Increased Productivity Key to Postal Service’s Success

Op Ed

When your ship’s taking on water, that’s not the time to scrub the deck. But with the Postal Service facing chronic billion-dollar losses, the “solutions” being tossed about by USPS management and others would ignore its most serious problems.

Indications are that the substantial postage rate increase implemented June 30th will likely fall far short of resolving the Service’s financial difficulties. Confronted with mounting deficits, it has even taken some steps to cut expenditures. But the Postal Service’s latest quarterly figures indicate that these stopgap measures are still a long way from a return to smooth sailing.

Postal management suggests that the Service’s financial woes are due to competition from alternative, electronic media, and from rigid pricing rules that prohibit it from competing effectively. They seek to free the Postal Service of these pricing rigidities entirely for what they deem to be “competitive” products. This new pricing flexibility, they say, coupled with enhanced freedoms for introducing new products, would produce sufficient profit opportunities to encourage managers to create a more efficient Postal Service.

However, if the Postal Service retains the monopoly it presently enjoys over letter mail — with freedom to raise prices (within the limit of CPI inflation) each year — this access to new revenue would seriously reduce the motivation to improve efficiency.

The USPS’s financial problems are a consequence of its failure to improve productivity by reducing the size and cost of its labor force, which constitutes 80 percent of its total operating expenses. Any successful reform must begin by addressing the cost problem directly.

The Postal Service already has sufficient pricing freedom to grow mail volume: in the 1990s it offered discounts to mailers to make their mail compatible with automated mail sorting equipment, as well as discounts for presorting the mail. The experiment succeeded in stimulating mail growth. Presorted first-class letters qualifying for the extra automation discounts have grown 6.3 percent per year since 1997 and increased from 35 to 43 percent of total first-class letters. But be careful what you wish for: contrary to the presumed result for pricing flexibility, Postal Service management has cited the reduced revenues from these discounted mails as a significant cause for their looming deficits.

Even in the “Golden Age” of first-class mail growth during the 1980s, when First-Class Mail grew in excess of 4 percent annually, Postal Service management was able to achieve a productivity increase of only 4 percent for the entire decade.

Expanded pricing freedoms would likely result in more discounts for mailers — but without seeing actual cost savings ever materialize — and only worsen the Service’s financial condition. Combined with the increased debt ceiling the Service also seeks, the potential for disaster becomes serious.

Increased mail volume alone will not rescue the Postal Service, unless it is accompanied by increased productivity. A commitment to reduce the labor force consistent for slower mail volume growth will be vital to any hopes of returning the Postal Service to financial health.

The U.S. Postal Service admits it is in need of dramatic transformation. But ultimately, the solution to the Service’s woes is unlikely to occur without competition. Other countries, especially the United Kingdom, have either removed the letter mail monopoly completely or scheduled the introduction of competition for letter mail. While these experiments are evolving and the results not fully known, this could be a valuable model for transforming the USPS.

Lexington Institute Adjunct Fellow Charles Guy, Ph.D. is the former Director, Office of Economics, Strategic Planning, U.S. Postal Service. Don Soifer is Executive Vice President of the Lexington Institute.

— Lexington Institute Adjunct Fellow Charles Guy, Ph.D. is the former Director, Office of Economics, Strategic Planning, U.S. Postal Service. Don Soifer is Executive Vice President of the Lexington Institute.