Denationalizing the Mails

Electronics and entrepreneurs challenge the archaic postal monopoly.

In 1976, Patricia and J. Paul Brennan, residents of Rochester, New York, made a fascinating discovery. Frustrated in their use of the United States Postal Service for local mail, they decided to bypass the problem and hand-deliver their letter communications. Soon, the Brennans were delivering not only their own letters but others' as well. What the Brennans discovered was that they could hand-deliver mail within downtown Rochester, guarantee same-day delivery, and charge three cents per letter less than the Postal Service. The Brennans founded the P.H. Brennan Hand Delivery Service for fun and profit.

In early 1977, the Brennans made another discovery: they had broken the law, and it would be enforced. The US District Court for western New York shut down P.H. Brennan Hand Delivery Service and enjoined it from delivering the mail. The Brennans battled, but on April 13, 1978, the United States Court of Appeals, Second Circuit, upheld the injunction. And four months later the Supreme Court stopped the Brennans cold by refusing to hear their appeal.

What befell P.H. Brennan is not unique in history. Like others before them, the Brennans had been masticated au flambé in the jaws of the Private Express Statutes.

The Private Express Statutes defend the Postal Service's monopoly on the handling of first-class letters against the intrusions of free enterprise and competition. No other type of mail is so protected—not books, magazines, newspapers, bulk mail, nor parcels. The statutes are like a crocodile-infested moat, behind which the Postal Service has labored feverishly to shore up the moldering walls of its once-invincible castle.

Formidable foes are fighting to dry up the guardian moat. Among them is Congressman Philip Crane, who testified before the Senate Post Office and Civil Service Committee: "Full-fledged competition with the Postal Service is effectively prohibited, and that is the problem. Without competition, there is no incentive to improve, to cut costs, to provide better service, to innovate, and ultimately to satisfy the postal consumer."

Added Crane, citing the earlier conclusions of the President's Council on Wage and Price Stability, "Permitting competition to the Postal Service's first-class service probably would result in significant benefits to the economy and to the mail user." Crane concluded: "In short, more and more people here and elsewhere, frustrated by rising postal costs and declining postal service, are looking for alternative ways of providing the desired service at an affordable price. If the operation set up by the government cannot or will not do the job, then it stands to reason that private enterprise should be given a chance."

MONOPOLY TRADITION

Give private enterprise a chance? Absolutely unprecedented, say postal authorities. Charles D. Hawley of the Postal Service's Legal Affairs Office invokes tradition: "The Statutes have been part of American law in one form or another since the Articles of Confederation. They protect against the loss of revenues that could be anticipated if the Postal Service had to compete for the delivery of letters with private firms which do not provide the comprehensive nationwide service that, as a matter of law, is required of the Postal Service at generally uniform rates." Actually, the history of government monopoly over the mails goes back even further than Hawley claims.

The US postal monopoly springs from early European monarchy, where sovereigns, for military and security reasons, maintained exclusive government handling of the mails to ensure delivery of their own communications and control over everyone else's. England exported this practice to the American colonies. In 1692, William and Mary granted Thomas Neale a royal patent for exclusive carriage of letters.

As the nonunited states of colonial America unified against the British throne, the Continental Congress felt a need for a well-controlled postal monopoly in order to carry out its revolution. So "by the time John Hancock, with a flourish, set his hand to the Declaration of Independence, the tradition of a government monopoly over the carriage of correspondence was well-established in the lives of the people" (as pointed out in a 1973 report to the Post Office and Civil Service Committee). The Articles of Confederation codified this practice by granting "sole and exclusive powers" to the Congress.

The federal Constitution, however, said nothing about a monopoly. Article I decreed: "The Congress shall have Power to establish Post Offices and Post Roads." But Congress bolstered its power by passing the Private Express Statutes in 1792. With various revisions and clarifications they remain to this day the bastion of the postal palace—a palace that endures steady siege.

INEFFICIENCY

Besides the fury and frustrations documented in individual recollections of a lost letter here, a delayed delivery there, or the payment that never arrived, there are ongoing revelations of financial mismanagement, operational inefficiency, and an absence of intelligent, long-term planning. Such a revelation appeared recently in one of Jack Anderson's Washington Post columns, entitled "Bulk Mail Center: Automated Nightmare."

The Postal Service, notes Anderson, spent a billion dollars on 21 automated bulk mail centers to speed the processing of parcels and other non-first-class mail, thus saving the Postal Service in the neighborhood of $300 million dollars a year. But woe unto the customer whose parcel drops on those conveyor belts! "Packages that get jammed in the automatic conveyors are ripped apart. Attempts are made to patch them up, but the many Humpty Dumpty irreparables end up in a parcel graveyard—a room designated 'loose in the mail,' off-limits to all but a few employees. Our reporter got inside for a look around, and found thousands of items from books to homemade Christmas presents. There were so many books that they had been arranged by topic on metal shelves.

