On Falling Mail Volumes, A Tale of Two Stories

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“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair.” — Charles Dickens, A Tale of Two Cities

HOW FAST are mail volumes falling, and what’s causing the declines?  If you’ve been listening to the Postal Service and reading the news, the answer is obvious: Faster than you can imagine, and all because of the Internet.

Postal Service managers have told that storyline at thousands of public meetings on post office closings and plant consolidations, and it’s been reported in thousands of news articles.  The line is repeated over and over again, like a magic mantra, and you’d be hard pressed to find anyone who doesn’t believe it.

To question the dominant narrative at this point seems like lunacy.  Does anyone really think that the Internet isn’t putting the Postal Service out of business?

But there is more to the story.  If you look closely at the projections the Postal Service is putting out, there are significant discrepancies, which suggests that they’re basically just making up numbers.  The Postal Service is also offering conflicting explanations for the declining volumes, which suggests that they’re less interested in trying to explain what’s happening than they are in furthering an agenda — an agenda that is not being fully revealed.

 

Conflicting projections

Over the past couple of weeks, the Postal Service has produced two documents — the Form 10-K Fiscal Report for 2011, which came out on Nov. 15, and the Integrated Financial Plan for FY2012, which was released on Nov. 23.  Though issued a week apart, the two reports provide wildly divergent projections for mail volume in 2012.

The Form 10-K says, “Forecasting in the current economic environment is subject to significant uncertainties.”  That doesn’t stop the K-10 from coming up with an estimate: “The operational plan for 2012 anticipates a reduction in mail volume of approximately 8 billion pieces from 2011 levels with an associated drop in revenue of approximately $2 billion” (p. 69, bottom of the page; Italics added.)

The Integrated Financial Plan (IFP) offers a much worse projection: “In 2012, we anticipate total mail volume of 158.0 billion pieces, a decline of 9.9 billion pieces or 5.9 percent from 2011” (p. 2).  (Italics added.)

So what are looking at for fiscal year 2012 — a drop of 8 billion pieces or 9.9 billion pieces?  Given how bad both projections are, that discrepancy might not mean much, but that’s a big difference.  A couple of billion pieces comes to more than half a billion dollars — way more than the $200 million the Postal Service says it would save by closing 3,650 post offices next year.

How could the Postal Service issue two reports, a week apart, providing such different estimates?  It seems as though the Postal Service is pressing so hard to show how bad things are getting, it’s not satisfied with one awful projection and has to come up with an even worse one a few days later.  The Postal Service can’t even keep its own numbers straight.

And where are these predictions coming from, anyway?  Last year, the Postal Service asked the Boston Consulting Group to make projections for the next ten years.  In March 2010, the BCG report predicted total volumes would decline at a rate of between 1.5% and 3.4% a year, with First-class declining between 3.7% and 4.7% a year.

Now that the actual numbers for 2011 are in, we find that from 2010 to 2011, total mail volume declined 1.7% — near the low-end of the range projected by BCG (K-10, p. 18).  Given that the economy is still bad and that BCG had assumed it would be better, one would have expected a much steeper decline.

On what basis, then, is the IFP now predicting a whopping 5.9% decline in total volumes for 2012?  That is almost twice as bad the worst-case scenario predicted by BCG.  The IFP says its projections are based on a “weak economic outlook,” but it says nothing about falling back into a deep recession like the one that caused the earlier steep drop.

First-class mail is suffering the most, and the actual drop from 2010 to 2011 — 6.3% — was worse than the worst-case scenario predicted by BCG (4.7%).  But why is the Postal Service now predicting an even worse decline of 8.6% for 2012?

No one knows how things are going to go in 2012.  The way the economy is looking, perhaps we’re in for a double-dip recession, and volumes will decline just as badly as the Postal Service is predicting — or worse.  (The preliminary numbers for October 2011 do look bad.)  But the Postal Service’s projections do not assume another steep downturn.  They just seem to come out of nowhere.

 

Cyclical events and secular trends

The Postal Service is not just making up inconsistent projections.  It is also offering two contradictory explanations for the drops.

These declines are being caused primarily by two factors — the ailing economy and the shift to the Internet for advertising, bill paying, email, tax returns, and so on. The first cause is considered a “cyclical event” — the economy is always going through periods of growth and recession — and generally speaking, companies try to ride out the bad times without resorting to permanent, large-scale downsizing.  In contrast, the Internet effect, or what the Postal Service calls “electronic diversion” or “substitution,” is a “secular trend,” and it’s permanent, so you can’t ride it out, and you need to make more serious — but gradual — adjustments.

The question, then, is: How much effect is each of these two causes having on mail volumes and revenues?

