Politics & Policy

Return to Sender

Postal reform has miles to go yet.

The postal-reform legislation that passed overwhelmingly in the House on Tuesday has been hailed as a much-needed repair to the ailing United States Postal Service. Unfortunately it doesn’t fix the postal service’s biggest problem. In the face of falling mail volumes and massive liabilities, the USPS has claimed for years that greater pricing flexibility would solve its financial woes. Free of existing regulation, its managers argued, the USPS could respond quickly to market opportunities and thereby increase earnings.

#ad#It looks like the USPS is finally getting what it wanted: At the core of the new bill are measures that free up the pricing system. To really mend itself, however, the postal service needs not so much flexibility on pricing as the flexibility to cut its massive labor costs. And the new legislation doesn’t give it that.

Until now, as a government bureaucracy with monopolies on letter delivery and mailbox use, the USPS has had its price-setting regulated by the independent Postal Rate Commission. The new legislation replaces the old system with a price cap based on the Consumer Price Index. If the bill passes the Senate and is signed by President Bush, the postal service will be allowed to raise rates on letter delivery as it sees fit–so long as it does not increase them faster than the inflation rate, as measured by the CPI.

The notion that pricing freedom alone can put a business in the black simply doesn’t stand up to inspection. For evidence, look no further than Amtrak, a regulated government enterprise that already has full pricing flexibility; its operating loss has exceeded $1.3 billion in each of the last three years.

Michael Schuyler, a senior economist at the Institute for Research on the Economics of Taxation who has analyzed the new postal bill, points out that “if price flexibility were the secret to financial health, most airlines would be booming, as would Amtrak. In reality, price flexibility does little good when costs are high.”

And postal -service costs are out-of-control. Nearly 80 percent of USPS spending goes toward labor, compared to about 50 percent at private delivery companies. The average postal worker earns over 25 percent more than his private-sector factory-worker counterparts.

Any serious reform plan would try to bring down labor costs by strengthening USPS management’s power to negotiate with postal unions. But the House bill explicitly states, with only a minor exception, that “nothing in this Act . . . shall restrict, expand, or otherwise affect any of the rights, privileges, or benefits of either employees of or labor organizations representing employees of the United States Postal Service.”

That means no-layoff rules will continue. So will provisions that ban the USPS from moving a postal employee from one city to another, effectively barring the organization from properly allocating its own labor resources. The bill completely kowtows to unions, and it even mandates that one slot on the USPS board of governors is to be filled by an individual with unanimous backing by organized labor.

Another problem with the proposed legislation is that the inflation-based price cap doesn’t include a standard provision, one that was recommended by the 2003 Report of the President’s Commission on the USPS: a downward adjustment “to motivate the Postal Service to pursue a far higher standard of efficiency.” A downward adjustment would also account for technological improvements: The price caps normally imposed on regulated businesses are actually lower than the rate of inflation, based on the premise that technology is steadily improving efficiency.

Moreover, any inflation-based rate cap is excessively generous, because postal prices shouldn’t be rising by anywhere near the rate of inflation in the first place. They should, in fact, be dropping. A 2004 study by leading experts of the Postal Rate Commission notes: “The doubling of overall volume coupled with scale economies should have resulted in the average price of the stamp dropping in real terms.”

Expansion and technological advance normally add up to savings for customers, as they have, for example, in long-distance telephone service. But new technology doesn’t seem to have any impact on the postal service’s ability to cut costs, even with innovations like modern reader/sorters that process more than 30,000 pieces of mail per hour.

While the reform plan falls short of what’s really needed, there are some notable bright spots. The Postal Rate Commission, renamed the Postal Regulatory Commission, would have the power to subpoena USPS information. That could help bring about much-needed accounting transparency, which is another of the postal service’s biggest problems.

Still, what the USPS really needs is flexibility to cut labor costs, and that’s only going to happen if policymakers summon the political will to break the postal unions’ stranglehold. Until then, all the rate-setting flexibility in the world won’t rescue the postal service from its downward slide.

Sam Ryan is a senior fellow at the Lexington Institute in Arlington, Va.

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