Going postal: regulatory reform for the digital age.

• Author: Montanye, James A.

[The post office] is perhaps the only mercantile project which has been successfully managed by, I believe, every sort of government.

--Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations

Any mention of regulatory reform brings to mind previous legislative efforts that improved performance in the airline, trucking, and telecommunications industries. The recently enacted postal-reform legislation is a disappointment, however, not only by these standards, but also by almost any other.

The U.S. General Accounting Office, the American Enterprise Institute, the Cato Institute, and a handful of market-oriented independent scholars have published many copious volumes over the years detailing the need for extensive reform of the U.S. Postal Service. The need arises from two concerns. The first flows from conventional economic theory, which argues that a government-operated virtual monopoly that is partly de jure, partly de facto, and almost certainly not "natural" underserves the country owing to its high costs, bland offerings, and comparatively middling service. The argument draws comparisons with private delivery firms such as United Parcel Service (UPS) and Federal Express (FedEx), which have taken away the lion's share of the package-delivery business from the Postal Service. These firms operate profitable delivery networks over the same streets traversed by the Postal Service, indicating the lack of natural-monopoly conditions in local delivery. The Postal Service's own outsourcing of long-haul transportation, sorting, and barcoding functions signals the absence of significant scale and scope economies for the balance of its core functions. No compelling economic reason therefore exists for using statutes and criminal penalties to shield one-half of the Postal Service's mail volume against competition from private carriers. Neither does a valid rationale exist today for providing postal services through a government entity, national-security needs aside. The European Union and several other countries already have begun demonopolizing and privatizing their postal operations, subject only to prescribed minimum delivery standards and universal-service obligations. Countries that managed postal services successfully in Adam Smith's day now admit that they cannot manage them efficiently, a point of importance in this age of technological competition.

The second concern about postal operations is more ominous. The Postal Service's de jure monopoly of the letter-delivery business, which pays the bulk of its institutional overhead costs, is being eroded by electronic communications that arc faster, more convenient, more reliable, and less expensive than traditional mail. First Class Mail volumes have been declining for several years and at a faster pace than was predicted only a few years ago. This decline harbingers a future of falling postal revenue and rising average cost. More than 60 percent of the Postal Service's forty thousand post offices are unprofitable, and this number will increase as the volume of letter mail declines. Sustaining the Postal Service in its present form may entail potentially large federal subsidies, broadened de jure monopoly protections, and perhaps the extension of postal regulation to encompass electronic alternatives to letter mail.

A prudent course of action at this juncture is to reform the Postal Service in a way that squares its traditional operations with twenty-first-century realities. The U.S. Postal Service was created in 1971 from the ruins of the former Post Office Department, which was a Cabinet-level, patronage-riddled bureaucracy whose annual deficits reached 23 percent of operating costs. The Service's job was to put postal operations on a businesslike footing. Its creation unfortunately coincided with bold pronouncements by serious economists, weekly news magazines, and many public intellectuals to the effect that capitalism could not survive the realities of a modern industrial economy. The 1968 presidential commission that recommended reform of the Post Office Department rejected privatization as the means to this end. The upshot, as noted by law and economics scholar George Priest, is that the Postal Service "remains today as the most significant example of socialism in the United States ... [embracing] almost all the aspects of socialism rejected in Eastern Europe and in the privatized Western economies" (1994, 50).

Comprehensive postal reform will be difficult to effect until the Postal Sea-vice teeters on the brink of collapse. It is not there vet. The price of a First Class stamp increased to forty-one cents in 2007, which is still at the low end of its post-1971 inflation-adjusted price range. Moreover, the mailing public awards the Postal Service resoundingly favorable performance ratings. There is thus no taste for comprehensive postal reform at present, and public resistance against it might be easy to mobilize.

