Groundhog Day at the Post Office: Time for an exigent rate increase, again?

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BY MARK JAMISON

It may be September, but it feels like “Groundhog Day,” the movie in which newsman Bill Murray wakes up to the same day over and over again.  A few weeks ago, rumors started swirling again that the Postal Service was going to request an exigent rate increase. 

News reports said that at its meeting on September 5, the USPS Board of Governors would decide whether or not to file a request with the Postal Regulatory Commission.  After the meeting, we learned the BOG had postponed making a decision, and the question of a rate increase was back up in the air.

It’s the same old story.  We went through this same mood swing in 2010 when the Postal Service took a break from finding things to cut and ways to diminish service and instead submitted a request for a rate increase to the PRC.  It was badly mishandled.  The Postal Service provided a mishmash of an argument claiming that it was the Internet, no, the Great Recession, well maybe both after all, that was behind the precipitous drops in mail volume that began in 2008. 

The PRC spent months analyzing the Postal Service’s request and found that an exigent increase was not justified by “electronic diversion” because it was a “long-term structural problem,” not an “extraordinary” circumstance.  The Internet has been around for a long time, and its impacts on mail volumes should be fairly predictable. 

The PRC did find, however, that the Great Recession — the worst economic decline in seventy years — may have been the likely cause for the loss of billions of pieces in mail volume.  The Commission encouraged the Postal Service to come back with a more specific analysis that measured just what portion of the losses were “due to” the economic decline itself.

The Postal Service sued in Federal Court.  The court remanded the case back to the PRC.  The Postal Service dallied with reopening the docket and then let it fall by the wayside while it pursued further cuts to its infrastructure and legislative remedies.  For a while, it seemed as if the mailers had succeeded in convincing the Postmaster General that a rate increase should not be part of the solution to the Postal Service’s problems. 

The mailers were thus quite naturally dismayed to learn a few weeks ago that the exigent rate increase was back on the table.  Their lobbyists immediately began howling disconsolately over the possibility that rates might go up, and their press machinery began cranking out op-eds and letters-to-the-editor claiming that civilization as we know it would come to an end if a rate increase were imposed. 

“Put those crazy ideas about rates aside and get back to the business of cutting wages and infrastructure,” they told anyone who would listen. These mailers have spent the past two years (more really) encouraging the Postal Service to downsize in order to keep costs down and thereby avoid a rate increase.  All the “rightsizing” has meant declines in service, and they certainly didn’t want to suffer lower standards and a rate increase too.

So here we are again.  Just as it did before, the Postal Service has announced it might seek an exigent rate increase, and once again, it has decided to postpone the request.  Who knows where things will be when we wake up tomorrow?

 

Getting the attention of Congress

Over the past two years, Congress has held several hearings on the Postal Service and come up with various versions of postal reform legislation.  The Senate passed a postal reform bill in the 112th Congress, but since then the Senators have preened and postured while covering the same old ground. 

In the House, Darrell Issa has used his chairmanship of the Oversight and Government Reform as a bully pulpit to advance ideological arguments that basically follow the script of “workers and government — bad, lobbyists and business — good.”  Issa passed a bill out of committee on a strictly partisan vote.

Right now Congress has its attention on other matters, like Syria, a continuing budget resolution, and the debt ceiling, so the prospects for legislative reform have once again dimmed.  Under the circumstances, it’s difficult for Postmaster General Donahoe to focus Congress on solving his problems.  Apparently closing post offices and processing plants and making gloomy predictions of cash flow disasters weren’t enough to make the front page anymore.  Maybe the PMG and the BOG figured that they needed to do something more to goose Congress into action.

So on the theory that no one in Congress is happy when contributors are angry — and the mailers are certainly large contributors, and they are certainly not very happy when they hear talk of a rate hike — Mr. Donahoe and the BOG thought they would take a big bold step to get back in the spotlight by broaching the subject of a new request for an exigent rate increase.

 

Unwise, unlawful, and a terrible mistake

When the rumors of an increase began surfacing a few weeks ago, the response from the industry was immediate and forceful.  Spokespersons for the stakeholders rent their garments and cried in protest. 

“Catalog volume could decline to post-2007 rate increase levels, and will be very hard for some companies to recover from,” said the American Catalog Mailers Association.