That’s a difficult question to answer for a couple of reasons.  One, the bad economy is fueling the shift to the Internet since it’s a less expensive way to market products, pay bills, etc.  So one cause is making the other cause worse.  Two, the economy continues to languish.  If the economy were to improve considerably, any declines in volume that persisted could more readily be assigned to the Internet.

A 2010 George Mason study puts it this way: “There is uncertainty about how much of the recent decline [in volumes] is related to cyclical events associated with the great recession of 2007-2009 as opposed to the secular trend of [Internet] substitution that has been noticeable for many years.  This uncertainty will not be resolved in the United States until the economy resumes growth for a sustained period” (p. 8).

In a footnote to that passage, the study cites a “highly respected postal econometrician at Finland Post” who recently wrote: “The deep global economic recession experienced in 2009 has lowered letter volumes nearly everywhere in the developed world….  It can be clearly discerned that some of the effects of the economic crisis have been interpreted as substitution.  It is, obviously, difficult to separate these matters.  At least it can be said of Finland that the drop in letter volume in 2009 (total addressed letters -7%) was almost entirely the result of the economic crisis (GDP volume fell -8%).” (Italics added.)

In other words, in Finland anyway, nearly the entire volume decline in 2009 was due to the recession.  That may seem like an extreme case — how could the Internet have almost no effect on declines? — but that is almost exactly what the Postal Service has been telling the Postal Regulatory Commission (PRC) in its argument for an “exigent rate increase.”

 

The strange case of the exigent rate increase

When the Postal Service wants to increase postage rates beyond the rate of inflation, it needs approval from the PRC.  The Postal Service has been flip-flopping over this “exigent” rate increase for some time now.  It originally submitted the request to the PRC in July 2010, but then it withdrew the request in August 2011 (probably because of pressure from the mail industry).  In early November, it announced that it would be pursuing the increase again.  Even as it renewed the request, however, the Postal Service said it hoped that something would happen — like new legislation — so that it could withdraw the request yet again.

At issue with the PRC — and the reason the PRC rejected the rate increase last year — was that the Postal Service had not done a satisfactory job explaining what part of the mail revenue decline was “due to” the recession.  That was important because an exigent rate increase can be granted only for “extraordinary circumstances.”  The recession was such a circumstance, especially if it was an unusually bad recession, but the Internet was not.  The Internet effect is long-term, gradual, and systemic, and it demands a response that is similarly long-term and gradual and that addresses systemic problems, like the $5 billion pre-funding for retiree health benefits mandated by the PAEA.

So the PRC might have been willing to grant the Postal Service a rate increase, but only to the extent that revenue declines were clearly “due to” the recession, not the internet or other causes.  The PRC therefore told the Postal Service to come up with a number that quantified the recession effect.

The Postal Service has offered at least five different ways of calculating the relative weight of the two causes, and the PRC has asked for an explanation of the methodologies being used.  A few days ago, the Postal Service submitted to the PRC testimony from two of its experts explaining how they had done their calculations for the case (their statements are here and here).  There are basically three modes of calculation on the table.

The PRC proposed that, according to testimony from the USPS witness, that two-thirds of the blame for the volume declines should be credited with the recession, while the Internet should get one-third.  But the Postal Service says that because the recession fueled Internet diversion, the economy deserves much more of the blame, and it offers a second method that gives the recession 85% of the responsibility, and the Internet only 15%.  (It says the drop from 2008 to 2009 was 22 billion pieces due to the economy, 4 billion due to Internet diversion.)

But the Postal Service would like to go even further, and it has suggested a third methodology.  The first two calculations apply specifically to volume changes from FY2008 to FY2009.  But if you look at the cumulative FY2008-FY2009 period, says the Postal Service, “the factor relating recession-related losses to actual net volume changes is 0.969, or approximately 97 percent” (Initial Remand, p. 42).    (These modes of calculation are discussed here, and there’s more analysis here and here.)

In other words, the mail decline for these two years — the depth of the recession — can be almost entirely attributed to the economic downturn.  That is exactly the conclusion the Finnish study came to.

In terms of dollars and cents, the Postal Service estimates its losses “due to” the recession for 2008-2009 as follows: Using method one (two-thirds), $2.5 billion; method two (85%), $3.2 billion, and method three (97%), $3.6 billion.

Overall, the Postal Service says that the recession has cost it something on the order of $5.57 billion for 2008 – 2011.  (Initial Remand, p. 46, footnote).  If you combine that loss with the $21 billion in annual payments to the retiree health care plan, the Postal Service’s net deficit of $25 billion over the past five years completely disappears — without saying a word about the Internet.

