Postal Reform Should Start Now By Capturing Forgone Productivity Gains

Issue Brief

With a reported loss of $1.7 billion for fiscal year 2001, and an expected loss of $2 billion or more during FY2002 announced before the events following September 11, postal management is now seeking a taxpayer bailout of $5 billion or more. However, a superior alternative is available, made possible by the multi-billions of dollars of capital deployed by the Postal Service since 1985. The Postal Service has increased its capital by 90 percent since 1985, with a massive deployment of high speed, optic character-reading mailsorting equipment. This investment has proven very successful in terms of reducing the cost per piece of mail sorted.

However, the postal workforce the equipment was designed to replace, mainly postal clerks, has continued to grow as postal workload has grown, as the accompanying chart demonstrates. In other words, the displaced workforce was simply absorbed by other postal functions rather than taken off the rolls. Thus the savings from this capital investment were lost. The failure to capture productivity from this massive capital investment is due in no small part to distortions caused by the Service’s widely criticized incentive payment system. As has been reported by this author, this incentive system offered no reward for increased productivity until FY 2001. Postal reform should start now with a mandate to formulate an effective plan to capture these foregone productivity gains.

The magnitude of the potential savings made possible by the massive investment in automated mail sorting equipment can be illustrated. For example, if productivity had increased by a modest 1.0-1.5 percent annually since 1985, postal costs would be about $13 billion less, and the price of a first-class stamp would be only 28 cents today rather than 34 cents. The savings for the mailing community would be similarly billions of dollars.

— Charles Guy, Ph.D., is Adjunct Fellow with the Lexington Institute and former Director, Office of Economics, Strategic Planning, U.S. Postal Service.