“Attempting to address some of the service's inherent problems — notably an oversized and underutilized infrastructure — by imposing a rate increase” on periodicals would be “both unwise and unlawful,” said MPA, The Association of Magazine Media.

A price increase would be “a terrible mistake,” said a plant director of Quad/Graphics (one of the nation’s largest printing companies, a company that grows the American way by buying competitors and laying off employees).  It would be, he said, “a temporary substitute for a badly needed overhaul of the postal system — not to mention a dangerous precedent — and one that inevitably will lead to another round of sharp declines in mail volume and revenues.”

The lobbying appears to have been successful, at least for now. At its meeting on September 5, the BOG decided to postpone a decision on the increase until later this month.  The mailers reacted with elation, claiming that their voices had been heard.  

Whatever the BOG decides, it seems that all the media attention, the high dudgeon, and the screams of indignation — “how could anyone even think of raising postal rates?” — have brought renewed focus on the need for postal legislation.  Unfortunately, it’s not likely that postal reform will address one of the most basic underlying problems facing the Postal Service — the postal rate system itself.

 

A question of values

An exigent rate increase may be helpful to the Postal Service’s bottom line, but it is ultimately a temporary fix.  If Congress is to engage in real postal reform, the question of the postal rate system ought to be front and center.  In many ways all the other issues that have been getting attention — the retiree health prefunding, the cuts to service, “rightsizing” the infrastructure, labor costs, and the postal business model — are secondary questions.  

The single most significant question Congress must answer is this: What kind of postal system does the country want and need, and how should the rate structure support that system?  Or to put it another way: What sort of postal network and postal infrastructure will best serve the needs of the American public, provide robust universal service, protect our core values, and bind the nation together while still offering maximum opportunity for commercial use and economic innovation?

Perhaps the most central element in answering that question successfully is the rate system.  It determines how the network is funded.  It is, or ought to be, a clear demonstration of our principles and values.  The rate system is not merely about providing sufficient revenues to create a sustainable postal system.  Obviously sufficient revenues to maintain the system are essential, but the structure of the rate system also confers advantage and access, and it can create entitlement.  There are consequences beyond revenues embedded in the structure of the postal rate system.

 

A little background

The postal rate system has developed over the nearly 240-year history of the Postal Service.  James Madison and George Washington had discussions over whether newspapers should receive free mailing privileges.  At one point, recipients paid postage.  There were challenges as rural free delivery service and parcel post were added.

Throughout this history, the development of a national postal system was primarily motivated by a desire to further public goals — disseminating news and opinion, advancing scientific knowledge, expanding commercial opportunities, and educating citizens so they could participate intelligently in the democratic process.  While the postal system was generally expected to pay its own way, the maintenance of the postal network was more a political question than a matter of generating revenue.

One of the goals of the Postal Reorganization Act of 1970 was to make the system more businesslike.  This transformation of the postal system occurred at a time when corporate interests began commanding more of the public stage.  The business community became more proactive in trying to tailor government to fit its agenda, and changing the postal system was part of this agenda. (There’s more on that in this previous post).

There have always been questions related to how the social and public goods delivered by the postal network would be paid for.  For many years, for example, Congress made annual appropriations for revenue forgone to support mandates like cheaper rates for nonprofits, newspapers, and free mail for the blind.  As one might imagine, anything tied up with the Congressional budget process becomes quite political. Over the years Congress has made various attempts to solve the problems of postal costing issues by applying various formulas and changes in methodology.

Over the years since the PRA was enacted, the mentality of senior postal management has had a great deal of impact on how rates have developed.  One of the most significant developments was the way management began designing a postal network that was built solely on a volume model.  A cost structure developed that was based on the premise of increasing volumes rather than on increasing the value of the mail.

Another key factor in the evolution of the rate system over the past four decades has been the introduction of workshare discounts.  These discounts have had especially significant impacts on the profitability of First Class mail, the product upon which the rest of the rate system relies.  Worksharing also led to schemes for quantity discounts, a natural outgrowth of a volume pricing system. 

In addition to focusing on volumes and discounts, the leadership of the Postal Service increasingly saw themselves as advocates for mail, particularly advertising mail.  Recognition of the social and public values embodied in the postal network was eroded by the growing focus on discounters and advertisers.

