The American Interest
The Middle East & Beyond
Published on August 1, 2012
How to Fix the U.S. Postal Service

Yesterday there were warnings that the U.S. Postal Service (USPS) was about to default on its prepaid pension obligations. And today, sure enough, the USPS announced that it could not meet today’s obligations, and also that it would not meet those pending six months hence. For loyal and long time readers of The American Interest, this is no surprise: We predicted this would happen in our July/August 2009 issue in a pseudonymously authored essay by Georg Jensen, “The Imminent Death of the U.S. Postal Service.”

I recommend that anyone who is interested in the subject go back and read that essay, because it explains the circumstances of the USPS default far more carefully and in depth than what has passed for analysis in the press lately. But before I briefly review the circumstances, let me take up a prior question: Why should you be interested?

The financial circumstances of the USPS are hardly the stuff genuine national crises are made of. Certainly the story does not hold a candle compared to the onrushing financial cliff, the continued instability of our financial institutions, the anemic condition of the economy, the roaring dysfunction of American politics, and, of course, one could go on. Nevertheless, the ills of the USPS are in truth symptomatic of broader problems. It is a story that focuses on leadership with no vision, on a Congress whose parochial shenanigans almost invariably produce counterproductive outcomes, and, not least, on the inner workings of American plutocracy. It is not as marginal a story as all that, as it turns out.

So what has the press had to say about the now validated USPS default? A good example is yesterday’s New York Times column by Joe Nocera. Nocera points out that the pension pre-funding stipulation is truly bizarre, is Congress’ doing, and only ever made sense in the first place in the Alice-in-Wonderland environment of American politics. All this is true, and it’s also true that the pension pre-funding stipulation is the proximate cause of today’s default. Nocera points out, too, as has just about every observer, that the real culprit here is technology and the USPS’s failure to keep up with it. Moving information through the manipulation of physical pieces of paper cluttered with ink lines and dots used to be the only way to do this beyond shouting range. Obviously, this is no longer the case, and there is really no dispute over the drop in the volume of first-class mail during the past half-dozen years, thanks to email, texting, VoIP and the like.

But these points are to a satisfactory explanation of the problem what clubs are to a full deck of cards. So let me try to round out the picture for you.

While the pension pre-funding stipulation is the proximate cause of the USPS default, default was always in the cards. The imbalance of revenue to expenditures is huge and growing huger everyday. Yes, it’s true that the USPS leadership has been trying to reduce costs, particularly labor costs, and it has succeeded to some degree. But it has done so belatedly and cannot hope to keep up with the slope of decline. It has a structural problem, not a cyclical or temporary problem.

This downward slope, however, has as much to do with second-class mail as it does with first-class mail. And here’s where the story gets interesting.

Many years ago the USPS leadership designed its business model around the idea that advertising mail provided a larger and more lucrative revenue stream than did first-class mail. So the USPS tried to incentivize advertising through the mail by offering a range of bulk and presort discounts. Over time, USPS offers to business customers became ever more complex and, generally speaking, ever more inviting as de facto subsidies to advertising. As a result, technological innovation at the USPS largely shaped itself around second-class mail, both in terms of extent and anticipated volume and in terms of the character of the automated sorting functions.

This critical decision by the USPS leadership to cater to and rely on advertising revenue to keep itself afloat and to finance its technology automation programs has turned out to be disastrous, because the volume of second-class mail is now in sharp decline too. The reason is clear: Beyond the general economic stagnation of the past four years, advertisers, just like ordinary users of the postal system, are turning to the internet and other non-print media to get the word out on their wares. This leaves the USPS with not only an oversized automotive, real estate and labor infrastructure but also a vastly oversized investment in mail-handling technology.

However, what is not generally recognized—and what is I admit somewhat controversial and hard to prove with facts and figures (since the USPS doesn’t even know its own numbers and would not share them if it did)—is that the decision to depend heavily on second-class mail was catastrophic from the start.

First, in order to attract a diverse array of business customers, the USPS complexified its rate structure to truly bizarre degrees. All you have to do to see the outcome of this process is to get a hold of a copy of the post office manual for commercial customers. It’s thousands of pages long, indecipherable for mortals, and almost gives the Medicaid manual a run for its money.

