstrung.

What Greater Flexibility for the Post Office Would Entail

Suppose Congress accedes to Postmaster General Donahoe’s request for greater “flexibility to operate more as a business would.”  What would that mean in practice?  If one starts from textbook economics, such flexibility could ultimately lead to complete privatization.

So long as Congress obligates the Post Office to run some portions of its business at a loss, it must subsidize them from other, more profitable, aspects of its business.  But in a perfectly competitive market, price equals cost, and so the USPS would not be able to raise prices on those other aspects of its business without losing customers to competitors that do not operate under the congressional mandate.

The same basic dynamic applies to the congressional mandates regarding costs for retired workers.  These costs too must be funded out of the profitable aspects of the USPS’s business, but again, a competitive market severely limits the ability of the USPS to earn enough money to cover these extra costs.

To be sure, real-world markets are not perfectly competitive in the way that economic theory assumes.  However, the models of how markets ideally work are accurate enough to spell doom for the Post Office.

Consider a recent real-world analogy.  With respect to retiree benefits, Congress has placed the Post Office in circumstances similar to those that faced General Motors (GM) before it was rescued and restructured by the federal government.  Even though GM’s then-current labor costs were comparable to those of its competitors, its contractual obligations to pay benefits to retirees still left the company operating at a net loss.

Accordingly, Congress may not be able to give the Post Office the flexibility to cover its costs without essentially eliminating the mandates that make the Post Office different from other delivery businesses.  And at that point, the USPS would simply be another private firm, in form if not in name.

The Subsidy Option

Congress, however, might make a judgment that the traditional goals of the Post Office are worth meeting.  What are those goals?  The foundational statute defines the Post Office’s “basic function [as] the obligation to provide postal services to bind the Nation together through the personal, educational, literary, and business correspondence of the people.”

Those are worthy goals, and in the early days of the Republic, and even through most of the Twentieth Century, the Post Office played a vital role in serving them.  One might wonder now, though, whether inexpensive postal service to all parts of the country is still needed to meet the needs described, when electronic communications are widely available. Nonetheless, Congress could make a judgment that especially for some subset of older Americans, mail remains a vital link to the life of the country.

If Congress Endorsed the Subsidy Option, What Might It Look Like in Practice?

If Congress did make such a judgment, it could then ensure that the postal needs of far-flung Americans were met by subsidizing postal service for them.  How might that be done?

One possibility would be by maintaining the existing service mandates on the Post Office, but permitting it to operate at a loss.  Under this approach, Congress would continue the mandates that are in effect, and would cover the shortfall between sales and expenses out of general revenues.

Alternatively, Congress could provide the subsidy directly to consumers.  People who live in under-served areas could be given vouchers redeemable with the Post Office or one of its competitors.  But recipients of the vouchers might then wonder why they cannot redeem them in other ways that foster the broad goals of the Post Office, by, for example, buying books or iPhones.  Like other voucher programs—such as the food stamps program—this one would rest on the paternalistic view that the government knows best how people should spend their money.  At the end of this line of reasoning lies a simple cash subsidy, but such an all-purpose subsidy—in the form of a tax credit on returns filed from specified zip codes, say—would be highly vulnerable politically.

Finally, Congress could level the playing field by imposing the rules that are now applicable only to the Post Office on its private competitors as well.  Doing so would also amount to a subsidy, albeit a hidden one.

This was more or less the approach that the government took to air travel in the days before airline deregulation, and it would be justified on more or less the same grounds:  That the country as a whole ought to help people who live in remote places stay connected with the rest of us.  Granted, airline deregulation has had many problems, but re-regulation along the old model seems extremely unlikely, and thus, this option seems unlikely for the Post Office as well.

The Virtues of a Stopgap Solution

In the end, there is no perfect way to achieve all of the goals that Congress has set for the Post Office.  Moreover, it should not even try.

Eventually, post offices may become obsolete.  Even package delivery, as we now know it, could eventually be almost entirely replaced by in-home or in-office 3D printers that fabricate all manner of objects based on downloadable blueprints.

The Constitution authorizes Congress to “establish post offices and post roads,” but nothing in the Constitution requires Congress to do so.  Just as the power of Congress to “grant letters of marque and reprisal” has been rendered obsolete by international law, so too, the post office power may become a relic.  If so, no tears need be shed.

So long as Congress believes that the Post Office fosters its goals of national unity through a connected populace, it should extend the Post Office a lifeline.  But given the long-term trends, it almost does not matter what form that lifeline takes.  Any solution to the problems besetting the Post Office will necessarily be a stopgap.

Posted in: Government

  • Free Earth Citizen

    I heard an expert recently on MSNBC, stating how USPS has overcommitted $50 to its pension fund, and that some simple accounting fixes would entirely solve the budget problems currently existing.  That person also implied that the failure of Congress to address this issue, has been done primarily for political reasons.  So let’s hear more detailed truth on this please. 

  • It’s one more attempt by the Republicans to eliminate the elderly and minorities without cars from voting via absentee ballots. They never stop thinking of ways to eliminate the Democratic vote. When they say the Democrats are trying to crush their party they are just projecting what they are ACTUALLY DOING onto Democrats.
    There should be federal laws that can protect minority votes that could take care of this ever-growing problem.