 

PAEA changes things

In 2006, the Postal Accountability and Enhancement Act (PAEA) modified an existing rate system that already had several problems built into it.  One of the professed goals of the legislation was to create “a modern system for regulating rates and market-dominant products.”  That’s right there in Section 3622 on “Modern rate regulation.” 

The PRC was tasked with updating the existing rate system, and to a large extent it has gone about its business quite professionally.  But it has been constrained by memories of what existed before and by the expectations of those most interested in the rate system — the Postal Service, which wanted to retain more control over rate setting, and the mailing industry, which wanted to retain many of its embedded privileges.

The PRC goes to great lengths to accommodate the broader interests of the public and the social goods inherent in a public postal network, but law and legacy often leave those greater concerns by the wayside as powerful interests compete for attention and advantage.

Prior to PAEA, the Postal Service would bring requests for rate increases to the Postal Rate Commission.  (PAEA changed the name to Postal Regulatory Commission when it expanded the scope of the Commission’s authority.) In the case of a broad proposal that affected the entire rate and classification system, known as an omnibus rate case, it could take many months for the Rate Commission to reach a decision, and even relatively simple cases took a long time and often ended much different from the original proposal.

PAEA was supposed to give the Postal Service and mailers some certainty about rates by allowing for periodic rate increases that were kept within the rate of inflation as determined by the CPI.  While virtually no business works under similar restrictions (remember the free market), this was deemed to be a workable system.  The system didn’t address some long-term issues relating to pricing of nonprofit and periodical mail, but it was thought that those issues and others would be addressed over time as the modern rate system evolved.

As a safety valve, the PAEA contained a section — 3622(d)(1)(E) — that allowed for rates to be adjusted outside of regular procedures “on an expedited basis due to either extraordinary or exceptional circumstances.”  In other words, there was an option to adjust rates because of exigent circumstances when conditions were such that increases above the CPI were justified.

If one wants a sense of what lawyers in Washington do for a living, it’s edifying to read the briefs in the original exigent rate case (N2010-4), albeit in a painful sort of way.  The various attorneys in the case fill page after page arguing about the meaning of “extraordinary” and “exceptional.”  There’s also a good deal of discussion about what Congress really meant when it passed the legislation.  The briefs bring a whole new definition to the word “parsing,” and by the looks of things, we may be about to go through the whole business again.

 

Making a case for an exigent rate increase

There are two aspects to the case for an exigent rate increase. First, is the request warranted by circumstances?  Has the Internet or the Recession or some other event been so unforeseen and so damaging to the Postal Service that it warrants raising rates beyond the CPI and outside the regular process, which is relatively confining and narrow? 

Of course, most of the mailers usually find the answer to this question to be a slamdunk “no.”  On occasion you’ll find a mailer who uses the process as an opportunity to gore someone else’s ox, so a catalog mailer might suggest that periodicals don’t pay enough or an ad mailer may complain that both catalogs and periodicals don’t cover their share.  But for the most part, the mailers agree that nothing justifies an exigent rate increase.

The second issue is, if exigent circumstances are found to exist, how much of an increase is justified?  For mailers, the short answer is again simple: As little as possible.  And as for how the increase should be applied across various classes and products of mail, the answer to that is also simple: Someone else should bear the burden, preferably individual consumers and small businesses who send First Class mail.

Aside from the basic matter of whether or not extraordinary circumstances exist to justify an exigent increase, there’s the question, will the increase do any good?  Obviously, if a rate increase drives away a lot of business, it’s entirely possible that total revenues will actually decrease and do more damage than good.  This takes us to the economic principle of “elasticity.” 

 

The question of elasticity

While the math and models around this subject can get very complicated and daunting, simply put, “elasticity” refers to how sensitive a product is to price increases.  If a price increase causes people to consume less of an item, then demand for the item is said to be elastic.  If a price increase doesn’t affect demand for the product, then the item is inelastic.  The more inelasticity there is, the less danger there is of a price increase backfiring because consumers want or need the produce or service so much that they will pay the higher price.