It didn’t used to be this way. Back before the early 1970s, the rate structure of the Post Office (which was then a cabinet-level Executive Branch department before it was semi-privatized) was very simple. Aside from standard services like first class mail, airmail, special delivery and parcel post, there was only one second-class bulk-rate. When the first-class rate was 2¢, the bulk rate per piece once ounce or less was 1.5¢. The Post Office Department issued its first 1.5¢ stamp in 1925, just in time for Calvin Coolidge’s proclamation that the business of America was business. (The stamp bore the likeness of the late President Harding, something that should have given pause at the time but didn’t.) Commercial mailers could buy “pre-canceled” stamps to use to send this mail. That was it. The rate manual fit on two sides of a single sheet. (See illustration, below, of the 1.5¢ stamp with a Honolulu precancel.)

After that, complexity grew slowly. In 1943, the Post Office Department produced a 4.5¢ stamp to pay for heavier bulk mail items. It wasn’t until 1960 that things started to get strange, when the Post Office Department issued a 2.5¢ stamp and, most ominously, a 1.25¢ stamp to go with the 1.5¢ item. You can track how rapidly things got out of hand simply by noting the existence of the following stamp denominations that proliferated as rates adjusted for inflation during the 1970s and 1980s: 3.1¢, 3.4¢, 3.5¢, 4.9¢, 5.2¢, 5.3¢, 5.5¢, 5.9¢, 7.1¢, 7.4¢, 7.6¢, 7.7¢, 7.9, 8.3¢, 8.4¢, 9.3¢, 10.1¢, 10.9¢, 12.5¢, 13.2¢, 16.7¢, 17.5¢, 20.5¢, and 24.1¢.

You think I’m joking? Sad to say, I’m not. You could look it up.

What the USPS never took properly into consideration as all this was going on were the enormous transactional costs of this new complexity. For every new curlicue in the rate structure (zip-plus-four, bundled, presorted, etc.) the USPS had to hire personnel to manage it, and every new employee who sat on his or her duff instead of actually going out and delivering the mail cost a lot of money. That employee had to have an office, so the USPS real estate (and insurance) bill went up. That employee had a pension, and medical benefits. All those employees required the hiring of human relations employees to take care of the other employees, and so on and so forth.

And of course the byzantine complexity of the second-class mail rate structure led, in the case of larger businesses at least, to the hiring of specialists just to deal with the post office. Smaller businesses sometimes had to hire consultants to do the work of keeping up with the glass bead game artists at the USPS. So gratuitous complexity sired more gratuitous complexity, more transactional costs, and the creation of vested interests on the part of those whose jobs depended on all this. Guess who ultimately has been paying the tab? We have. If we have a cousin or a friend whose business depends on printing this junk, we may note the economic value of the arrangement. But it’s still junk. If you’re looking for a below-the-radar example of the logic of collective interests at work, it would be harder to find a more pristine example.

If that were not enough, the job descriptions of the various rate-structure employees brought on to manage the increasing complexity of the commercial mail structure were quite high on the salary pecking order. These were management jobs, and they were paid accordingly. Moreover, most of these jobs fell under the purview of the Postal Service union, which made it very hard to get rid of people who were just sucking oxygen and really not doing very much. And, although it is uncomfortable to have to say this, a rather large percentage of these employees in urban areas were minority hires, as the growth of post office complexity dovetailed with affirmative action programs inside the federal government. One might therefore say that this whole arrangement formed part of the “blue model” of government that Walter Russell Mead has discussed so shrewdly in this space.

Now, when USPS officials reported their evolving budgetary circumstances to their own overseers, and also to Congress, they never included the full cost of their second-class-mail-first strategy, most likely because they themselves never fully understood it. The numbers made it seem like the strategy was working. More revenue was coming in, the revenue trend lines pointed up for many years, and operating costs plus technology investments seemed more or less in balance. But these numbers failed to account for the future costs of these transactional add-ons, and they banked on estimates of future volume and productivity advances that were often unrealistic. The systematic understatement of fixed and future costs became part of the culture of USPS accounting. It was, in short, a kind of Ponzi scheme that paid off the present by discounting the future. This is not a unique phenomenon in government, alas. Look at Social Security, or for that matter, the entire Greek government.