 

Look into my eyes: It’s the Internet

That’s not what we hear everyday in the news, however.  According to the media, there’s only one cause for the postal crisis, and that’s the Internet.  Just to cite a couple of examples:

“As any computer user knows, the Internet revolution has led to people and businesses sending far less conventional mail….  The causes of the crisis are well known and immensely difficult to overcome.  Mail volume has plummeted with the rise of e-mail, electronic bill-paying and a Web that makes everything from fashion catalogs to news instantly available. The system will handle an estimated 167 billion pieces of mail this fiscal year, down 22 percent from five years ago.” — New York Times, Sept. 4, 2011

 “The rapid growth of email, online bill paying and the like has reduced the volume of first class mail by 22% since 2006, cutting into the government’s monopoly.  An inexorable decline is underway.  Online shopping catalogs and package-delivery competition from UPS and FedEx have further contributed to the Postal Service’s woes.” — Wall Street Journal, Oct. 5, 2011

In addition to these mainstream news items, the local news across the country reports the same thing in every story about a meeting on closing a post office or processing plant.  There have been thousands of these stories.  In each one, the USPS representative explains to the community that the Postal Service is in “a dire financial crisis because of the increase in electronic mail, online bill paying and other electronic devices” (Canon City Daily Record, Sept. 2, 2011)

The Postal Service tells this story at every opportunity.  Just yesterday, there was a report in the West Central Tribute in Minnesota entitled “Declining volumes leads to closing of post offices.”  Pete Nowacki, communications director with the United States Postal Service in Minneapolis, explains the problem.

The volume of postal activity has declined by 20 percent in the last five years, says Nowacki, and single-piece first-class mailings have been cut in half over the last 10 years.  “We’re getting to a situation that’s getting pretty close to a crisis,’’ said Nowacki. ‘’We’ve about reached the top of our borrowing limit and we know that volume is down. It is difficult to maintain this network on the volume we’re generating now.’’

“The move to electronic communication is the driving force behind the decline. As an example of what’s happening, Nowacki points out that Americans made more than 140 million income tax filings with the IRS this year. Of the total, 100 million were completed electronically.”

Nowacki didn’t mention that the 20% decline of the past five years was almost entirely caused by the recession.  He didn’t mention that practically everything else is down too — like housing starts (down over 70%) and car sales (down over 30%).   He didn’t mention that before the recession started, total mail volume was actually increasing and that the 50% decline in single-piece first-class over the past ten years has been largely offset by increases in other types of mail.  And he didn’t mention that from 2010 to 2011, total mail volumes declined only 1.7%.

Nowacki, like all the other USPS spokespeople we’ve had to listen to over the past few months as this “crisis” has grown, has only one story to tell: The Postal Service is going under due to the Internet, and it must make drastic cuts to its network and workforce, period.

 

Mind the gap

So the Postal Service tells two stories.  When it argues for the exigent rate increase, the recession gets 97% of the blame for the 2008-2009 declines, and a significant part of the blame for the next two years as well.  But when the Postal Service wants to explain to communities why it has to close their post office or processing plant, and when it wants to frighten Congress into enacting legislation to enable it to act “like a business,” the story is always about how the Internet and e-mail are stealing volumes and revenues.

We will continue to hear the Internet explanation because it works much better for the Postal Service — and for others with an agenda.  If you want to close half the country’s post offices, reduce the workforce by 220,000 employees, and do all the other draconian things the Postal Service wants to do, you need a permanent paradigm shift.  A recession is cyclical and temporary, but the Internet is here to stay — just look at the ubiquitous iPhones and Blackberries, the TV ads for electronic devices, the hours people spend at the computer.  The technology has transformed our lives, so of course it’s killing the post office — except it’s not.

So if things aren’t really as bad as they’re saying, why push for this radical “optimization” of the postal system?  Who is behind these efforts?

The players are not a secret.  The direct marketing business wants to downsize the Postal Service because that keeps postage rates down and profits up.  Anti-union corporations would love to see the no-layoff clause pulled from union contracts, the unionized workforce drastically reduced, and the power of public employees dramatically diminished.  Anti-government ideologues would like nothing better than for a large government entity to be cut in half.  Mail industry companies are hungry for more outsourced business and a bigger piece of the pie.  And privatization advocates of all stripes can’t wait for the Postal Service to be “decoupled, bifurcated, and unbundled” — cut up into pieces that can be sold off to the highest bidder.  Better for the Postal Service to take the heat on making the cuts before privatization, so that private corporations don’t have to make them after privatization.

No one expects the Postal Service to explain that these are the forces motivating its policies and projections.  But the least it could do is keep its predictions consistent and more reasonable.  And it would help if it were more honest with the public about the real causes of the declines we’re seeing.

The Postal Service has many problems right now.  It doesn’t need to add to them by dissembling.  Undermining its credibility will do much more harm to the Postal Service than declining mail volumes.

(Image credits: George Washington & the cherry treeUSPS graph; people falling; rate increase; hypnosis; credibility gap.)

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