Economists try to measure the elasticity of demand for a product across a range.  They don’t merely want to know whether demand changes with price; they want to know by exactly how much.  If a 10% increase causes only a 2% drop in demand, then the item is relatively inelastic; you may sell fewer widgets after the price increase, but your total revenue will still be greater.

In the case of the mail, then, the question is this: Is demand relatively inelastic, so that price increases don’t portend great losses in volume, or demand relatively elastic, such that rate increases can cause volume declines of such magnitude that revenues will fall, sending the system into a death spiral? 

The mailers argue that pricing is so elastic that any increase is a hideous affront that will cause volume to leave the market faster than people fleeing a building on fire.  They argue that not only is the demand for mail elastic to a very high degree but also that the problem is compounded by the fact that mail is under threat by the Internet, social media, and all sorts of technological denizens. 

There’s a big problem with this argument – it simply isn’t true.  Not only isn’t it true based on economic models, it isn’t true based on evaluations by people who would nominally be ideologically disposed to support business generally.  It also doesn’t stand up to things the advertising industry says about its mail products. 

 

Studying postal price elasticities

The question of how elastic postal prices are has been the subject of countless studies and reports.  Last May, for example, the USPS OIG published a white paper entitled “Analysis of Postal Price Elasticities.”  The OIG found that postal prices were generally inelastic, although there were some questions about the degree when electronic competition was factored into the calculations.  

A paper offered by Margaret Cigno and other economists at the PRC similarly found postal prices to be inelastic.  Several papers from GAO and the Congressional Research Service have likewise found that postal rates are relatively inelastic.  Over the years Michael Crew and Paul Kleindorfer, two academics who study postal issues, have reached many of the same conclusions with respect to postal pricing.

The Institute for Research on the Economics of Taxation (IRET), a right-leaning think tank, has also determined that postal rates are relatively inelastic.  In a study entitled “Why the Postal Service Is in Greater Financial Trouble than Most Foreign Posts – The Role of Postal Rates,” the IRET found not only that prices are inelastic but that U.S. postal rates were comparatively low to other countries and could and should be higher.

The IRET puts it this way: “The fact that most foreign postal services are profitable and charge much more than USPS undermines claims that increased prices here would push USPS into a death spiral. Historical evidence, here and abroad, demonstrates that higher postal rates usually raise a postal operator’s income.  It is conceivable that at least a few foreign posts have healthier bottom lines than USPS not because they have smarter managers, less expensive workers, better designed networks, or are subject to less government interference, but simply because they charge more.”

Despite all these studies, many in the mail industry argue that postal rates are elastic, and a price increase will drive away a fatal amount of business.  The direct mail industry and those who use the mails primarily to sell (and that include nonprofits who solicit which is nothing more than a form of selling) cry the loudest.  

 

Improving the value of mail

The position of the ad mailers is self-contradictory, however.  They claim that price increases will sink mail advertising, but at the same time they boast that mail has unique abilities to sell products that cannot be duplicated by other platforms.  Would a small increase in rates or even a general rationalization of the rate system change the value of direct mail and other advertising mail that much?

Looking through the DMA Statistical Factbook 2013, one finds all sorts of numbers that support the idea that mail is a vibrant advertising medium.  For example, catalog direct mail generates almost $129 billion in revenues, and non-catalog direct mail is responsible for nearly $514 billion in sales.  Would a 10% increase in postage rates make a market segment that large disappear overnight?

There’s an old adage in advertising that says half the money spent on advertising is wasted – you just don’t know which half.  Advertisers will continue to make decisions based on return on investment (ROI).  If mail currently works to sell, then it will continue to work.  Moderate changes in rates won’t really make much of a difference.

Many people with personal experience in the Postal Service believe mail is way too cheap.  It’s so inexpensive that there’s not much incentive to clean up mailing lists and put more effort into targeting customers.  This point is developed in an interesting OIG paperentitled “Postal Service Revenue: Structure, Facts, and Future Possibilities.” 

The OIG makes the point that price increases for Standard Mail may cause mailers to be more efficient and more targeted, e.g., culling address lists and making sure that mailings are meaningful to customers.  This could actually have some salutary effects in reducing complaints about “junk mail,” thereby making advertising mail more valuable to the end user and thus more valuable to the advertiser.