And there is more. As the USPS incentivized advertising through discretionary second-class mail rates, business-friendly lobbies sought and succeeded in getting Congress to allow most advertising costs to be deducted from corporate taxes. In plain English, this means that businesses did not have to pay the full cost of what amounted to a subvention to the USPS: taxpayers did. You have to follow the money to understand the politics: The USPS offers small businesses and large corporations alike deals they can’t refuse (or don’t refuse, at any rate), and these businesses and corporations then turn around and muscle Congress to get taxpayers to indirectly foot most of the bill. Are you annoyed by all the junk mail that ends up littering your anteroom floor six days a week? Does it annoy you any more to know that you are subsidizing it? I would guess so.

The moral of the story is that it takes many contributors to really screw up a good thing. No one can deny that Congress is largely responsible for this mess, not only through the ridiculous prepaid pension obligation, but also because, for the usual self-interested, parochial reasons, Congress has prevented the USPS from diversifying its business model. In most other countries post offices offer a range of services: paying bills, buying cell phones, even postal savings banks. But Congress, in thrall to business interests, refuses to allow new competition for those who dump dollars into their re-election coffers. It is also holding up major changes in USPS servicing like dropping Saturday home delivery. With every delay, the USPS deficit soars.

But Congress is not to blame for the entirety of the USPS’s woes. USPS leadership over the years has been slow to react to technological change, extremely timid in taking on its union, and miserable failures when it comes to understanding the implications of its own business strategy. Perhaps this was inevitable given the neither-here-nor-there for-profit character of the operation. The USPS is supposed to stand on its own two feet financially without taxpayer subsidy, but it has benefited in many ways from its in-between public/private status (too complicated to detail here), and it has always supposed that, in a pinch, taxpayers would bail it out. (We’ll soon see about that.) All you have to do is compare USPS parcel service technology with that of FedEx or UPS to get the point.

As I said, the troubles of the USPS are not cause for any loss of sleep. I’m sure that most Americans seeing today’s news about the default can barely summon more than a large yawn in response. That’s probably appropriate, as long as they’re not so curious as to look under the rock. Move that rock, however, and quite a bit of slimy activity will come to light.

Can this be fixed? In today’s dysfunctional political environment, no, probably not. But otherwise, as with most things in public policy these days, the answer is yes, of course. How would we do this?

First, we would simplify the rate structure, and make businesses pay the full cost of advertising through the USPS. All subsidies and tax write offs should be eliminated; let the market sort out the most efficient way to advertise. My bet is that there would be a great deal less junk mail produced and delivered as a result. I’m way over the top for that. This would hurt the business of some printers, true, but if we are determined to save all job categories then we would still be making lots of saddles and bridles and horseshoes and the like a century and more after the arrival of the automobile.

If we simplify the rate structure, the USPS can shed a huge chunk of its overhead costs. Indeed, if the USPS stops using first-class mail rates to subsidize advertising, it is possible that the first-class rate could, for the first time since just after World War I, fall. Jobs would disappear, true, but again, these are jobs that don’t produce anything except paper and delay and are, if one calculates properly, a net debit to net national product. Moreover, these jobs are in the not-for-profit sector in effect, so they don’t necessarily reflect a wise allocation of capital.

The USPS must maintain its universal service obligation, which has been at the core of its mandate since the days when Benjamin Franklin set up shop. Yet it need not provide the kind of door-to-door service everywhere that it has in recent years. In the history of the post office this is anyway a rather recent innovation. Not all that long ago most Americans had to go down to the post office to pick up their mail. It would not be the end of the world if service were reduced, especially since the extent to which people depend on the mail is a great deal less today than it used to be.

(If I had it my way, too, I would introduce a special 2¢ rate for all mail sent by constituents to their political representatives on the local, state and federal levels. I would call it the “My Two Cents” rate, and of course I would order up a spanking new, red white and blue stamp for the purpose.)

In short, there is still a role for the postal system, just a smaller one. If the Post Office were able to diversify its products, get out from under the pressure of its union, and downsize its business model to focus on ordinary citizens instead of businesses, it could create a new equipoise and maintain its stability indefinitely. Unfortunately, as simple and logical as this sketch is, it will never happen as long as Congress acts like Congress, corporations act like corporations, and the two go merrily dancing hand-in-hand down lover’s lane, all the way to the bank.

