Tuesday, March 19, 2013

In Defense of the U.S. Post Office

The Post Office (USPS) is going to cut Saturday delivery. That's not the only change in 2013. It will close half of its processing centers, more than 3,000 of its local branches, and eliminate about one-third of its workforce -- nearly 220,000 employees. One reason is that the USPS lost $15.9 billion in 2012. This, and the rising cost of stamps, support the conservative mantra that the government can not do anything right. Virtually no one who has ever visited a Post Office is surprised.

Yet it is more complicated than that. And the broader picture is much more indicative of what is wrong here.

Look at the money lost last year. $11.1 billion of that loss was from pre-funding of the USPS' pension and health benefit fund and half of that ($5.5 billion) was deferred from 2011 when they defaulted on its pre-funding to fund operations. Funding its pension and health benefits is reasonable enough but this has some special circumstances. First, the funding is to cover 75 years of liability. Second, the funding for that 75 years is mandated to be done in 10 years. 75 years of funding in 10 years. Why? In 2006, Congress passed the Postal Accountability and Enhancement Act, forcing USPS to pre-fund the present value of 75 years of its pension and health-benefit fund in 10 years -- about $5.5 billion annually for a business mandated to break even. That is virtually impossible for anyone to do.

When faced with bizarre and byzantine strictures, look for the special interests. For example, USPS has invested heavily in modern systems to speed distribution, and, in fact, has partnerships with FedEx and UPS for "last mile" delivery. In particular, FedEx relies heavily on USPS, which delivered more than 30% of FedEx Ground shipments in 2011. So the USPS provides service that is cheaper than the service UPS and FedEx can provide for many locations. That is government subsidizing private business.

Whenever USPS tries to enter a new arena, private competitors complain to Congress. There are multiple examples: plans to develop an online payment system in 2000 (Internet industry cried foul); public copy machines (office supply stores complained); in-store sales of phone cards and money transfers; selling postal meter cartridges (Pitney Bowes objected). And with rivals such as UPS complaining, Congress in 2006 restricted USPS to mail delivery.

It's bad enough that USPS is forbidden from entering new markets. But rivals complain to Congress even when USPS does a good job on its basic assignment. As economist Dean Baker explains, "About a decade ago, the Postal Service had an extremely effective ad campaign highlighting the fact that its express mail service was just a fraction of the price charged for overnight delivery by UPS and FedEx. [They] went to court to try to stop the ad campaign. When the court told them to get lost, they went to Congress. Their friends in Congress then leaned on the Postal Service and got it to end the ads." When they could not outlaw their success, they outlawed their taking credit for it.

And when USPS tried to take advantage of web shopping? As Elaine Kamarck at Harvard's Kennedy School of Government explains. "But parcel shipments were generated by large organizations and the USPS was not allowed to negotiate discounts and thus lost business. It was forbidden by law from lowering prices to get more business. This resulted in the entirely incredible situation in the 1990s where the United States government negotiated an agreement for the delivery of U.S. government package services with Fed Ex because the USPS was not allowed to negotiate for lower prices!"

One of the great problems in the Post Office is its incredibly hostile and off-putting employee-customer interface. It looks like a make-work project and reinforces the notion that government can not do anything right. As service declines, that opinion will be magnified. But, as these distortions clearly show, there is more corruption at work here than the USPS can be held responsible for.

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