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May 18, 2011

Paper-Cut Postal Service Gets Wrong Kind of Band-Aid

By

Is the end near for the U.S. Postal Service? Things certainly look grim at USPS, which has suffered four straight years of red ink. Last week came more bad news, with postal officials reporting a $2.2 billion dollar loss for the second quarter.

Perhaps more disconcerting, they predicted that by September the Postal Service will run out of cash and default on a payment owed to the U.S. Treasury for retiree benefits.

While a sour economy and high fuel prices have certainly taken their toll, the cause of these troubles isn’t hard to find. The fundamental problem is the computer or mobile device you may be looking at right now. E-mails, online bill payments, even digital greeting cards are taking the place of paper and stamps. All told, the total volume of mail has dropped more than 20 percent since 2006.

The post office is on the wrong side of the information revolution.

Mail delivery could go the way of blacksmithing and steam engines, disappearing into economic insignificance, with perhaps a few scattered historical re-enactors delivering letters for curious tourists.

Others disagree, arguing that old-fashioned physical delivery can never be completely replaced. Even under the rosiest of these scenarios, the nature and scale of mail delivery will change, and change dramatically.

The question is whether USPS can keep up with those changes.

Improving Productivity

While the term “post office” has long been a metaphor for “appalling inefficiency,” USPS management has done a creditable job in reducing costs and improving productivity over the past few years. Overall, the Postal Service points to some $11 billion in cost savings since 2008.

That’s good, and it’s not enough. The immediate political focus will be on the looming $5.5 billion payment due to the U.S. government to pre-pay the Postal Service’s retirement obligations. USPS argues that such pre-payment isn’t necessary, and that they should be allowed to fund its obligations on a pay-as-you-go basis.

Even if so, any relief is bound to be seen as a bailout and face a tough road in the current TARP-shy Congress. And such relief would only shift the timing of the obligation, rather than implement long term change.

A more fundamental problem is that in several key areas, USPS is not allowed to make the changes that are needed. It is, for instance, prohibited by law from closing individual post offices if they are losing money. As a result, thousands of lightly frequented postal facilities stay in operation, serving few customers but costing the postal service and its customers billions.

Saturday Delivery?

Congress is also keeping the Postal Service from dropping Saturday delivery, although that step would save some $1.7 billion a year. Such a move would surely be unpopular, but given the changing role of mail, it’s sensible. And it wouldn’t be the first time that such an adjustment has been made: Before telephones existed, mail deliveries were sometimes made several times a day.

Just as telephony made such multiple deliveries unnecessary, Internet communication has made Saturday delivery non-essential.

At the same time, the Postal Service should also be stripped of its special marketplace privileges, including its monopoly on first-class mail. If someone is willing and able to make a profit in this shrinking market, they should be encouraged, not jailed.

Would abolition of the letter monopoly hurt, rather than help, USPS? Not necessarily. The introduction of competition could spur it to improve its operations even more. In any case, the ultimate goal is to reduce barriers to mail delivery, not to protect USPS.

FedEx and UPS

USPS’ current competitors in package and express mail, led by FedEx Corp. and the United Parcel Service Inc., have shown little interest in entering the world of first-class mail. This is understandable given the declining volumes. Nor do they necessarily have an interest in the demise of the USPS, since the postal service is also a major customer of their transport services.

So any competition is likely to come from new entrants to the field, bringing innovative ideas and fresh perspectives. Such new blood may be just what mail delivery needs.

As digital technology continues to advance, the Postal Service will continue to struggle to find a place for itself. Policy makers are making that struggle even harder by hobbling USPS’ ability to cut costs, and by banning competition. While mail service may lose its race for survival, it should be allowed make a run.

James Gattuso is senior research fellow in regulatory policy at The Heritage Foundation.

First appeared in Bloomberg

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