  • The Watcher

    More misinformation and plain ignorance. First, let’s get some terminology correct. What the author refers to as “second-class” mail actually used to be called “third-class mail.” Today it’s called “Standard Mail” and it’s used for advertising. Mailers use it because it’s cost-effective. And what used to be called “second-class mail” today is called “Periodicals” – this is what normal people call newspapers and magazines.

    Now some economics. As a class, Standard Mail actually covers its variable costs by a huge margin. On average as a class, this advertising mail is not subsidized (although small parts of it are by other mail within the class) by First-Class Mail. If advertising mail left the system, the Postal Service would actually be worse off financially since this mail covers its variable costs.

    But the Postal Service has increasing returns to scale, so there are large fixed costs. This also means that even if the Service covers its variable costs, it may not cover its total costs.

    With decreasing volumes and fixed costs and burdened by abovve market wages and a price cap, the Service does not break even. For it to break even, costs must either decrease or revenue increase or some of both. The arithmetic is easy, the politics are hard: sound familiar? But blaming the situation on advertisinig mail is not only incorrect but may also suggest “solutions” that exacerbate the problem.

    • Adam Garfinkle

      Sorry about te terminology–you’re right: I confused 2nd class and 3rd class, or what’s now called standard mail. But I disagree that this mail covers its variable costs. I still think you can only get to a conclusion like that if you exclude a whole range of factors from the calculation. Unfortunately, it’s almost impossible to prove this one way or the other, since the data is so convoluted and presented so poorly.

      The Post Office was created to move mail and to serve citizens, not to be a taxpayer-subsidized vehicle for corporate America. But that’s what it’s become, with Congress’ blessing. That’s my story and I’m sticking to it.

      • The Watcher

        It’s a wonderful country and you are certainly free to stick to any fictional tale that you want to believe: I am told that there are people who don’t believe in evolution and who do believe that Barack Obama is not an American citizen. But you may wander to consider some additional information on the Postal issue.

        The Postal Service is regulated by the Postal Regulatory Commission, the PRC, an independant regulatory agency. The PRC requires the Postal Service to report costs by mail class according to economic principles and accounting methods that it approves. For Fiscal Year 2011, the Postal Service reported revenues for Standard Mail of $17.826 billion and costs of $12,078 billion. With these numbers, Standard Mail covered its costs and contributed more than $5.7 billion to cover the fixed costs of the Postal Service.

        Now you can argue that the cost methods are incorrect – that a regulatory agency with five commissioners no more than three of whom may be from the same political party, appointed by the President, and confirmed by the Senate with a well respected apolitical technical staff has put its thumb on the scales to benefit advertising mail. But at this time, the methods are what they are. Further, I have yet to see any reasonable evidence or argument showing that under alternative methods, Standard Mail is subsidized.

        I am also sure that you or I or anyone with any facility with numbers and spreadsheets could construct a set of costs showing a different outcome. This, however, does not make it true.

        As to your complaint that the date are convoluted and poorly presented, I’d be more than willing to give you a tutorial. And I’d be curious as to what factors you believe are excluded from the calculation.

        Finally, please note that citizen-to-citizen mail comprises a tiny fraction of the mail volume in America, and if you drove out all the rest of the mail, what remains would become extremely expensive. The punchline here is that advertising mail is good for the entire postal system. And that’s not only my story, that’s what the facts show, and I’m sticking to it.

        • VFNH

          Can you please clarify what you mean by

          “… citizen-to-citizen mail comprises a tiny fraction of the mail volume in America, and if you drove out all the rest of the mail, what remains would become extremely expensive.”

          What about mail (packages, letters, etc.) that is solicited from businesses by citizens? In other words, all *solicited* mail, so to speak. That cannot be an insignificant amount of mail.

          Not a new argument at all but I see the USPS as an essential service not unlike agencies that maintain bridges and roads, or the military, or other systems we could not do without, even if we may debate whether some should be entrusted to government v. private parties. Zero subsidization, while desirable, should not be the golden standard in such cases. Currently the USPS is subject to advert exploitation on a mind-bending scale. This is only “efficient” because the advertisers exploit a pre-existing system that they themselves would never develop and pay for on their own. They have been allowed to convert a system that was never designed with such ends in mind.