"When the 'loose in the mail' room is full, the items are moved to a depository in Washington, where they're auctioned off to the public."

Mr. Anderson adds: "Nor is there any evidence that the bulk mail system saves time. A package en route from El Paso to Midland, Tex., for example, is sent 1,483 miles out of the way to be processed by a bulk mail center." He also points out that the $300 million projected savings has been revised downward to $40 million. And George Gould, staff director of the House Postal Subcommittee, claims that the centers are actually losing money.

Give free enterprise a chance? The opportunity arose nine years ago, but it wasn't taken up.

Citing the Chicago Post Office's disastrous breakdown and shutdown during the Christmas crunch of 1966 as the precipitating event, then-Postmaster General Larry O'Brien, embarrassed at having to borrow about $30 million to repair damages, called for a commission to study complete postal reorganization. President Johnson appointed Frederick R. Kappel to head that commission, which concluded that too much politics was the problem and that the Post Office should be run as a business, eventually to stand on its own fiscal feet, and not as a governmentally controlled and subsidized agency. The result was the Postal Reorganization Act of 1970. Like most sweeping governmental reforms, the first major stroke was a name change—from the creaky-toned "Post Office" to the space-aged "United States Postal Service."

NO PROFIT

The USPS is set up somewhat like a corporation: The president of the United States appoints nine governors, who appoint the postmaster general, who along with the governors appoints the deputy postmaster general. Together, they make up the Board of Governors. The board is comparable to, though not identical to, the board of directors of a corporation, and the postmaster general and his deputy are the chief operating officers. Under the governors is the Postal Rates Commission, which recommends rate changes to the governors after a lengthy, competitive, and judicial-like process.

All this was touted as ensuring the least possible political interference in moving the mails. Looked at another way, it meant the pressure was off the president and Congress to ensure effective mail service. This was a Postal Service based on the American model of efficiency, excellence, and innovation: the corporation. But it lacked an important key element: the profit motive. For the Kappel Commission had recommended maintaining the Private Express Statutes. And so they remained. And so private enterprise was kept at bay.

In May 1973, the first chairman of the Board of Governors, the same Frederick R. Kappel, proclaimed triumphantly to the Subcommittee on Postal Service, "We have been in business a year and a half now, and no one gives any thought to any man's politics on that Board of Governors today. We are dedicated to the business of running the Postal Service." During the Christmas season of 1974, the Chicago Post Office repeated its 1966 performance and broke down. Of course, it had only been four years since the great reorganization, and perhaps that wasn't enough time to reverse postal problems.

Nor, apparently, was six years. In 1976, M.A. Wright, new chairman of the Board of Governors, went before the congressional committee and bragged of fewer personnel, greater efficiencies, and good marks from the General Accounting Office in quality of mail service, reasonableness of rates, and quality of compensation and working conditions. He also, though, requested a billion-dollar bail-out from Congress because of inordinate delays in rate increases and double-digit inflation. Congress came through, rescuing the Postal Service and essentially giving up any hope of a deficit-free postal organization.

TIME FOR COMPETITION?

How about seven years? A January 1977 report by the US Department of Justice, Changing the Private Express Laws, concluded: "Given the tremendous problems that now confront the Postal Service, it is not irresponsible to argue that things are now so bad that any change can only be for the better."

Or eight years? A study published by the American Conservative Union's Education and Research Institute in September 1978 asserted: "Observers of all persuasions agree that the Postal Reorganization Act has been a failure. The two main goals of the act—efficient management and self-sufficiency—remain unachieved."

Could it be that Congressman Crane and those who agree with him are right? Could it be that former chairman of the Postal Rate Commission John Ryan was correct when he said, "The only solution to the problem of adequate mail service is competition and is to do away with the Private Express Statutes?" Is it an idea whose time, long overdue, has come?

No, no, and no are three responses by current Postmaster General William F. Bolger on three occasions when he confronted these questions. On the October 20, 1978, edition of the "MacNeil/Lehrer Report" on public television, the postmaster general declared: "I think we're trying to protect the interests of the American public in saying that this monopoly has to be continued." In a November speech before the National Newspaper Association, Bolger affirmed: "If we should lose our monopoly, it will mean the demise of the postal system as you have known it." In a December speech before the National Press Club, he reiterated: "Should our monopoly be broken or even weakened, it will be a tragedy that will cost this country its universal postal system."

