Private Cures for Postal Ills

A government bypass is the remedy. The argument now is how to prepare the patient for surgery.


Monopolies tend to exhibit a number of unattractive characteristics, and the U.S. Postal Service (USPS) is no exception: Its prices exceed market levels, having risen 367 percent between 1970 and 1987, well above the corresponding increase in the consumer price index. Its labor costs—with annual compensation for postal workers running a generous $42,000—are excessive, as much as 50 percent above comparable private-sector wages. Its service is poor, downgraded further this year when the system dropped Sunday sorting and reduced window hours even as the new rate hike was going into effect.

And as a public monopoly, in contrast to a private monopoly sheltered by government, the USPS suffers from another serious defect—it loses money, as much as $400 million this year. This despite federal subsidies of roughly $3 billion a year, estimates the Office of Management and Budget (OMB).

Yet even with its monopoly status—protected by Uncle Sam's threat to prosecute anyone who attempts to compete with the USPS by delivering first-class mail—the postal system is losing its hold over the communications market. United Parcel Service (UPS) handles some 90 percent of all packages. UPS and such companies as Federal Express and Purolator Courier also dominate the "urgent mail" field; as of 1987, industry leader FedEx alone handled more than six times as much overnight business as the USPS, and FedEx's average daily volume this year is up 24 percent over 1987.

Moreover, roughly 400,000 fax machines, which allow almost instant transmission of documents, were sold last year; one in every 10 businesses now owns one. Computers linked by modems can communicate with each other through electronic mail, at a marginal cost below the 25 cents it costs to send a letter. In effect, writes economist Richard McKenzie, of Clemson University, the "postal service is in the process of being privatized—gradually but relentlessly by technology."

In its present form, the USPS is doomed by its own inefficiency and the economy's ever-changing technology. Only as a private enterprise would it have the incentives necessary to achieve the efficiency it must have to survive, and only as a private enterprise would it develop the nimbleness it needs to adapt to and apply new communications technology.

In addition to offering the Postal Service a chance to save itself, privatization would save postal customers some $4 billion to $12 billion a year in lower prices alone. That savings would be broadly distributed to personal and business consumers alike; improved and swifter service would yield additional, though unquantifiable, benefits. The question now is how to get from here to there: given the political obstacles, how can the Postal Service best become a private enterprise? The answer is a matter of hot debate among policymakers and analysts.

Among the more cautious supporters of an increased private role in mail delivery is John Crutcher, a member of the Postal Rate Commission. Crutcher argues that full-scale privatization is politically impossible. As an alternative, he advocates widespread contracting out of postal service functions, starting with the Origin Destination Information Service, which measures USPS performance. Instead of launching a proposed $1.5-billion building program to expand mail-sorting capacity, Crutcher suggests, the USPS should hire private companies to do the job. Contracts could also be let for retail services (such as stamp sales), individual carrier routes, and 7,000 postal substations.

This use of private contractors, Crutcher believes, would push the limits of what is politically feasible. Others, including former OMB Director James C. Miller, see contracting out as a first step toward private postal service. Thomas Gale Moore, a member of the Council of Economic Advisers who backs full privatization, has suggested widespread contracting out as a way to prove "to consumers and government officials that the market really does provide better service at lower costs than government can hope to."

Toward that same end, Moore proposes two other limited options that would not need congressional approval. One would be administrative relaxation of the private express statutes, which prohibit competition in the delivery of "letters." The USPS Board of Governors could, for instance, exclude from the definition of letter utility bills, Christmas cards, or advertisements.

"By giving the public a taste of mail service that may be cheaper, faster, and more reliable than the government alternative," Moore argues, "it would help change minds about the desirability of 'government-only' postal service and demonstrate the feasibility of private postal services."

Moore also advocates an end to the federal government's prohibition on depositing anything in a personal mailbox—purchased and installed by the customer—unless the item in question has a stamp on it. Under the private express statutes, private companies or individuals may deliver magazines, parcels, and other forms of second-class and fourth-class mail, but they may not put these materials in mailboxes. So, for example, neither UPS nor the local paperboy can legally leave their deliveries in a customer's mailbox. Eliminating federal control of personal mailboxes would encourage more competition with the Postal Service.

Such proposals are, however, only steps toward the ultimate goal of making the Postal Service fully private. Generating sufficient political support for such an undertaking is, of course, a daunting task, but airline and trucking deregulation once looked equally impossible. In those cases, however, intellectually sound arguments and diverse political coalitions eventually overcame vigorous special-interest opposition. Supporters of postal privatization have now put forward a variety of detailed plans, all aimed at making private mail delivery both politically achievable and economically sound.

One of the most detailed such proposals comes from Douglas Adie, an economics professor at Ohio University. Adie, who has worked with both the Reason Foundation and the Cato Institute, offers a three-part reform program: deregulation, divestiture, and privatization. First, Adie would eliminate the private express statutes, thereby allowing free competition in the postal delivery business. Companies could form whatever connecting networks they saw fit, and restrictions on the use of private mailboxes, too, would be ended.