Given what we know about the inelasticity of prices for Standard Mail, volumes might drop after a rate increase, but they would be offset by higher revenues.  As the OIG paper points out, this could have positive effects on the overall value of mail.  

 

Value versus volume

The Postal Service has invested a great deal in tracking tools and monitoring systems that are more about helping mailers than moving the mail.  Much of that technology and some of the overall efforts the postal hierarchy makes as salesmen of advertising mail rather than stewards of national infrastructure don’t ever seem to get paid for in rates. Higher rates would reflect both those efforts and the concurrent productivity achievements.

GAO recently issued a report entitled “Opportunities to Increase Revenue Exist with Competitive Products; Reviewing Long-Term Results Could Better Inform Decisions.”  The GAO discusses some of the NSAs that include volume discounts and comes to the conclusion that the benefits of many of these agreements are quite limited and that in some cases there are no discernible benefits.  It’s difficult to determine if more mail is generated by the agreement or whether the volumes are simply ones that would have entered the system anyway.

As suggested by these various reports, the Postal Service has gone from being a neutral network to being an active advocate for mail, particularly advertising mail.  Discounts like the one for applying QR codes are designed to add value to mail.  These sorts of discounts don’t reduce handling or distribution costs.

The leadership of the Postal Service has built a volume-based system.  They did this even though the challenges from electronic alternatives were clearly on the horizon.  Rather than designing a system that was based on value, a system that lent itself to other sorts of complementary innovations like e-mail addresses tied to physical addresses or a small depositor banking system that built on the money order business, the leadership of the Postal Service went full in on mail volumes.  In doing so they put themselves in a position of having to favor segments of the mailing industry.  Almost by necessity they have become cheerleaders for direct mail.  

Worse, their technological innovations have become so narrowly focused that they now commit significant resources to developing mailing products and services that rightfully are the province of the mailers and the private sector.  There are real questions of whether rates accurately reflect the investments in scanning technologies and other technologies that don’t actually support postal infrastructure but are simply supporting better ways to advertise.

 

Workshare discounts

Most of the discussion so far has related primarily to Standard Mail products.  However, one of the biggest losses of revenues occurs through the workshare discounts granted to consolidators and aggregators of First Class mail.  The APWU has raised this issue repeatedly over the years and presented persuasive evidence that the discounts go beyond any cost savings flowing to the Postal Service.

In a recent piece on his blog, William Burrus, former President of the APWU, indicated that revenue losses from workshare discounts are as much as $18 billion per year.  These discounts are nothing but a gift to companies that process the mail, companies like Pitney Bowes.

Worksharing transfers revenues — and the profits derived from First Class mail — from postal worker wages to the aggregators, without adding any real value to the system. In a very real sense, these discounts do a great deal of harm.   The revenue lost to the system supported the mail processing and distribution network that made overnight and two-day delivery possible.

As Burrus concludes, “Rate discounts have outlived their usefulness and now serve only to give commercial mailers postage rates far below the actual costs incurred by the Postal Service in providing a full range of services.”

A former senior USPS executive comes to the same conclusion.  As he told me, “Former USPS CFO Dick Strasser used to talk about value-based pricing and associated volumes, rather than trying to run as much mail as possible through the system.  He also believed that workshare discounts were far too deep, that unions had the upper hand on that argument, with plenty of facts and data supporting their view."

 

Competitive Products

So far most of the discussion has related to what are known as market dominant products.  Postal products are divided into two categories: market dominant, i.e., those that are presumed to benefit from postal monopolies, and competitive products, i.e., products like Priority and Express mail that supposedly compete openly in the market.

There are few restrictions on the raising of prices for competitive products. However, these products are supposed to cover their attributable and assigned institutional costs, and they may not be cross subsidized or supported by market dominant products like First Class.  So, unlike a regular corporate business, the Postal Service can't use some products as "loss leaders" to attract other sorts of business.

The distinction between competitive and market-dominant may make sense, but it also muddies the waters. There are good reasons for allowing a government postal infrastructure to offer products that directly compete in the market.  Priority and Express, for example, serve several purposes, like providing an alternative to the oligopoly of the private providers that dominate the package delivery business.