Vested interest poses a second obstacle to reform. The Postal Service, unlike the airline, trucking, and telecommunications industries, is an entrenched federal bureaucracy. It employs eight hundred thousand voting and highly unionized workers, totaling nearly one-third of the federal civilian workforce. Wages represent 80 percent of its operating costs. Studies of the wages and benefits it pays indicate a 30 percent compensation premium compared to the private sector, totaling $9 billion, or 15 percent of the Postal Service's annual revenue requirement. The sentiment in Congress understandably echoes that of the vigilant and aggressively protective postal unions: "Our Postal Service isn't broken. The last thing we need is for Congress to try to 'fix' it" (qtd. in Taub 2000, 189).

The Postal Reform of 2006

"Fix it" is what Congress did not do in 2006, despite the General Accounting Office's dire warning that "comprehensive postal reform is urgently needed ... to minimize the risk of a significant taxpayer bailout or dramatic postal rate increases" (Walker 2004, i). Congress instead passed a timid reform bill that scarcely addresses the Postal Service's impending problems. We might more optimistically imagine that Congress was laying a foundation for further and more substantive reform.

Congress became interested in postal reform a decade ago. The upshot of this effort was the Postal Accountability and Enforcement Act of 2006 (HR 6407 and Public Law 109-435). This act amends Title 39 of the U.S. Code and revises the Postal Reorganization and Salary Adjustment Act of 1970 (Public Law 91-375), which created the U.S. Postal Service and the Postal Rate Commission.

The 2006 act concentrates largely on administrative reforms. It allows the Postal Service to adjust rates (prices) without regulatory scrutiny so long as increases do not exceed changes in the Consumer Price Index (CPI). The intent is to check rate increases while permitting the service to respond more quickly to changing cost and market conditions. The renamed Postal Regulatory (nee "Rate") Commission is relieved of ratemaking oversight responsibility so long as increases do not exceed the CPI caps. The act otherwise refocuses the commission's efforts onto fashioning rules and regulations for governing postal operations, conducting statutorily prescribed analyses and reviews, and acting in concert with the Postal Service to improve service quality, streamline operations, and increase operating efficiency. The commission will oversee the Postal Service's efforts to "rationalize the postal facilities network" (Sec. 302) by consolidating and closing unprofitable post offices, an economy measure that the 1970 Postal Reorganization Act expressly prohibited. The 2006 act also prescribes a range of administrative changes, such as revising the regulations governing the Postal Service's reserves for pension and health-care liabilities. These changes, though significant, lie apart from regulatory reform issues and so are not considered here.

Pricing Reform

The overarching mission of postal ratemaking--"binding together a nation"--is literally carved in stone at the District of Columbia's Main Post Office building (Adie 1989, 46). The old Post Office Department had little systematic knowledge of its costs and knew even less about postal demand characteristics. It set prices largely on the basis of mission statement, guesswork, and politics. Financial losses were covered by general tax revenues.

Section 3622(b) of the 1970 Postal Reorganization Act prescribed nine quasi-economic criteria for fashioning rates:

(1) the establishment and maintenance of a fair and equitable [rate] schedule; (2) the value of each class or type of mail service to both the sender and recipient, including but not limited to the collection, mode of transportation, and priority of delivery; (3) the requirement that each class of mail or type of mail service bear the direct and indirect postal cost attributable to that class or type plus that portion of all other costs of the Postal Service reasonably assignable to such class or type; (4) the effect of rate increases on the general public, business mail users, and enterprises in the private sector of the economy engaged in the delivery of mail matter other than letters; (5) the availability of alternative means of sending and receiving letters and other mail matter at reasonable costs; (6) the degree of preparation of mail for delivery into the postal system performed by the mailer and its effects on reducing costs to the Postal Service; (7) simplicity of structure for the entire [rate] schedule and simple, identifiable relationships between rates or fees charged the various classes of mail for postal services; (8) the educational, cultural, scientific, and informational value to the recipient of mail matter; and (9) such other factors as the Commission deems appropriate. Section 403(c) of the 1970 act further required that rates not "make any...