Title 39 of the US Code provides that "the Postal Service shall have as its basic function the obligation to provide postal services to bind the nation together through the personal, educational, literary, and business correspondence of the people. It shall provide prompt, reliable, and efficient services to patrons in all areas and shall render postal service to all communities." The rule also requires that the rate for each class of mail "shall be uniform throughout the United States, its territories, and possessions."

First-class mail is the bulwark of the postal system. It accounts for 60 percent of the approximately 97 billion pieces of mail that the service will handle this year and is the source of close to 70 percent of postal revenues. Not all first-class mail falls under the statutes, which pertain solely to letters; but most does. In fact, delivery services and customers alike often complain of the ever-broadening postal interpretation of the term letters.

FIRST-CLASS CREAM

"The problem is," says Postal Service attorney Jerry Belenker, "that the costs of delivering any given letter vary. It may go from downtown Manhattan to downtown Manhattan; that's relatively cheap. It may go across the country. To maintain the nationwide system, you have overhead in terms of transportation systems, contracts with airlines, etc. You have stations, branches, and you have huge overhead that has to be apportioned among all the pieces of mail—not only letters, to be sure, but among all the pieces of mail—without regard to the fact that, at any instance of delivery, from a business point of view, you are making a profit or losing your shirt. I don't know of any other business that can reject nobody. We can't make a determination that your business is good for us, because we're a public service, and we don't deal with the point of whether we make money."

Repealing the Private Express Statutes would mean the loss of a substantial portion of the already indebted and subsidized Postal Service's income without an attendant diminution of costs and overhead, according to Postal officials. And that, they say, is unfair "cream skimming."

The cream-skimming complaint relies on the reality that areas of dense population and business and banking concerns, such as metropolitan cities, provide the greatest revenues at the lowest per capita handling costs, whereas sparsely populated and widely separated areas, such as rural towns, provide the lowest revenues at the highest per capita handling costs. The Postal Service fears that private competitors would voraciously devour the high-income, low-overhead cream and leave the curds and out-of-the-way locations for the USPS, robbing it of the finances it needs to carry out its congressionally mandated requirements and all manner of investigative, legal, and customer services.

In 1973, McKinsey and Company, commissioned by the USPS and using its statistics, studied the cream-skimming argument. Their results supported the USPS position with three principal findings. First, "Local mail involving business transactions appears to be the most attractive market segment for potential cream-skimming competition to the Postal Service for reasons of operating simplicity and low processing cost." Second, "Cream skimming enterprises could be highly attractive to entrepreneurs." Finally, "Cream skimmers would divert substantial First Class mail volume from the Postal Service."

The McKinsey analysis indicated that the Postal Service could lose about 4.7 billion pieces and about $420 million in revenues annually. Those figures would be considerably higher today, of course. With this argument, USPS lawyers squash would-be competitors in the courts. The judges always buy the argument.

CREAM SKIMMING

Economists, though, point out that cream skimming—in spite of its pejorative connotation—can be great for consumers. Established suppliers accuse entrepreneurs of siphoning off the most profitable business, but to get that business they have to be charging a lower price, offering better service, or both. Thus, notes John Haldi of the American Enterprise Institute: "In a competitive market, cream skimmers are the good guys who protect consumer interests by keeping other suppliers honest."

The USPS, of course, is required by law to provide services at a loss—such as maintaining post offices in little towns all across the country, or providing lower rates to tax-exempt organizations—and that's why it needs all of its first-class revenue, say USPS defenders. And, notes economist Alan Reynolds in the Harvard Business Review ("A Kind Word for 'Cream Skimming,'" Nov.-Dec. 1974), "there is an element of plausibility in [the] assertion that high prices are needed to offset low ones" whenever a company "is compelled by the state to engage in activities that are not economically justifiable."

But this USPS defense still doesn't ring true because, as Reynolds goes on to point out, the USPS loses a lot of money where it wouldn't have to. It makes money only on first-class services, whereas private carriers, he notes, have entered the third- and fourth-class (and now second-class) markets, undercut the USPS's "supposedly unprofitable" rates, and made money. Concludes Reynolds: "The fact that competitors can profit from a service that is unprofitable for the tax-exempt and subsidized USPS suggests that the USPS may simply be inefficient. If so, the monopoly rates on first-class mail actually subsidize inefficiency; this seems, at best, a dubious policy objective."

In fact, the Postal Reorganization Act leaves no room for cries against cream skimming. It requires that each class of mail pay its own way and contribute some to institutional, fixed costs. The act specifically precludes subsidization of any class of mail by another. Few outside the Postal Service believe that this requirement is being observed.