          No persons or businesses should have any “right” to exploit any vital service in this country, unions included.

          • Servius

            Just a quibble. USPS is not an essential service. Delivering mail is an essential service.

            However, grocery stores and a host of other businesses not run by the government are essential services.

            It is difficult for me to see the desirability of a government run post office when most of the mail it delivers is undesirable.

  • njcommuter

    I am a postal customer not by choice but by monopoly under law. So long as the Post Office has the power to set my mailing address (which other carriers must use), change my mailing address (which it has done twice, for its convenience) or deny me a mailing address (which it did to my brother when he lived outside Saugerties, NY.) the universal service guarantee should stand. And I don’t mean universal service three hundred feet from my door across a parking lot. Universal service is part of the monopoly deal, as far as I am concerned.

  • Steven E

    Advertising is deductible because it’s a business expense, whether you’re buying print, TV, radio, Internet, direct mail, flyers handed out by teenagers, or whatever. Just like office space is an expense (and thus deductible), salaries are an expense (and thus deductible), raw materials are an expense (and thus deductible), machine tools are an expense (and thus deductible, though on a depreciation schedule as capital), electricity consumed by the business is an expense (and thus deductible), office supplies are an expense (and thus deductible) . . . et cetera.

    None of that represents a “subsidy”; it simply reflects the fact that we tax income, not total receipts. If it costs a company $95 to make and sell a device, and they sell it for $100, we tax them the 15-35% corporate rate on $5, not $100. Because the company made $5, not $100. If they, because (say) they spent too much on advertising to sell it, spent $105 to sell an item at $100, we tax them nothing on the $5 they lost. Because they didn’t have income, they had a loss.

    • Nearsited

      The author’s apparent lack of business and tax knowledge is crushing.

    • Mark P

      Well said Steven E. Subsidies in the tax system usually take the form of tax credits.

  • Andrew Allison

    It’s unfortunate that Mr. Garfinkle cast his net so wide as to provoke largely irrelevant arguments. The issue is that, whatever the reasons, the USPS cannot support its current cost structure. It should also be evident that increasing rates will further reduce, not increase, revenue.
    The answer, of course, is to have recipients of mail pay for the level of service they desire. A couple of ideas: a reduced rate for mail delivered to PO boxes; and every-other day physical delivery of First Class mail (there are plenty of “next-day” options for urgent mail) thereby eliminating the need for half the carriers and their overhead. Unfortunately, given Congressional meddling, postal unions and neanderthal management, the only way the sort or radical transformation required is like to come about is in bankruptcy.

    • Nearsited

      Drop the USPS mail delivery monopoly, along with Congressional oversight. Then guarantee delivery only to post offices, with an additional charge for site delivery.

      As a competitive 100% private concern, USPS might want to deliver to sites once or twice a week, and drop mail into post office boxes as often as it arrives.

  • Laurel

    I live in Sweden. They have strong unions but they cannot have an entity like this losing money for the taxpayers. In the cities the mail person rides a bike. Saves lots of money. No mail on Saturdays. No major buildings to rent. They changed to private kiosks inside shopping malls for people to mail things and customers to pick up packages, etc. Also, it costs 7 kr to mail inside Sweden, about $1.

  • Nancy in Ohio

    I do know that there too many people between congress and the operating of the USPS. Those people have mucked it up big time and have been doing so for some time.

    You’re on to something, Mr. Garfinkle. There’s definitely some bureaucracy that needs cleared away and this cronyism with corporate America has to stop.

    We need the USPS, no doubt, but it should be able to pay for itself simply through selling its products and services. And public sector unions? They need to go, period.

  • willis

    “This critical decision by the USPS leadership to cater to and rely on advertising revenue to keep itself afloat…”

    There certainly explains their tactic of alienating their first-class mail customers with employee attitudes ranging from indifferent to outright hostile, coupled with weak performance. That part of their strategy has worked flawlessly.

