Yes, Postmaster General

A private-sector superstar comes to the Postal Service with all the right instincts, but his managers are well-entrenched, with all the wrong incentives.

To some observers, it must appear that New York Yankees owner George Steinbrenner is running the U.S. Postal Service. We have had five postmasters general in the past four years. The last three left within a year of taking office. In March, a new CEO took the reins at the Postal Service, after having built First Nationwide in California into the country's sixth-largest savings institution. Let's consider the situation that Anthony Frank faces now that he has left the banks of California for the banks of the Potomac.

Our new postmaster general shows more promise than any I've known in the six years I have been on the Postal Rate Commission. He is a serious person and has taken this most difficult and unrewarding job for a very serious reason. He promises, with the help of other successful business people such as H. Ross Perot, to significantly improve the efficiency of the Postal Service.

But boosting efficiency means improving service and reducing costs. And the prospects are bleak. The Postal Service is not only a monopoly in all its important markets but is also a government bureaucracy. These two stark facts are like an enormous ball and chain around each of Postmaster General Frank's legs. Either one alone would make it difficult to become more efficient; together they make it almost impossible. The fault with the Postal Service is not with the caliber of its leadership; it is with the institutional set-up.

The Postal Service lacks the profit motive that disciplines our commercial economy. Perhaps even more important is the lack of real accountability. There is no scrutiny by postal stockholders protecting their interests and no threat of a hostile takeover if management doesn't perform. The Board of Governors is intended only to review the most general policies of the service. The board has no staff and is not equipped to hold management accountable, nor does it have an incentive to do so.

Congress has been unwilling or incapable, or both, to find out what is really going on within the postal system, let alone to hold it accountable. Nor is the Postal Service accountable to the president, and that's the way every administration, since reorganization in 1970, has wanted it. Finally, the Postal Service is not accountable to the Postal Rate Commission. The courts have made it abundantly clear that the commission's role in postal finances is extremely limited. The commission can only rule on Postal Service rate requests.

In this situation, with no profit motive or real accountability, the institution's incentive is only to be efficient enough that neither Congress nor the president takes the drastic step of putting the Postal Service back into the government proper. Frank's attempts to improve efficiency cannot make much difference—unless, of course, he is willing to change the institutional set-up.

Suppose, for example, that Postmaster General Frank wants to increase efficiency by improving service. He must first have a reliable measure of its quality. By now, he probably has had an earful of complaints from customers. How is he to know whether they are legitimate, or merely cranky outbursts unrelated to everyday circumstances?

He will, no doubt, turn to the Postal Service's nearly 20-year-old service measurement system. His new subordinates will shower him with glowing statistics demonstrating that his customers and the marketplace are wrong. But the postmaster general should know that the measurement system is unreliable.

It is easily manipulated. Those in postal management have reason to manipulate it, because it is used in performance evaluations. And in fact the Postal Service's inspection service has found it to be manipulated in several offices. Advance notice is given before data are collected—enough notice to move overripe mail out of the way. Since the system samples every nth piece of mail, it is easy to take the 11th piece, rather than the 10th, when the latter is a piece that has been delayed.

Would Frank's old company, Ford Motor, be willing to rely on such a self-serving system? Not since the Japanese have come. Unfortunately, postal management does not have the equivalent of Japanese competition to spur it on.

Management's constant citing of the measurement system to prove that service is fine is just as misleading as its old practice of touting gross productivity figures to prove that productivity growth was fine. Those figures, which simply calculated total pieces per person-year, failed to account for volume growth and fixed costs, work-sharing by postal customers (such as presorting of bulk mail), and changes in the proportion of different mail shapes.

Postal management's reluctance to measure performance accurately is understandable—what the public doesn't know about the postal system can't hurt postal managers. Today those managers feel the same way about service measurement as they did about productivity measurement. The institutional set-up ordains it.

