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WebMemo #206

February 14, 2003

Comments of James L. Gattuso to The President's Commission on theUnited States Postal Service

By

 In accordance with the procedures adopted by the Commission at its January 8, 2003 public meeting, I respectfully submit these comments to the President's Commission on the United States Postal Service.

 

This Commission, established in December by President Bush, is charged with "articulating a proposed vision for the future of the United States Postal Service" and recommending reforms needed to "ensure the viability of postal services."  This is a daunting task.  In the wake of technological changes that are fundamentally changing the way Americans communicate, the Postal Service is an increasingly troubled organization.  As the General Accounting Office stated in a report last year: "A transformation [is needed] if USPS is to remain viable in the 21st century."[1]

 

In the long term, it is not clear what role the physical delivery of mail will have in U.S. society.  What is clear is that that role is changing, and the USPS will have to change as well.  This certainly means a leaner, more efficient organization, and one with more flexibility to adapt to market conditions.  Perhaps most importantly, it should also mean an organization without the special protections - including the monopoly on letter mail - that have in the past dulled the postal services ability and incentive to react to change.

 

The challenge from the Internet.
The challenge to the Postal Service from electronic communications is real and growing.  Despite the economic downturn among high-tech firms over the past few years, the Internet's usage and popularity has continued to grow.  According to a recent report by Jupiter Media Metrix, half the population, some 142 Americans were online in 2001, with the number projected to rise to 211 million by 2006.[2]  And the single most popular use of the Internet is e-mail, used by 84 percent.  An increasing number are also using the Internet for transactions that may have previously taken place through the Postal Service, with 39.1 using the Internet to make purchases, and 17.9 percent banking online.[3]

 

One after another, forms of communication are moving into cyberspace and away from the post office.  For many office workers, it's a rare day when they stick a stamp on an envelope, instead of simply pressing the "send" button on a computer.  Even official communications are moving on-line.  (These comments, for instance, will be sent to the Commission electronically, and not through the mail.)  Outside the office, more and more communications are taking place electronically as well.  Once unthinkable, today it's not even unusual to receive a greeting card by e-mail.  With increasing numbers of American subscribing to always-on, high-speed Internet access services, these trends may accelerate.

 

Ironically, the other great challenge facing the Postal Service - security - may also be accelerating this trend.  The anthrax attacks of 2001 drove large numbers of Americans away from the mail, forcing them to find alternative ways to communicate.  Having found them, they may never come back.  In Washington, large portions of Capitol Hill and the executive branch have been without normal mail deli very for months, yet life has gone on much as before. 

 

Decreasing mail volume. 
This shift has already shown itself in postal volume statistics.  As shown in briefing prepared for this Commission by Richard Strasser, the chief financial officer of the Postal Service, total mail volume has decreased for the past two years by some five billion pieces, from 208 to 203 billion. First-class, single piece letter volume has dropped by almost 10 percent since 1998, from 54.3 to 49.3 billion pieces.[4]  The bottom line effect has been a series of deficits for the Postal Service (although a surplus is expected this year).

 

The Postal Service's analysis of types of mail is also telling.  "Nonhousehold to nonhousehold" (presumably business to business mail) has dropped from 37 percent to 26 percent of total volume from 1987 to 2001. Household to household (presumably personal mail) has remained relatively insignificant, at 7 percent in 2001.  That leaves mail between households and nonhouseholds, presumably businesses to individuals with a dominant 67 percent of volume.  That segment may also melt away as electronic bill payment and other new services become more common. [5]

 

USPS Transformation Plan. 
To its credit, the Postal Service recognizes that it is in trouble, and that it needs to significantly change.  To this end, it announced last April a comprehensive "transformation plan" proposing a wide-ranging set of reforms.  It has already begun to implement many of the management reforms in the plan, such as cost savings.  This is good news, but - as the General Accounting Office pointed out in a recent report - there is still reason for concern.[6]  Among other things, GAO points out that historically, USPS has had difficulty sustaining cost savings, employee-related costs are expected to continue increasing, and that many of the cost savings were gained through a freeze on capital spending rather than long-term policy changes. 

