Bail the Mail?
Options for the postal service.

By Edward L. Hudgins, director of regulatory studies, Cato Institute
November 9, 2001 12:00 p.m.

he postmaster general is asking Congress for $5 billion to help the U.S. Postal Service (USPS) recover from anthrax attacks and to make the mail safe. But the USPS is unlikely to recover from the downward financial spiral it was in before the September 11 attacks, and a bailout could delay the inevitable privatization that would help postal customers and the American economy.

Before the attacks the postal service was projected to lose $1 billion to $2 billion annually over the next decade as people turn to electronic bill paying and as the composition of the mail changes in the e-mail, Internet era. At the time of the attacks the USPS was completing a preliminary "Postal Transformation" discussion document to consider short-, medium-, and long-terms options for the last government monopoly. Further, the Mailing Industry Task Force was wrapping up a study entitled "Seizing Opportunity" that examined the likely evolution of the entire industry, not just the USPS. In addition, Rep. John McHugh (R., NY) was circulating proposed legislation that would significantly reform the Postal Service. These three efforts demonstrate that all observers acknowledged the perilous position of the postal service even before the attacks. The attacks simply are accelerating the USPS's decline.

The postal service wants part of the bailout money to cover the cleanup and other costs associated with the anthrax attacks, and to purchase equipment such as irradiation machines to make certain that the mail is free of anthrax, smallpox, or other threats. The legitimate need for funds is real enough. But should the taxpayers foot the bill and should the funds come with no strings attached?

Private companies such as Federal Express and United Parcel Service will have to pay for their own protection equipment, passing on the costs if necessary to customers. If higher prices could scare off customers, those companies might simply have to take a temporary hit on the bottom line. Pitney-Bowes, which operates 1,300 mailrooms, including those of 40 percent of the Fortune 500 companies, already offered its customers a special mail-security service, mainly to protect from bombs, and will be offering protection against bioterrorism as well. So why should taxpayers rather than customers pick up the tap for protection of the U.S. mail?

The argument of course is that the postal service is a government monopoly and that the government thus should protect it. Just as tax dollars go to protect the U.S. Capitol, courthouses, and other government installations, so they should protect the mail. But this argument ignores the situation of the USPS that predates the attacks, and the very need for the bailout points to the USPS problems that must be addressed.

Consider the hotels that have seen customers staying away because of the recession or fear of traveling. They have cut workforces to reduce costs and cut prices to attract more customers. But unlike a private businesses, the postal service will not make major workforce cuts. And predating the attacks, it had been seeking to raise the price of a stamp from 34 cents to 37 cents. Further, it wants to increase the price of commercial mail, which has already gone up twice in the last 10 months by nearly 20 percent. With larger drops in mail volume and thus in revenues projected, the USPS likely will wish to raise prices even more.

The postal service in the past has spent billions of dollars on new high-tech equipment, not for protecting against anthrax but for improving productivity. But in the three decades since its creation, USPS productivity has risen only by a total of 12 percent, compared to an average of 55 percent for all businesses during that period. Three decades ago nearly 80 percent of postal-service revenues went to cover labor costs. Today the figure is about 76-77 percent. (And let's not forget that this poor showing occurs even though the USPS enjoys special privileges, e.g. it pays no taxes and is not subject to most of the regulations that burden the private sector.) In other words, the postal service and, more to the point, its captive customers, benefit little from innovation. New irradiation equipment might eliminate anthrax but it will not stop the Postal Service's decline.

But out of adversity often comes opportunity. Consider the example of Germany. After the fall of the Berlin Wall, when the divided country unified, the mail service in the East was on the verge of collapse. Since the West was going to have to absorb the costs of cleaning up the mess the Communists had made, German officials decided they might as well clean up part of the mess that had been made by the government in the West. Deutsche Post (DP) in the west would absorb the system in the east but also would be put on the road to privatization.

A private management team was brought and DP was reorganized as a joint-stock company. Inefficient operations were sold and the funds used to open new, cutting-edge facilities. The workforce was reduced by about one-third, but over a period of years through attrition and early retirement rather than through massive layoffs. In 2000 an initial public offering of 30 percent of DP stock was made and in 2002 another offering will push the private share of that company to over 50 percent. DP now offers innovative lines of service and is becoming a larger European and global player. In a few years DP will lose all its monopoly protection.

American policymakers can learn from the German example. If they insist on handing tax dollars to the U.S. postal service, they should do so as part of a long-term plan to reorganize the USPS, to place it in private hands, and to remove its monopoly protection. Such an outcome will probably occur in any case. But the transition will be far smoother for postal workers, for managers, for postal customers, and for taxpayers if the need to deal with these terrible attacks is used as an opportunity do the right thing.