June 1, 2004

June 1, 2004 | WebMemo on Regulation

Congress and Postal Reform: Less than Letter-Perfect

Over the past few weeks, things have been moving quickly in the normally glacier-like world of the Postal Service. On May 12, a House committee voted unanimously in favor of H.R. 4341, by Rep. John McHugh (R-NY), the first broad postal reform legislation to be approved by a congressional committee in 30 years. The next week, very similar legislation, S. 2468, was introduced in the Senate by Sens. Susan Collins (R-ME) and Tom Carper (D- DE). The good news is that these bills would implement some welcome changes in the way the U.S. Postal Service operates. The bad news is that they fall short of the kind of real transformation that is needed and would saddle taxpayers with billions in postal costs. Congress can and should deliver more than this disappointing package.


It is no secret that the U.S. Postal Service (USPS) is in need of change. Americans have increasingly been turning to e-mail and other forms of electronic communication to send messages, rather than visit the post office. Last year, total mail volume shrank for the third year in a row and has continued to do so this year. And although USPS ran a surplus last year, it suffered huge deficits the three previous years, and more are likely. The old way of doing things just doesn't work any more: without change, the postal service may soon no longer be viable.


Last year, a special presidential commission looked at how the Postal Service should respond to these long-term trends. That commission recommended a broad set of reforms, focused on reducing costs, increasing USPS's flexibility to respond to market conditions, and increasing oversight of the organization. The postal reform bills now in the House and Senate would implement many-but not all-of the commission's recommendations. Specifically, the bills would:

  1. Grant USPS broad authority to set prices for "competitive" products (i.e., those for which it does not enjoy a monopoly). It would be prohibited, however, from subsidizing competitive products with money from other areas.
  2. Limit USPS to provision of "postal services," although all current activities would continue to be allowed.
  3. In markets where the Postal Service is "dominant," replace the current, cumbersome, system of setting rates with more "modern" regulation, such as price caps, to be established by the new Postal Regulatory Commission. This is meant to give postal managers more flexibility in setting and adjusting rates by putting an end to the years-long administrative hearings typical under today's system.
  4. Require more transparency in USPS's operations, with more public disclosure of information about its finances and other activities.
  5. Replace today's relatively weak Postal Rate Commission with a much more powerful Postal Regulatory Commission. This oversight board would review and approve rates, establish service quality standards, and review financial data from USPS. Unlike the current Rate Commission, this agency would have clear authority to subpoena information from the Postal Service.
  6. Reduce some of the special privileges enjoyed by USPS. Among the changes, the Postal Service would be subject to certain antitrust laws, would have to comply with local building regulations, and would pay an "assumed" federal income tax on competitive product revenue (although this payment would simply be a transfer from USPS's competitive products account to its general account). USPS's statutory monopoly on letter mail would remain, although the price that competitors such as FedEx and UPS can charge would be slightly reduced.

The operating theory behind these principles is clear and largely sensible. In order to survive in today's changing world, USPS-like other companies-needs the flexibility to adapt to changing market conditions. But USPS is not an ordinary company-as a government enterprise, it enjoys legal privileges and protections unlike those enjoyed by any private firm. Thus, in return for increased flexibility, these privileges and protections must be reduced and oversight must be increased to prevent market abuses.


Yet, the House and Senate bills fall far short of the comprehensive reform that is needed, and they would in some ways would make the current situation worse. Among the problems:

  • The bills provide for billions in new subsidies for the Postal Service. The legislation relieves the Postal Service for paying some $27 billion over the next few decades in pension benefits due to postal retirees for prior military service. These obligations, however, are Postal Service costs, triggered by retirees' postal employment, and part of the total compensation paid to employees for postal work. Taxpayers should not be saddled with this burden.
  • The bills keep in place-or even expand-political restrictions on USPS's ability to cut costs. For instance, the Postal Service would continue to be banned from closing post offices because they run a deficit. Moreover, the bills ignore a proposal by the President's reform commission to streamline the closure of other facilities through a process similar to that used to close unneeded military bases. The bills also would limit the ability of the Postal Service to use "workshare" agreements, under which private users take over some mail processing functions in return for lower rates.
  • While the bills whittle away at several of the special privileges enjoyed by USPS, they barely scratch the most important one: the statutory monopoly that makes it illegal for anyone else to deliver letter mail. This monopoly should be repealed. Short of that, there are a number of important changes that could be made. The President's postal reform commission, for example, proposed giving the Postal Regulatory Commission authority to determine the extent of the monopoly, rather than let the Postal Service itself define its own monopoly's limits.

Many elements of the postal reform legislation now pending in Congress are welcome steps in the right direction. Yet, it falls far short of the comprehensive transformation of the mails that USPS requires-and American consumers deserve.


James Gattuso is Research Fellow in Regulatory Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies