What Does the Looming Collapse of the US Postal Service Tell Us?

Devin Leonard’s article on the US Postal Service in the new Bloomberg BusinessWeek is rich with insight, and a sign of the magazine’s revival. First, I will highlight a few of the most striking observations and then I’ll offer a few tentative thoughts.

(1) After describing the extraordinary size and reach of the USPS, Leonard writes:

 

Since 2007 the USPS has been unable to cover its annual budget, 80 percent of which goes to salaries and benefits. In contrast, 43 percent of FedEx’s (FDX) budget and 61 percent of United Parcel Service’s (UPS) pay go to employee-related expenses. Perhaps it’s not surprising that the postal service’s two primary rivals are more nimble. According to SJ Consulting Group, the USPS has more than a 15 percent share of the American express and ground-shipping market. FedEx has 32 percent, UPS 53 percent.

The USPS has stayed afloat by borrowing $12 billion from the U.S. Treasury. This year it will reach its statutory debt limit. After that, insolvency looms. …

So there we have the scale of the problem.

(2) Leonard then gives us a sense of the political landscape:

 

Democrats receive the vast majority of the contributions made by postal workers’ unions, according to campaign finance records, so they tend to be sympathetic. President Barack Obama inserted a proposal in his 2012 budget to absolve the USPS of $4 billion of its retiree health-care liabilities in 2011. This would enable it to slog through another year without extraordinary changes. Meanwhile, Senator Thomas Carper (D-Del.) introduced a bill on May 17 that would relieve the USPS of its prefunding headaches. “If we do nothing, we face a future without the valuable services that the postal service provides,” Carper cautioned in a statement the same day. 

Keep this quick fix in mind as you read on. In fairness, the shutdown of unprofitable post offices would have significant political repercussions, so it’s easy to see why Congress is gunshy. Incredibly, as Leonard explains, federal law makes the consolidation process extremely difficult:

The USPS is targeting 2,000 of its 31,871 post offices. That’s not much for an agency that’s nearly $15 billion in debt. Donahoe says he’s doing what he can, despite a federal stricture that forbids the closing of post offices solely for economic reasons. He tells anybody who will listen on Capitol Hill that the prohibition makes little sense at a time when his agency’s coffers are nearly depleted.

If FedEx and UPS operated under similar restrictions, one assumes that they would also suffer from a bloated cost structure. 

(3) Leonard also draws attention to the role of organized labor in shaping the cost structure of the USPS:

The USPS has historically placed the interests of its unions first. That hasn’t changed. In March it reached a four-and-a-half-year agreement with the 250,000-member American Postal Workers Union, which represents mail clerks, drivers, mechanics, and custodians. The pact extends the no-layoff provision and provides a 3.5 percent raise for APWU members over the period of the contract, along with seven upcapped cost-of-living increases. The union is happy. “Despite the fact that the postal service is on the edge of insolvency, the union and management have reached an agreement that is a ‘win-win’ proposition,” said APWU President Cliff Guffey on the union’s website. A USPS spokeswoman said the agency agreed to the raise because it feared the decision would otherwise be made by an arbitrator who might be even more deferential to the union.

Here is Barry Hirsch via Adam Ozimek of Modeled Behavior:

The costs of deliberate or sluggish union governance … increase with the speed of change and the degree of competition. New information is constantly coming to a firm and its workers and it is prohibitively costly. to have explicit contract terms for every possible contingency. Revising formal contractual terms is costly. Although many collective bargaining agreements have broad management rights clauses, formalized contractual governance limits flexibility and managerial discretion in union companies.

If we think of USPS as being in the information and logistics business, it is safe to say that it is part of a sector that is changing quickly and in which the degree of competition has intensified markedly in recent years. 

(4) But at the heart of Leonard’s narrative is the effort of the erstwhile anthropologist Phillip Herr, a senior official at the GAO who in Leonard’s telling represents America’s civil service at its best, to learn from the successful transformations of postal services in other countries. 

 

Three decades ago, most postal services around the developed world were government-run monopolies like the USPS. In the late ’80s, the European Union set out to create a single postal market. It prodded members to give up their monopolies and compete with one another. The effort roused an industry often thought to be sleepy and backward-looking.

Many countries closed as many of their brick-and-mortar post offices as possible, moving these services into gas stations and convenience stores, which then take them over—just as the USPS is trying to do now, only far more aggressively. Today, Sweden’s Posten runs only 12 percent of its post offices. The rest are in the hands of third parties. Deutsche Post is now a private company and runs just 2 percent of the post offices in Germany. In contrast, the USPS operates all of its post offices.

Some of these newly energized mail services used the savings to pursue new business lines. 

The rest of the article describes Herr’s struggle to get the USPS and lawmakers to learn from this worldwide postal revolution. Instead, the USPS is focusing on considerably more quixotic schemes, e.g., 

[T]he USPS is focused instead on trying to slow the migration of its customers to the Net. 

While the postal revolution in Europe took off in the 1990s, the USPS remained frozen in place:

 

In the late ’90s, there was talk within the USPS about reforms, including privatizing the organization. Robert Reisner, a former USPS vice-president of strategic planning, recalls raising some of these issues during a visit to the White House with a Clinton Administration official: “She said, ‘Well, we would have to ask our union friends. You know they are critical to the coming campaign.’ “

Rather than empower the USPS to modernize its cost structure — a euphemism for constructive slash-and-burn — Congress embraced a quick fix. And like all quick fixes, it didn’t work terribly well:

In 2006 it relieved the postal service of $27 billion in pension liabilities for workers with military service. At the same time, the USPS agreed to make annual payments of $5.5 billion for the next 10 years to build up a fund for future retirees. John E. Potter, the Postmaster General at the time, was ecstatic when the bill was signed into law. “We’re planning for the future right now,” he said. “Today the postal service is operating in the black.”

The USPS was O.K. that year. Then, over the next three years, the economy collapsed, and the service lost $12 billion. …

“The postal service is already carrying more junk than first class,” says postal consultant Campbell. “Pretty soon it’s going to be a government-run advertising mail delivery service. Does that make any sense? It doesn’t make any sense.”

No, it does not. Incredibly, the White House wants to offer yet another USPS bailout, under the assumption that giving the USPS more breathing room will somehow encourage constructive change. 

Leonard’s article is a beautiful illustration of the fact that while the U.S. is home to many innovative private sector firms, we lag far behind the rest of the rich world in public sector innovation. And in many cases, ironically enough, it is because our European counterparts have proven more likely to dismantle public sector monopolies and to impose rigorous spending discipline. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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