The separation of products into market dominant and competitive classes was supposed to protect the private sector from the Postal Service abusing its monopoly powers.  Unfortunately, it has contributed to the problems associated with assigning institutional costs reasonably and efficiently, and it has turned the Postal Service into a two-headed monster, a sort of “push me, pull you” that wears both a public service hat and a corporate hat. It has thus led to a postal identity crisis that has caused postal leadership to sometimes ignore their public responsibilities in favor of pursuing corporate prerogatives.

Any serious discussion of the rate system ought to come up with better ways to define, account for, and manage the Postal Service’s monopoly powers while still giving clear direction as to the nature of the nation's postal infrastructure.  It is said that one cannot serve two masters.  The Postal Service can be a public entity with a public mission, or it can be a corporate entity with goals aligned with that mission, but it cannot be both.  The Postal Service can offer some products that compete directly in the market place and still fulfill its public-service mission, but it cannot fulfill this mission if it is preoccupied with corporate goals and incentives.  A proper and effective regulatory structure would alleviate, not exacerbate, an untenable identity crisis.

 

Getting back to the rate increase

The mailing industry is almost uniformly against higher prices and terrified of a truly rationalized rate system.  Rather than taking a longer view of how a rate increase might help improve the condition of the Postal Service, they see it entirely in terms of how it will impact the bottom line on their next quarterly financial statement.

Among the more outspoken lobbyists on rate issues is Rafe Morrissey of the Greeting Card Association.  Morrissey is a hired gun who represents over 200 companies, most of them small but some large like Hallmark.  

Earlier this summer, the GCA presented a proposal it called “common sense solutions” to postal problems.  It contains many of the same attacks on postal workers as similar proposals, and with the exception of its support for maintaining Saturday delivery, it pretty much toes the BOG party line. 

Ironically, Morrissey’s positions on rates, cluster boxes, and discounts would seem contrary to the basic economic interests of his clients.  As First Class mail loses value, while still being burdened with carrying the bulk of the weight of profitability and institutional costs, it’s not rates that threaten greeting cards — which are highly inelastic — but degradations to the quality of First Class mail through deterioration of service.

GCA is one example of a group that takes positions that may be counterproductive to its own interests.  For other groups, it’s easy to see where the resistance comes from.

 

Suppliers vs. service providers

Printers and paper and envelope makers — suppliers of products that go into mail — are understandably opposed to anything that might decreases mail volumes.  Suppliers have no interest in a system based on value rather than volume.  They make money by selling more of their product, so more mail, even if it's targeted poorly and ends up in the trash, means more sales and more profits.  Any innovation that rewards efficiency in mailing is against their interests.  Of course, one might credibly argue that they could and should also make efforts to adjust their business strategies to meet changing conditions in the market. 

The firms engaged in providing services to mailers might actually benefit from a system that focused on value rather than volume.  Their services might be more valuable if efficiency were highly prized.  For example, if you run a company that develops mailing lists, or one that designs mailpieces to make them more effective, then your services would be in high demand in an environment where efficiency counts.  Moderately higher rates that drive a desire for more efficient, effective, and targeted use of mail offer them an opportunity to innovate and shine.

These firms ought to be less concerned with rates than with things like technical standards that affect mailpiece design.  They would benefit from a broader network with more on ramps and more endpoints, factors that give these service vendors more and better opportunities to use creative skills to design more effective mail or more targeted mail campaigns.

Their enemy isn’t a large mail processing network or lots of small town post offices with personalized service – those aspects of the system can be used to enhance their offerings.  No, their enemy is a headquarters mentality that is obstructive, hidebound, and autocratic.  As much as the senior leadership of the Postal Service seeks to cultivate its relationships with mailers, it is still burdened by a bureaucratic institutional culture that hinders creativity and innovation. The folks in the creative professions that provide service to mailers need fewer rules, more flexibility, less confusion – all things that Congress can’t legislate and the current management can’t provide.

 

Newspapers and periodicals

The newspaper and periodical industries have a real problem, but it isn’t just with a potential rate increase.  Newspapers have lost huge chunks of classified ad revenue to Internet sites like Craig’s list. They’re struggling to find business models that fit Internet technologies while preserving physical distribution channels that are still viable and necessary.  