  • James R. Westmoreland

    How about customers… those who pay for services. The service in Brooklyn, NY is so bad that I cannot take a chance on the post office for any important transaction. I have NEVER had a certified letter come to me. They leave a “pink slip” and I go to the dirty and chaotic post office and wait in a line with angry customers … and hope, they find the package. I only get one pink slip… no second notice. How many customers has the post office lost by the aura of death that permeates the institution and the shoddy and unreliable service. I gladly pay 5 times the rate and go to Fedx where I know my package will be delivered in a clean vehicle by a competent employee. It’s so sad that Americans see the face of government via the post office, TSA and the IRS. Soon we will be intimate with HHS.

  • postal widow

    many do not understand the current situation in the usps for background the United States Postal Office was formed by continental congress members Samuel Adams and Benjamin Franklin during the revolutionary war to win the war and form the nation and write the constitution of which the post office is included as a part of congressional duties to build post offices not destroy them, however since congress has always seemed to be at odds with the postal service, and its employees, since in 1913 they were ignoring the working conitions and so collective bargaining was formed , can go to the free google book to read, ” the post office, its past record, its present condition and its potential relation to the new world era, Daniel Calhoun Roper, chairperson of the United States tarriff commision and also first assistant post master general who wrote the basic difference in the post office mission and its unions is service to the american people. In 1970, most postal workers were either working 3 jobs with the post office as one to support themselves on an economic level with the rest of the country making more money in the private sector, or on welfare along with working with the usps and being ignored once again by congress, so a postal strike took place calling attention to the workers plight , a no strike law ensued along with the rights of collective bargaining firmly in place. From 1980 until 2000, postal employees took cuts in pay, health benifits and pensions worth up to 200 billions in savings . In 2000, 2001 they were made to pay in 15 percent more to their retirement systems known as fers, federal employee retirment system and for older postal workers, csrs, civil service retirment system, for budget reasons only not for retirment . They were thanked by the president and congress for their ‘sacrifice ‘ while others were getting tax cuts. In 2002 the increase was removed from the presidents budget, and new legislation came about called the postal accountibilty and enhancement act, or paea, where an increase in pay for performance bonues were giving to the top of the executives in the post office , including pmg potter of an increase of 72 thousand more a year, and a heafty retirmeent benifit amounting to 5.5 million in the year he retired in 2010. Meanwhile non allowance of part of the law took effect of the law of having union as part of the oversight of the usps, was broken in the law that gave bonuses plus a non replacement policy of retirees to the working class craft taxpaying employees of the usps.more information can be found at this weebsite of http://www.postalmag.com/joygoldberguspsstress.pdf or AWPU 3800 first area tricounty local, PA, library, stress in the workplace articals, including ” how the ongoing violation of the usps guiding principles are creating a toxic work environment.” then if you search in google and look up http://www.billburrrasjounal.org -misc page, scroll down the elevator and read ‘ phoney excuses for diverting usps revenues’ and ‘myths versus facts,” you can find the poltiical landscape scapecoating techniques for blaming the usps for a manafactured crisis and risking the lives, health of the craft employees of the usps for corporative greed and lobby purposes. Plus can go to search and read ALEC/Koch Cabal The Priviitization of the USPS for Ups and FedEx, by bob sloan of vltp, and then go to examiner.com, read the Tim Mc Cown artical called ‘ behind all the schemes and lies of the privitization of the USPS”, june 10, 2012. Then go to http://www.savethepostoffice.com to read up on the process of destruction of the USPS and its working class work force , plus go to post office in criis the real story, michigan postal workers union, or http://www.mpwu.com/post_office_in_crisis.htm

  • Glen

    Talk about not seeing the forest because of a few trees!

    The USPS is simply another example of how cost‐control, efficiency, and innovation only occur when intense competition by new entrants puts old companies out of business or forces unwelcome and disruptive changes.

    Not surprisingly, these are all very painful processes, especially for entrenched incumbents who will use every ounce of their power to protect the status quo. And that’s exactly what’s happened to the USPS, along with GM & Chrysler, United & American, Kodak, IBM, Sears and thousands of other once-giant (and highly bureaucratic) firms.

    There’s no reason anymore to “save“ the Post Office. It’s irrelevant that postal services in other countries do more than deliver the mail. The USPS has long-since past the point when it fulfilled any national purpose; let it die.