Second—and this aspect of Adie's plan makes his approach unique—he would break up the USPS into a support services firm, a parcel/bulk mail company, and five regional delivery corporations, or Postal Operating Companies, patterned after the regional Bell operating companies created by the AT&T breakup. By splitting up the USPS into smaller units, Adie hopes to encourage competition within the postal marketplace.

Third, these companies would be sold to private operators through public stock offerings. Once the former USPS was in private hands, the government would no longer deliver the mail or regulate stamp prices.

To build political support for his plan, Adie would offer stock in the different firms at a discount to USPS employees, both union members and managers. He also predicts that the prospect of raising as much as $5 billion from the sales would garner support from not only taxpayers but also deficit-conscious legislators and executive branch policymakers.

In formulating his proposal, Adie has reviewed the Thatcher government's success in surmounting sustained opposition to the privatization of British Telecom in 1984—also a government-owned communications monopoly with strong unions. In that case, workers were allowed to buy shares at below-market prices; some managers were given directorships in the newly privatized firm. As part of the sale, the new company was required, for a number of years, to maintain rural service and limit rate hikes to the rise in the price index.

"In this way every possible interest group was identified and dealt with," observes Adie. He and many other analysts have attempted to design their proposals and strategies to win over specific groups—most notably by giving postal workers a share in a private system.

Stephen Moore of the Heritage Foundation, for example, hopes to woo both postal workers and the general public through a detailed plan for privatizing the USPS within its current structure. He would divide the system into independent sub-functions and sell those parts to postal employees. Postal workers' jobs would be secure, and the government would continue to honor the pension benefits of those who participated in the employee stock ownership plan (ESOP).

Each new unit would receive a three-year to five-year exclusive contract, after which those functions would be open to competitive bidding from anyone who wanted to get into the business. Moore's plan would leave the private express statutes intact, although any company could bid for the contract to deliver letters. A uniform national Postal Service would continue to exist, but only as an umbrella organization that contracted out its activities. By preserving a national system, Moore hopes to reassure the general public, which, he says, now views the USPS "as somewhat of a hallowed institution." Though he acknowledges the benefits of simply repealing the private express statutes, Moore argues that his proposal is more salable politically and "would assure that postal system reform would move in the direction of competition."

Detailed plans for breaking up the Postal Service into subunits suffer from two potential problems: Their complexity makes them difficult to explain to politicians and the public. And, as the President's Commission on Privatization noted in its 1988 report, they may sacrifice efficiencies by imposing an arbitrary structure on the postal business. For its part, the commission recommended that "although employee ownership should be encouraged, the specifics of how the Postal Service should be turned over to the private sector should be developed as part of the gradual phase-in of privatization, with substantial employee participation."

The commission also strongly supported the eventual repeal of the private express statutes: "the benefits in terms of quality of service, cost-efficiency, and the incentives for innovation clearly outweigh the costs of the transition to a free market." It proposed full privatization of the USPS over the long-term.

In keeping with its gradual approach, however, the commission recommended that obstacles to private delivery be phased out over time—not ended all at once. For starters, it urged immediate elimination of restrictions on delivery of third-class mail and on rural delivery (categories that the Postal Service complains about handling). And it advocated loosening restrictions on urgent mail and lifting the ban on private use of private mail boxes.

For better or worse, not all privatization proposals are as complicated as Adie's and Stephen Moore's. Private consultant Bert Ely proposes selling stock in the USPS to its employees at a reduced price to buy off their pension rights and the wage premiums they now earn. He would then repeal the private express statutes, allowing competition with the newly private post office; he believes the system is a "natural monopoly" and that a private USPS would hold its own in the marketplace.

CEA member Thomas Gale Moore has suggested simply giving the USPS to its employees. Moore would transfer to the workers half of the Postal Service's equity, selling the rest to the public through stock offerings. The employee-owners would be allowed to operate the system as a monopoly for five years, with price hikes limited to the inflation rate. During this time, employees could only transfer their shares to other postal workers and, as owners, they would pocket any savings they achieved.

Once the five-year monopoly expired, the private express statutes would be repealed, the USPS would face private competition, and postal workers would be free to sell their shares on the open market. Moore's plan would encourage efficiency, since, he explains, "the value of the postal workers' shares in USPS would depend on how well they had prepared their company" to meet the challenge of private competitors.

Former OMB Director Miller has proposed what is probably the simplest program of all—repealing the private express statutes, eliminating restrictions on the use of mailboxes, and leaving the final disposition of the USPS to the marketplace. If the system could streamline itself and compete effectively without the aid of legal restrictions or subsidies, it would persist as a nonprofit government entity. If, on the other hand, the USPS proved incapable of meeting the service and prices offered by its competitors, it would disappear, with its assets likely to be sold to private delivery firms.

"Virtually everyone," observes Miller, "agrees that the Postal Service ought to be improved." But everyone does not agree on how to reform the system. The entrenched postal establishment—management as well as unions—naturally contends that all that is required is a little tinkering and, of course, steady rate hikes. In reality, however, the system's problems are impervious to minor reforms, stemming as they do from the status of USPS as a government monopoly, subsidized by the taxpayers and protected from private competition. Only by privatizing the system will Americans get the kind of mail service they deserve.