Magazine and periodical publishers have many of the same challenges.  Unfortunately, the lobbying outfits that advocate for these groups are dominated by the big players like Time Warner.  The behemoths are more sensitive to price, and they’re certainly more able to take advantage of volume discounts and rules that favor volume in mail entry.

Periodical mail, newspapers and magazines, have for years been classed as underwater (i.e., not paying their full share of attributable or institutional costs).  Some of that goes back to the founding of the post office when newspapers and similar media were given special treatment because the social value of journalism and opinion was deemed essential for a well functioning democracy.  

The problem with our current rate system is that it does not sufficiently address the reasons for protected rates for periodicals and media mail.  In this context, it is worth taking a look at two papers by the Congressional Research Service, “Postal Subsidies for Periodicals: History and Recent Developments” and “The Postal Revenue Forgone Appropriation: Overview and Current Issues.”  For a broader perspective, Robert McChesney and John Nichols have a wonderful book, The Death and Life of American Journalism: The Media Revolution that will begin the world again.  Itdiscusses broader solutions for protecting journalism and media, including special corporate constructions that might help an industry essential to basic democracy survive.  

 

Nonprofits

We also give preferred rate status to nonprofits.  Higher rates based on a value system rather than a volume system would be less harmful to nonprofits than periodicals.  Much nonprofit mail is solicitation, and much of it could be entered more efficiently.  Everyone has the experience of donating to one charity and then receiving repeated solicitations from multiple charities, most of which they never respond to or intend to respond to.  Appropriate rate increases would create an incentive for mailers to avoid this waste. 

Overall, it’s clear that we need a broad discussion of how we treat nonprofits in this country.  The proliferation of nonprofits, especially political nonprofits, raises questions about what this designation means, what types of organizations receive special treatment, and how that treatment is rendered.  

Nonprofits already receive considerable advantages under our tax codes.  Is it really necessary to give them reduced mail rates as well?  And if so, should that apply to all sorts of nonprofits or only those providing charitable services?  Should solicitations be treated differently than, say, newsletters?

 

Paying the costs

There may be good reasons to give nonprofits and periodicals a break on postage.  Once we’ve provided a solid and rational intellectual basis for extending privileged discounts, we should also make the commitment to pay for such discounts.  

For a small group of discounts, like Free Matter for the Blind, the Postal Service still receives a revenue forgone appropriation from the government, but this is relatively small, in the range of $100 million per year.  For the most part, however, the discounts for certain classes of mail are essentially paid for by other mailers.  This is accomplished by adjusting the level of institutional costs charged to a particular class of mail (all classes must cover their direct attributable costs). 

Because they are responsible for covering such a large portion of the Postal Service’s operating costs, the large mailers have come to believe that they basically own the postal system. In their view, since business mail accounts for 73% of postal revenues — most of it coming from the largest 1% of mailers — it’s the big mailers who should be calling the shots.

Their argument, however, ignores the fact that the current arrangement dates back basically to 1971 and wasn't fully operational until legislation addressed forgone revenue in the early 1990's.  They don’t acknowledge that the postal infrastructure has been developed over generations by public money and that much of the intellectual property, like zip codes and addressing systems, that support the system predate the current arrangements.  Beyond that, it is simple arrogance to claim title to a public institution whose entire reason for being is to serve a basic and necessary public purpose.

Some have argued that it would be horrible if the Postal Service received taxpayer subsidies.  For the mailing industry especially, this is a self-serving argument that furthers their contention that because they pay most of the revenues they own the Postal Service.  

Besides being wrong, that is simply bad public policy.  There’s a current philosophy espoused by many in this country that government shouldn’t pay for anything, but even in the reddest of states (in places like Freistatt, MO) people need and appreciate their local post offices.

It’s estimated that paying for some of the subsidies inherent in the current rate system would require a payment of between $800 million and $2 billion per year.  Had the government been paying the Postal Service for the last twenty years for some of the things subsidized in the rate system, even at that lower end, then it’s likely we wouldn’t be having a postal crisis.

 

The public interest

Whether or not the Postal Service moves towards an exigent rate case may not be of much consequence in the long run.  The more basic issue is that the postal rate system has serious problems.  It no longer serves the broad national interest and, as demonstrated by the recent service cutbacks and facility closures, it has not enabled the Postal Service to fulfill its universal service obligation.  

