The path to postal nirvana: An entitlement program for the mail industry

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BY MARK JAMISON

The postal monopolies have been the subject of much discussion recently.  In last month’s Senate hearings, Senator Tom Coburn of Oklahoma offered his view that the monopolies weren’t worth much anymore so the Postal Service doesn’t need much regulatory control.  In the same hearing, Ruth Goldway, Chairman of the PRC, expressed concern that eliminating or modifying the price cap regimen for setting rates would be a serious concern in view of the Postal Service’s continued monopoly position with respect to market dominant products.  In her confirmation hearing for reappointment as a PRC Commissioner, Nanci Langley added her concerns about the ability of the Postal Service to abuse its monopoly powers.

The media has been full of comments and press releases from various mailers groups and lobbying organizations regarding the exigent price increase requested by the Postal Service.  Most of these groups express dismay at the thought of a price increase but also at the idea that the Postal Service would abuse its market dominant position if allowed to raise rates outside of the CPI price cap.

 

The road to perdition

One of the loudest voices has been that of Gene Del Polito, president of the lobbying group PostCom.  In a recent commentary, Mr. Del Polito takes Senator Coburn to task for his remarks about the postal monopoly and then goes on to chide every member of Congress who deviates from the Gospel According to Gene.

“One could say there are two roads to postal reform,” writes Mr. Del Polito.  “One is a narrow and winding; the other is a road that’s broad, well-paved, and straight. One leads to postal nirvana; the other to postal perdition.”

Mr. Del Polito’s idea of postal nirvana is one in which rates are kept low for the benefit of mailers — at the expense of infrastructure, postal workers, communities, and consumers.  Giving the Postal Service the authority to set prices without outside regulation, on the other hand, would take us down the road to perdition and expose us to all the evils associated with an unregulated monopoly.

Mr. Del Polito tends to get abrasive in his criticisms of those who disagree with him, using terms like “knotheads” and “socialists” to describe people (like me) who view the postal network as a piece of national infrastructure that must be protected for the sake of the many rather than the few.  Ironically it’s Mr. Del Polito’s sense of entitlement — his view that a few large mailers should be provided with artificially low rates and unnecessary discounts — that smacks of what economist Joseph E. Stiglitz describes as “America’s socialism for the rich.”

Mr. Del Polito’s PostCom commentary goes on to discuss the two postal monopolies, the letter monopoly and the mailbox monopoly.  He leaves out a lot, gets a great deal wrong, and is misleading and disingenuous about the subject generally.  For example, he omits the most important aspect of those monopolies – they come with the tremendous responsibility of universal service.  As I discussed in this post back in August 2012, the Postal Service may benefit from these two monopolies, but it is in exchange for providing universal service.

 

The letter monopoly

The letter monopoly requires that private delivery companies that want to handle mail of a First Class nature weighing less than twelve and one half ounces must charge a rate at least six times higher than the current USPS First Class postal rate.   This letter monopoly does not eliminate all competition.  Both UPS and FedEx have carved out very profitable businesses in the expedited mail market.  Yet it is this monopoly that Senator Coburn claims is no longer particularly necessary, at least in terms of providing regulatory control of postal pricing.

During their recent appearances before the Senate committee that oversees the Postal Service, both Chairman Goldway and Commissioner Langley pushed back at Coburn’s view.  I don’t often find myself in agreement with Senator Coburn on postal matters, but in this case his point is well taken, at least with respect to the price cap.

Ms. Goldway and Ms. Langley argue that regulation and constraint in terms of pricing are necessary to prevent the Postal Service from abusing its monopoly power.  I would suggest that the restraint the commissioners seek is to be found in the requirements for universal service.

The postal rate system has become a morass of embedded privilege. It has been cobbled together over decades using competing and often inconsistent visions of what the Postal Service should be.  Is the Postal Service a business that has acquired monopoly control over segments of the market through its pricing power?  Or is it infrastructure that has been developed to fill a necessary function that the market would otherwise fill incompletely?

If it’s just a business, then constraining the monopoly through the price cap would be a reasonable approach. The reality, though, is that the postal network is not simply a business.  It is more characteristic of infrastructure, and therefore the monopoly acts as a protective shield to ensure that the responsibility of universal service is met.

The First Class letter monopoly is largely meaningless at this point.  We see First Class mail declining due to the effects of the recession, but there are also long-term structural declines, as large numbers of people move towards electronic alternatives for receiving and paying bills.  The problem is that the mail system has been built on the back of First Class mail.  It provides the greatest institutional support and the largest profit margins — this in spite of the fact that the contributions of First Class mail have been undermined by workshare discounts that serve little productive purpose.

First Class mail will remain a relevant and necessary form of communication for the foreseeable future.  Tens of millions of people still rely on it to pay bills and transact business.  Still, First Class mail, even supported by the monopoly, is challenged by various alternatives that are an effective brake on pricing abuse by the Postal Service.

If the regulators should be concerned about anything related to First Class mail pricing it is that the Postal Service might overprice this segment not to maximize revenues but to undermine the relevance of First Class mail as a way of neutering universal service requirements.