A 1977 study by the Department of Commerce reported: "It is widely accepted that first-class mail subsidizes other classes." The report went on to cite the 1974-75 postal rate-increase hearings at which Chief Administrative Judge Seymour Wenner had recommended that the first-class postage rate be reduced from 10 cents to 8½ cents per ounce "to bring rates more in line with costs." The judge had condemned the Postal Service management for failing to carry out the directives of an earlier appeals court to correct the improper attribution of costs to various types of mail. Judge Wenner had argued that "the rate increases proposed for first-class perpetuate this allegedly illegal procedure," said the Commerce Department study. "He obviously felt that first-class-mail users bear an unfair share of the overall Postal Service costs." Despite Judge Wenner's admonitions, the price of a first-class stamp rose from 10 cents to 13 cents.

The Postal Service argues that its rate-making procedures are more competitive than if rates were arrived at in a free marketplace. In the last rate-increase hearings, more than 50 parties participated. There was a discovery process at which Postal Service witnesses had to answer over a thousand questions. There were cross-examinations and days of hearings, briefings, and oral arguments. In addition, the Postal Rate Commission has an officer—with a staff of lawyers, statisticians, and economists—whose sole purpose is to represent the public interest.

Nevertheless, rates have continued to rise to the present level of 15 cents and would probably have gone higher if the postmaster general hadn't determined that the rates were about as high as the public would stand at present. (He has promised—cross-his-heart-and-hope-to-die—no increase until at least 1981.) Given the usual excuses of higher labor costs, sky-rocketing fuel costs, and inflation, could true competition have averted the price increase? It did in fourth-class mail.

HOW TO PUSH RATES DOWN

Sitting complacently behind its protective statutes and its government subsidies, the old Post Office and the early Postal Service fiddled while United Parcel Service burned off 70 percent of the fourth-class parcel post business. It wasn't hard to lose. UPS undercuts USPS rates in most cases. It delivers nationwide and its rates are uniform based on weight and distance traveled with no added financial burden to rural recipients. UPS has a record of faster service, less breakage, and fewer losses. Its employees are well-paid, share in profits, and have a lucrative benefits package. It makes a profit every year and has cost the Postal Service a substantial portion of its operating revenues. So competitive is UPS that government agencies like the IRS and the Government Printing Office have begun diverting some of their business from the Postal Service to UPS.

How is the Postal Service reacting? Does it lobby for broader statutory control of the market? No.

According to the Washington Post, Postmaster General Bolger announced on February 13 that the USPS is liberalizing its Parcel Post system to compete more evenly with UPS. Among its changes is a cut in bulk mail and parcel post rates.

In another article, the Post reported that, faced with the loss of congressional subsidies for delivery of newspapers and seeing increasing competition in delivery of magazines, books, and records, the Postal Service announced it is in the process of changing up to 75 regulations regarding bulk mail delivery in order to make it more attractive to potential customers. Said Bolger: "There are literally hundreds of other regulations that we are scrutinizing. Many of these date from the beginning of this century and bear no relationship to the way the Postal Service and its customers today do business."

What stunning revelation finally enlightened the Postal Service? Why is it now examining and updating century-old regulations? What caused it to join the new age? The answer is obviously competition, and not just from companies like UPS.

ELECTRONIC COMPETITION

The ultimate challenge to the sanctity of the Postal Service is sure to come from the modern communications era in general. An example is electronic funds transfer already in operation in banks across the country. Someday, most financial transactions will be done by telephone or similar electronic media. Estimates have it that approximately 60 percent of all letter mail involves financial transactions: bills sent, payments submitted. So the Postal Service of the not-too-distant future stands to lose up to 60 percent of its protected monopoly unless it either gets into the electronic transfer business or somehow broadens the interpretation of "letters" to include some tangible moment in the electronics process.

As far-fetched as that may sound, Kenneth Robinson, an attorney for the Antitrust Division of the Department of Justice points out: "the term letter has been interpreted to include, for example, payroll checks, fishing licenses, Mickey Mouse posters, San Francisco Forty-Niner tickets, punch cards, blueprints, data processing tapes, computer programs, credit cards, boxes of merchandise with advertising enclosed, intracompany writings—in short, as one district court ruling recently suggested, 'anything properly transmittable' through the US Postal Service mail system."

The Postmaster General has repeatedly denied that the Postal letter monopoly would ever encompass electronic communications. He seems confident that it can depend on at least 70 billion pieces of hand mail each year. He indicates that the Postal Service is moving into the electronic transmission business and is experimenting with Communications Satellite Corporation of America (COMSAT) in something called INTELPOST, a sort of long-distance mixture of telegram and facsimile via satellite. Bolger also believes that the Postal Service has at least 10 or 20 years to gear up for the electronic transmission business. But what if changes occur more rapidly than expected? Will the Postal Service again raise the drawbridge and deepen the moat?