 

Beyond management issues, the Transformation Plan also proposes a number of reforms aimed at providing USPS wider flexibility in its operations.  These include wider powers to raise capital and to set rates, as well as expanding its lines of business to related field such as e-commerce, transportation, and printing.

 

The case for increased flexibility is sound.  In today's markets, access to capital and the ability to price dynamically for varying consumer demands (as firms in many historically regulated industries have found) are critical.  So too, is the ability to diversify lines of business, especially for companies in declining businesses. 

 

Special protections. 

In effect, the USPS is arguing for the same business tools enjoyed by ordinary firms. The problem, however, is that the USPS is no ordinary firm.  It enjoys a wide range of perquisites and protections tied to its government status, ranging from exemption from taxation to implied guarantees from the U.S. Treasury. 

 

Foremost among these is the legal monopoly on delivery of letter mail, making competition with the Postal Service a criminal offense.  Notably, while such legal monopolies were once common, mail delivery is now one of very few industries under such restrictions.  Over the past 25 years, legal restrictions on competition in most other protected industries - ranging from telephone service and cable TV to air travel and trucking -- have been lifted.[7]

 

Providing USPS with the operational flexibility it seeks without addressing these special protections would create very real concerns that the Postal Service could distort markets to the detriment of consumers.  Perhaps more importantly, eliminating special privileges and protections would be good for the Postal Service itself.  Insulation and protection from market forces helped foster much of the system's inefficiency in the first place, reducing its ability to respond to today's challenges.  The fundamental culture of the Postal Service needs to change, and such change will be spurred by more - rather than less - competition.

 

Universal service. 

It should be noted that additional competition is not inconsistent with universal service obligations.  In several other industries where competition has been introduced, support for service in high-cost areas has been continued by replacing cross-subsidies with explicit subsidies.  In the airline industry, for instance, the Essential Air Service program was created by the Airline Deregulation Act of 1978 to fund service to small communities.  On a much larger scale, the Telecommunications Act of 1996 provided for an extensive system of explicit subsidies to take the place of telecom cross-subsidies to rural areas. 

 

This is not to say that these subsidies themselves are necessary or justified.  Like postal subsidies, airline and telecommunications subsidies provide support without reference to individual need.  The troubling result is that many poor consumers pay to support wealthier consumers.   Nevertheless, by making subsidies explicit, the issue of universal service subsidy can be decoupled from the issue of competition in an industry - allowing each to be evaluated on its own merits.

 

Conclusion.

This Commission has been given a difficult challenge: to examine an extensive set of issues surrounding the Postal Service.  Members will no doubt be inundated with information regarding the operational details of USPS and the mailing industry.  At the same time, however, the fundamental changes taking place in postal services calls for a long-term assessment, and a focus on the fundamental basis under which the USPS will operate.   And this means a reevaluation of the Postal Service's mission, its governmental status, and the competitive protection it receives.  These issues are certainly not without controversy, but provide the best opportunity for the Commission to deliver real benefits to U.S. consumers.

Footnotes

[1] General Accounting Office, "U.S. Postal Service: Deteriorating Financial Outlook Increases Need for Transformation, February 2002.

[2] As cited in William F. Adkinson, Jr., Jeffrey A. Eisenach, and Thomas M. Lenard, "The Digital Economy Fact Book," Progress and Freedom Foundation, 2002.


[3] U.S. Department of Commerce, Economics and Statistics Administration and National Telecommunications and Information Administration, "A Nation Online: How Americans Are Expanding Their Use of the Internet," (February 2002).


[4] "Briefing for the President's Commission on the United States Postal Service," January 8, 2003.


[5] See, Jackie Spinner, "The Check's Last Writes: Some Can't Tear Themselves Away, but Electronic Payments Are Gaining Fast," The Washington Post, February 9, 2003, H1.


[6] General Accounting Office, "Major Management Challenges and Program Risks: U.S. Postal Service, January 2003.


[7] For a summary of the consumer benefits of competition in these deregulated industries, see, Robert Crandall and Jerry Ellig, "Economic Deregulation and Consumer Choice: Lessons for the Electric Industry, Center for Market Processes (1997).

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