When the service measurement system was introduced in the 1960s, by the way, the Postal Service had about three-fourths of the total small-package business. Today, parcel post volume has dropped to less than 150 million pieces annually, while United Parcel Service (UPS) has captured over 90 percent of the market, handling some two billion small parcels a year.

How did UPS manage to steal the Postal Service's bacon? Through plain old efficiency. UPS enjoys a preeminent position in the small-parcel market because it provides superior service at lower cost. And even with lower prices, it makes a hefty profit every year. UPS out-performed the Postal Service right from the start, even when the Postal Service was the colossus of the small-parcel business. If economies of scale exist for the Postal Service, and I believe they do, they were squandered by internal inefficiency.

The Postal Service could be more efficient. It would have to stop increasing the price it pays for inputs (primarily labor) faster than the rate of inflation, and it would have to use those inputs more effectively. Though the new postmaster general is surely aware that these offer his only route to major improvements, it is less clear that this road can be traveled very far.

Postal customers have suffered distressingly regular rate increases in recent years because the Postal Service's costs are out of control. The service has been taking a beating at the bargaining table with its five postal unions for 15 years. Eighty-three percent of Postal Service costs are wage-related, and bargaining failure sends costs skyrocketing.

Congress intended for postal wages to be comparable with those in the private sector. The federal legal code is straightforward and unambiguous: "It shall be the policy of the Postal Service to maintain compensation and benefits for all officers and employees on a standard of comparability to the compensation and benefits paid for comparable levels of work in the private sector of the economy." In reality, postal wages are comparable to those of the highest-paid workers in manufacturing: those in auto, steel, and mining enterprises.

Using current statistics on labor costs, the Postal Rate Commission calculates that average annual compensation is just over $42,000 a year, including benefits. The Postal Service, starting from the same point but making different assumptions, figures the average to be about $36,000. In either event, the average hourly cost of the pay package including benefits, a figure that both the Postal Service and Postal Rate Commission staff agree upon, is now more than $20 per hour.

Neither the Postal Service's figure nor the Postal Rate Commission's estimate includes the full cost of retirement benefits, much of which is subsidized by taxes. Amazingly, no one has ever quantified the value to the individual retiree of this additional benefit or measured accurately the cost to federal taxpayers.

But the postal unions should not be blamed for escalating wages. They are simply doing their best to get the most they can for their members. It is management that must bear a far greater share of the responsibility. Management has a great disincentive to control labor costs, because after each major contract is negotiated, almost all management salaries rise by a related percentage. It is difficult to think of another system where management's rewards are scaled not to savings achieved by tough bargaining, but to savings lost. And since postal managers have government-enforced monopoly power, they can pass on these costs to customers.

Can the new postmaster general use this high-cost labor input more effectively? The prospects are equally dim, for management has not only bargained away the farm; it has bargained away the mule, as well. Work rules are among the most restrictive in our economy. No more than 10 percent of the employees can be part-timers or temporaries. In contrast, at UPS most sorting clerks are part-timers.

The wage and work-rule problems may prove to be insoluble via conventional means. The Postal Reorganization Act mandates arbitration if no labor agreement can be reached. Given the way arbitration typically works in this country, an arbitrator will likely split the difference when the two sides fail to agree. So Frank is not likely to make much progress when he sits down at the next bargaining round with the unions in 1990, unless he can come up with a new chip or two.

While the postmaster general may be discouraged by his prospects for even making a dent in the pay and work-rule problems, he might be somewhat sanguine about improving postal management and increasing productivity if he uses what are recognized to be his considerable management skills.

Again, however, for institutional reasons, senior management really has no interest in change. Its members already are at the pinnacle of power in their organization. There are no stock options. Bonuses are awarded on a round-robin system. Salary growth is severely limited by congressional ceilings. Private industry never hires senior postal management. Upsetting the established relationship with the labor unions risks confrontation with Congress that could unglue the postal reorganization that gave the few men who make up senior postal management the great power they now enjoy.