Privatization of the mails does not appear likely in the near-term, given the political strength of the Postal Service's congressional protectors. The 800,000 USPS workers make "the postal unions one of the strongest political lobbies on Capitol Hill," argues Heritage's Moore.

Nor does he think that the general public is "likely to go for a drastic, immediate, overhaul of the system." He worries that talk of repealing the private express statutes, for instance, may doom all reform efforts.

Ron Utt, OMB's privatization "czar" and a one-time postal carrier himself, is more hopeful. "For the first time ever, privatization is viewed by many people as a serious option," he observes. "Only a year ago it was considered to be a frivolous idea advanced by a bunch of ideologues." The opposition to privatization is formidable but, he contends, it "will be overcome."

"The more the idea is out there, the less unusual it will seem, and the more confident public officials will be to discuss the issue." Miller, too, emphasizes "the compelling power of the idea, which over time can realize substantial changes in people's attitudes."

In fact, Miller points to airline deregulation and the volunteer military as issues where equally compelling ideas ultimately triumphed over powerful and entrenched opponents. In his view, the private competition provided by UPS, Federal Express, and similar companies will continue to erode arguments on behalf of a Postal Service, while public disgust with the "cozy relationship" between the postal unions and Congress will grow. Utt also suggests that another steep rate hike within, say, the next 12 to 18 months could "dramatically escalate interest in privatization."

Whether privatization occurs slowly or swiftly, it seems inevitable in the long-term. "The question is only how long the process will take," argues Miller. And even Stephen Moore, despite his short-term pessimism, believes that once more modest reforms—such as an increased contracting out and private competition in third-class mail—have eaten away at the periphery of the monopoly, privatization proponents will have "demonstrated that competition is good and will be able to defuse the myth that we need a first-class postal monopoly."

The USPS management and workers do have a choice: They can help shape the transition to a private system so that they as well as the public benefit. Or they can be forcibly, and painfully, deprived of their privileged position when the inevitable changes occur.

Contributing Editor Doug Bandow is a senior fellow at the Cato Institute.

The Third Force
Virginia Postrel

Every discussion of reforming the postal system inevitably comes down to one stubborn fact: Postal Service employees are numerous, vocal, and located in every congressional district, and they don't want change.

But there is another organized group—numerous, located in every congressional district, and increasingly vocal—that stands to gain a great deal from postal reform. They are the nation's direct marketers, companies that mail some 60 billion third-class business letters a year. And they are not at all happy with the Postal Service, especially since it recently jerked their rates up by an average of 26 percent.

Every issue of DM News, the direct marketers' trade magazine, brings two or three more articles calling for postal reform, pointing out the lousy service third-class mailers receive, or discussing private alternatives to the Postal Service. Reliable surveys show 10–20 percent of third-class mail doesn't get delivered, and that worries direct mailers as much as rate increases.

Take George F. Sterne, whose eponymous San Diego company compiles and markets mailing lists and sells business books by mail. His annual postage bill totals $50,000, and he is mad as hell at postal inefficiency. In August, he published an article in DM News calling for immediate elimination of the Postal Service's monopoly on third-class mail.

"I'm not saying the post office should get out of the third-class business," he says in an interview. "I'm saying, hey, look what happened when United Parcel Service got into the parcel business. Look what happened in overnight delivery. When there is head-to-head competition, they seem to come up with decent service at reasonable rates."

In the wake of the rate increase, more than 350 representatives of direct marketers, magazine publishers, and delivery companies met last spring to discuss ways of bypassing the Postal Service. By joining forces, direct marketers, who use third-class mail, and publishers, who use second-class mail, hope to create enough volume to justify a nationwide private delivery system.

If so, Phillip Miller will be in the thick of it. His company. United Delivery Systems, of Grand Rapids, Michigan, has been doing private delivery in the Midwest for 10 years, taking advantage of some of the loopholes in the private express statutes. Private services can deliver magazines and catalogs of more than 24 bound pages; they can also do "saturation" delivery, dropping off an unaddressed advertising circular at every house on the block.

Since the rate hike, United Delivery has added more catalogs to a list of clients that includes such magazines as Better Homes & Garden, Redbook, and Time. (The law won't allow United Delivery access to mailboxes, so employees hang deliveries on doorknobs or, in rural areas, put them in the tubes used by newspapers.)

Now, says Miller, the company is gearing up to go national. It is doing tests on the East and West Coasts and plans to develop regional hubs that will allow it to be in 50–60 markets by 1990. "Our whole thrust is to build to a crescendo by 1990 when the next postal rate increase would go into effect," he says.

Once that increase kicks in, he figures United Delivery can expand into the top 100 markets. Working only in those markets, he estimates, private delivery companies could "easily" collect $200–250 million in annual delivery fees—a huge sum compared to United Delivery's current $5 million in annual revenue but not even 1 percent of USPS's budget.

"It's not a matter of if it's going to happen," says Miller. "It's going to happen. There definitely is going to be a national delivery network for second- and third-class mail."