First Class mail is the primary product in the market dominant category, the group of products that are thought to benefit from postal monopolies, but the other products like standard mail, catalogs, and periodicals are not covered by the letter monopoly.  Those products could, and in some cases are, delivered by carriers other than the Postal Service. In the rural area in which I live, phone books are regularly distributed outside the mailstream.  I receive my morning newspaper in a receptacle that sits on the same post as my mailbox.  A relative who lives in Atlanta regularly receives advertising mail in a plastic bag that is tossed onto the driveway by private carriers.

 

The mailbox monopoly

In addition to the letter monopoly, the Postal Service enjoys a mailbox monopoly.  The Postal Service claims sole privilege to the mailbox.  Individuals and businesses who want to receive mail must provide a mail receptacle, but this receptacle can be accessed only by USPS personnel.  While it may seem like you should be able to receive whatever you want in a mailbox you’ve bought and erected at your own curb, the Supreme Court has upheld the validity of this arrangement.

A George Mason University study has indicated that the mailbox monopoly holds very little actual cash value — approximately $160 million per year, which is miniscule in the context of the Postal Service’s annual budget of $65 billion. The greatest beneficiary of the mailbox monopoly is the delivery customer, who has a sense of security and safety in knowing that access to the mailbox is limited.

Nothing in the law prevents private carriers or other businesses from building an alternate delivery infrastructure. Newspapers and carriers in urban areas already have implemented alternate delivery infrastructure.  Amazon has experimented with creating a system of delivery lockers, an initiative that has met with mixed success.

Those who offer the mailbox monopoly as an example of the Postal Service’s unfair advantage are arguing that the Postal Service should be penalized for successfully meeting its mission of creating a universal service network that has the capability of going to virtually every address — residential, business, and commercial — in the United States, six days a week.  The infrastructure that supports the postal network has been built over generations.  It can’t be easily duplicated, which seems to be the complaint of folks like Del Polito and others in the mailing industry, but the truly salient point is that no profit-oriented entity would want to duplicate the postal delivery network as long as it was also required to meet the universal service obligation.

Certainly private providers could cherry pick profitable markets or routes, but that’s the antithesis of creating a broad based infrastructure. There’s no question that markets offer the best method of engaging the incentives that Schumpeter characterized as creative destruction.  Entrepreneurs find niches and possibilities for profit and wisely and appropriately take advantage of those opportunities. What often gets forgotten is that for entrepreneurs to profit, for markets to work, we need strong public infrastructures that feature universal and open access.

 

The postal system as public infrastructure

The postal market gives a perfect example of what might happen if we abandoned the concept of public infrastructure. Today there are essentially three entities in the national package delivery market. Two of the entities are private sector firms, UPS and FedEx, which utilize the postal network for much of their own last mile delivery.  Absent a public infrastructure like the Postal Service network, it’s likely that both of these private sector firms would either refuse to serve many areas of the country or they would use their powers as an oligopoly to control prices. In this instance the Postal Service actually thwarts negative, rent-seeking monopoly behavior.

Dead Tree Edition, one of the most thoughtful voices in the mailing industry, recently offered a post entitled “Nine Ways the Postal Service Is Not Like a Real Business.”  The piece offers the usual examples of why the Postal Service is not like a real business: The USPS Board of Governors is not accountable to stockholders in the way a private companies board is; prefunding retiree health care and retirement funding in general are unlike normal private sector business practices; and so on.

The Dead Tree piece also scoffs at the postal monopoly as a government monopoly because in the real world monopolies make money.  But the Postal Service is not a business trying to maximize profits.  It is public infrastructure, and much of the distress it is currently experiencing results from a failure to recognize its most basic characteristics.

 

Under observation

The proposed exigent rate increase has the mailing industry up in arms.  There are no shortage of op-eds and commentaries like Mr. Del Polito’s, claiming privilege and entitlement for businesses that rely on the postal network.  As one might expect, there’s a great deal of self-interest on display.

Despite the fact that postal workers and rural communities have borne the brunt of workforce and service cuts, the industry would prefer more cutbacks to higher rates.  Over 200,000 jobs have been lost and the workers’ benefit are now under attack, but the industry says that postal employees are simply necessary casualties.

Our rates for advertising mail remain the lowest in the world, but the industry argues that nothing justifies a rate hike.  Even though numerous, highly credible studies show that prices on mail are largely inelastic, the industry claims that a rate hike will send the Postal Service will into a death spiral.  Meddle with rates, says the industry, and doom is around the corner.

Listening to the mail industry gives you the impression that the big mailers are in a life-and-death struggle for survival.   Actually, they are doing fine, and even with a rate increase they will continue to enjoy being the primary beneficiaries of the nation’s postal infrastructure.

The mailers are not under attack; they’re just under a little observation.  As that knothead socialist Bertolt Brecht once wrote, “There are many who pretend that cannon are aimed at them when in reality they are the target of opera glasses.”


[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.]

(Image credit: John Sherffius)

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