The postal rate system has become a nest of privileges.  The basic premise of the rate system is that each class of mail should pay its own way. That means that each class pays not only the costs directly attributable to its delivery but also a proportion of the overall institutional costs.  The PRC makes some very complex calculations in that regard, and there is no reason that those calculations are not consistent with their underlying assumptions.  

But all complex cost accounting systems rely on basic assumptions, and it is the validity of those assumptions that really determines the overall validity of the system. In the case of the postal rate system, it is time we re-examine the underlying assumptions of the rate system.

Currently single-piece First Class mail — the mail that individuals and mostly small businesses send — pays a larger part of institutional costs than other classes.  That means that individuals and small businesses may be paying rates higher than their fair share.  That situation is exacerbated by workshare discounts.

Over the years Standard mail has become more like First Class mail in many ways.  Many items that used to go First Class have been diverted to Standard.  With the current realignment of the mail processing network and the reductions in delivery standards, the handling of First Class and Standard letter mail is nearly identical.  At this point the only real difference between the two are forwarding and return privileges.

The Postal Service offers mailers several options in terms of updating address lists, and the technologies involved in forwarding mail have reduced the costs to the point where forwarding and even return is not especially expensive.  Under the circumstances it is certainly worthwhile to examine the price differences between First Class and Standard mail, particularly in letter size.

 

What we have built

The problems associated with periodicals and nonprofits cannot be papered over by the sort of legislation currently being proposed. They call for a much broader discussion.  As with many other elements of this issue it is time we examined our values and principles and made sure they are properly reflected in this essential piece of national infrastructure.

PAEA proposed to create a modern rate and classification system, but it did so on a faulty foundation. We need a broad and thoughtful discussion about why we have a postal network and what we expect of it.  Does it really exist to bind the nation together or is that simply empty language that sounds good in speeches and essays?  Do we want a system that is captured, essentially owned by advertising mail interests? If we do, is it appropriate for such a system to benefit from government monopoly protections?  If the mailers are to own the system, should they sink or swim on their own merits? And if that’s the system we agree on, how do we address the traditional public goods that have been provided by a government postal network?  

There are millions who still depend heavily on the mails for basic economic transactions, and that includes not only folks at the bottom of the economic spectrum but small businesses, the elderly, rural areas, and many in the middle class.  Do we cut all those folks loose and say, “You’re on your own — let the market provide”?

A healthy Postal Service needs a rate system that reflects the purposes and values we ascribe to that Postal Service.  The rate structure should recognize the diminishing difference between classes of mail.  It should have a solid intellectual and empirical basis.  It should apportion fixed institutional costs evenly across as broad a base as possible, provide a solid rationale when it extends preferences, and display a willingness to pay for functions that enhance a broader public purpose. 

We don’t have such a rate structure now, and we cannot resolve the current postal issues without addressing this most significant issue.

Over the past few years, we’ve watched thousands of towns fighting to save their local post office.  We’ve seen postal workers demonstrating on the street to protect their jobs and benefits.  We’ve heard from individuals, small businesses, newspapers, and many others about how much they depend on the postal system. 

It’s clear that the postal system represents much more than a means to deliver advertising.  The postal network is a fundamental and essential infrastructure that sustains our basic democratic values.

Just think of what we have built: A postal system that has a presence in virtually every community in the nation, that delivers mail to every home and address six days a week, that provides hundreds of thousands of workers with solid wages and good benefits, and that supports industries representing a large portion of our economy and employs 8 million additional workers, that sustains a mission of universal service and continues to bind our nation together.

Whether the current rate system sufficiently reflects the values we seek to embed in the postal network is a matter that desperately needs discussion.  It’s a question that has been dangerously absent from the debate about reform legislation.  The way our elected officials talk about the Postal Service resembles a doctor throwing medicines and procedures at a patient’s symptoms without trying to diagnose the underlying conditions, all while not having even a basic understanding of what a healthy patient might look like.


[Mr. Jamison is a retired postmaster and a regular contributor to Save the Post Office; his articles are archived here.  He can be reached at  Mij455@gmail.com.]
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