Safely behind the Private Express Statutes, the Postal Service can afford to watch and wait for a sign from above. Without the statutes, it would be forced to get with the times and plan in earnest to avoid a future catastrophe.

POLITICAL HOT POTATO

But would it really be catastrophic for the Postal Service to diminish its scope and relinquish some of its holdings? It would according to the American Postal Workers Union and the National Association of Letter Carriers, who themselves went to court in 1972 to defend their monopoly against a private intruder. The salient aspect of National Association of Letter Carriers v. Independent Postal System of America, Inc., was not that printed Christmas salutations were considered letters but that the union, empowered by the Postal Reorganization Act, went to court to protect the monopoly.

The union's stake is over 650,000 permanent positions paid so well above the norm that the quit rate for postal workers is significantly below comparable positions in related fields. In addition, the current contract contains a no-lay-off clause for those currently employed.

Specific and urgent requirements of some industries have forced the Postal Service to grant exceptions, exclusions, and suspensions to the statutes in areas such as time-sensitive and similar materials where it simply couldn't do the job itself. But such exemptions are slow in coming and begrudgingly granted. Mail express companies are kept well in check, and their customers still have to pay postage in addition to courier charges. Repeal of the statutes would allow companies specially equipped to provide their services at the lowest costs. Despite vocal consternation at the vagaries, interpretations, and enforcement of the statutes, courier Lilliputians are not anxious to challenge the postal giant for fear of retaliatory sanctions.

Where do the White House and the Congress stand on this issue? Apparently, as far away as possible. Mike Causey's January 24 "Federal Diary" column in the Washington Post would be amusing if it were not so telling: "Five of the cushiest jobs in federaldom are still standing vacant. Some have been unoccupied for several years. They are members of the US Postal Service's Board of Governors." In addition, the Postal Rate Commission is missing three of its five members.

May one infer that the president is not interested enough to fill five vacancies on the ruling body of the Postal Service? House Postal Subcommittee Staff Director George Gould blames it on the inexperience of the administration, claiming it is still learning. But the fact is that, since the postmaster general was removed from the Cabinet under the Reorganization Act, presidents have scrupulously avoided dealing with that all-American institutional whipping boy.

The House Post Office and Civil Service Committee, once a political plum, has turned into a revolving door since it stopped setting postal and federal pay raises and guarding postal patronage and prices. So much so that Mike Causey was moved to write on January 31: "Some members feel that association with the committee, even as a tough tail-kicker, is politically dangerous." He adds, "The Democratic leadership must resort to the draft to get a full complement for this session of Congress."

The Congress, then, is not likely to open the political pandora's box that repeal of the statutes would certainly provide—especially with large-scale mailers relying on discounts subsidized by the higher, regular first-class rates. Then, too, there's the congressional franking privilege.

PRIVATIZATION PLAN

Practically every independent study of the Private Express Statutes sees their demise as potentially beneficial. But almost all stop short of recommending repeal and conclude instead that the issue should be studied more carefully. The rationale is lack of enough statistical information to justify so momentous a change (never mind the historical record of this country's free marketplace). Any thorough study would require crossing the moat and entering the castle before the drawbridge goes up. But the Postal Service is more amenable to sending out an emissary or two with its version of the accounts. And when a judge in a rate case once asked for a better accounting, the Postal Rate Commission simply overruled him.

The only way to visualize clearly the results of repealing the Private Express Statutes is for Congress to announce that in so many years, say by 1984, the statutes will be phased out (1984, by the way, is the year the Postal Service was to become totally self-sufficient). This would force USPS to adjust and give it time to do so. Private carriers could gear up for action, and postal unions could varnish their bargaining tables.

It is quite possible that the Postal Service would look different after such a change. It might shrink some, diversify, or merge with another government service organization. But any predictions that free enterprise would destroy America's hard-copy communications system seem unfounded. In fact, a study of the postmaster general's speeches, coupled with recent postal developments, indicates that competition makes the Postal Service better, not worse.

Will Americans get the faster, more efficient communications delivery services they could be getting? Legislators should consider that the important issue is not the survival of the Postal Service but the survival and enhancement of postal service. Castles and crocodile-infested moats went out with the Middle Ages.

Jeff Sampson is a free-lance writer. His work on this article was supported by the Fund for Objective News Reporting, a tax-exempt foundation whose purpose is to promote the values of limited government and individual liberty.