It is because they are reluctant to upset the status quo that senior management has failed to devise a system for comparing productivity between branches. Years ago, in the bad old days prior to postal reorganization, there was such a system. It survived reorganization and even was automated. But when the system was actually used for performance appraisals, senior management grew to loathe it. Widespread cheating occurred, and finally the system was dismantled in 1975.

Contemplate for a moment what this means. Individual branches all tackle about the same job: they sell stamps and process and deliver mail. By their nature they are amenable to comparison. These comparisons can be used to reward management talent and to pass innovations along through the system. Of course, mindless comparisons must be avoided. St. Louis, for example, may have fewer expensive commercial deliveries than Philadelphia. But surely postal management could learn to make good use of interbranch statistical comparisons. Imagine Ford Motor Co. not keeping interplant productivity statistics. But no, the Postal Service's senior management felt that major post offices are not comparable and that local branches could not be prevented from manipulating the statistics. This lack of an interoffice productivity measurement system is a stark indication of the institutional aversion to change that Frank faces.

A postmaster general chosen from the ranks of private business is a lone individual. He doesn't know the mail business. He comes on the scene with few genuine allies. Every senior postal manager knows that in three or four years Postmaster General Frank will be a former postmaster general. If they can hunker down and avoid making a big mistake, they will survive his energetic spurts of reform. He will soon learn that he is an outsider in a world of insiders.

This is not to say that it would be better to hire an insider. It is not clear that anyone can really improve the system. The magnitude of the job plus the twin weights of monopoly and bureaucracy make significant movement nearly impossible.

What is to be done? I suggest that the structure of the institution must be changed.

Although John Naisbitt of Megatrends fame may be a trifle optimistic in observing that "privatization is sweeping the country," there is abundant evidence that it is an idea whose time has come. With respect to the Postal Service itself, competing proposals for privatization have been put forth during the last few years. The central element linking all of them is repeal of the private express statutes, which prevent competition in the delivery of first-class mail.

All of the various proposals have potential merit from a purely economic standpoint, but they are simply impossible for political reasons. Each of them requires affirmative congressional action, and Congress shows almost no interest in enacting such fundamental changes: the five postal unions and postal management organizations oppose it vehemently. Postal Service employment has grown 22 percent in the last five years; total employment now exceeds that in any federal agency except the Defense Department. With this army of interested constituents quartered in every congressional district in the country, I doubt that you could get 12 out of the 435 members of the House or a half dozen senators to put their names to a bill repealing the private express statutes.

Frank was already taught a stern lesson about these political constraints when he made the bold move of signing a consulting contract with Texas entrepreneur H. Ross Perot. It must have sounded simple enough to a businessman like Frank: hire Perot, a renowned expert on automating manual tasks with computer systems, to study the postal system. As an incentive, give him a percentage of any cost savings he could effect. Everybody wins, right?

But Congress quickly decided it should have something to say about how the service could be made more efficient. In the face of congressional objections that the contract was awarded without competitive bidding, it was voided. A federal appeals court upheld the deal, but to placate Congress, Frank agreed not to split cost savings with Perot.

So my assessment is that it will be impossible to win repeal of the private express statutes. Short of that, however, there is much that can be done by way of contracting out some of the functions now performed internally by career Postal Service employees. This kind of privatization has great potential for improving Postal Service efficiency and reducing overall costs.

There is a major, growing role for privatization throughout our nation's government. Clearly, the American public demands many services, including postal services. At the same time, they want them performed honestly and efficiently with a minimum of cost. They don't really care whether the services are delivered by public or private employees. But they are outraged when costs are unreasonable and when those responsible display a business-as-usual attitude rather than looking for ways to improve.

The Postal Service will not be able to avoid that outrage forever. Changes will come, Anthony Frank or no, the unions or no, the private express statutes or no. Let the debate go on, then.

John Crutcher is a member of the Postal Rate Commission. This article is adapted from an address at a Reason Foundation Forum in Los Angeles.