The Last, Best Hope for Postal Reform

March 19, 2012

The U.S. Postal Service (USPS) has long been on the track toward fiscal crisis.  As consumers substitute electronic mail for physical mail, USPS faces a rapidly plummeting volume from which to collect revenues.  This leaves the government-run industry with chronic deficits and an uncertain fiscal future, says Rick Geddes, an associate professor at Cornell University and an adjunct scholar with the American Enterprise Institute.

  • For the most profitable form of physical mail -- first-class mail -- volume is now down over 25 percent since its high in 2001.
  • With these declining volumes and relatively stagnant fixed costs, USPS reported a $5.1 billion loss for its 2011 fiscal year.
  • Furthermore, it expects to lose over $18 billion annually by 2015 unless changes are made.

One of the issues that USPS faces is that it is currently situated on the down-slope of economies of scale.  Because a national mail system requires substantial upfront costs that are not related to volume, a sudden decrease in mail does not result in lower costs that are able to cope.  This limits its options.

However, substantial change does appear to be possible.  Congress is now considering a new bill, the 21st Century Postal Service Act, which will seek to address many of USPS's long-term issues.

  • USPS will tap $7 billion in overpayments it has made to the Federal Employee Retirement System in order to ease approximately 100,000 workers out of its labor pool, through buyouts and early retirement.
  • The bill will require arbitrators to consider the financial condition of the USPS when rendering a binding arbitration decision, hopefully lowering future labor costs.
  • It would allow some deliveries to be converted from front door to curbside, which the Postal Service has estimated would save up to $4.5 billion per year.
  • It would also allow USPS to optimize its network by converting some retail outlets to window service inside a nearby drug store, for example, which would reduce the costs of providing those services in separate buildings.

The new bill offers a long-awaited opportunity to save the U.S. Postal Service from eventual fiscal insolvency.

Source: Rick Geddes, "The Last, Best Hope for Postal Reform," Real Clear Markets, March 14, 2012.

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http://www.realclearmarkets.com/articles/2012/03/14/the_last_best_hope_for_postal_reform_99565.html

 

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