Postal Service Must Cut Costs, Not Just Raise Stamp Prices

Op Ed Published in the Chicago Sun Times

It’s been only four months since the cost of a stamp increased from 37 to 39 cents – and the Postal Service already has plans to raise prices even higher. Postmaster General John Potter just announced that the agency could file its next rate case as early as this month. And that won’t be the end of it. Mr. Potter said USPS plans to move to small annual rate increases starting in 2009.

But are these price increases necessary? Is postal management truly using raising prices as a last resort, or can anything be done to slow or reverse this trend toward steadily increasing prices? I believe so.

The Postal Service’s quarterly financial reports over the last three years show a consistent storyline: A steady decline in the volume of First Class Mail, accompanied by a steady increase in productivity. Much credit is due to Mr. Potter for improving Total Factor Productivity – a measure of output per unit of input – thus reducing USPS costs.

Now, though, there is a new twist to this story. While First Class Mail volume has continued to fall, the growth we have seen in postal productivity has come to a halt and even reversed.

Productivity gains had already been shrinking quarter-by-quarter for the last few years. Now, for the first quarter of 2006, productivity fell by 0.6 percent over the first quarter of 2005.

In the past, the cost pressure put on the USPS by the fall in First Class Mail volume was offset in part by the cushion of growing productivity. (A growing volume of Standard Mail also lessened the impact.) With productivity increases at the USPS more difficult to achieve, and First Class Mail volume still falling, the Postal Service will now face additional pressure to control costs.

So the question is, what can USPS management do to reduce costs and resolve this bottleneck to future productivity growth?

Because current postal labor contracts bar the postal management from laying off employees, it has managed to shrink the workforce by encouraging voluntary retirement and not replacing departing workers. With that tactic already maximized, future productivity increases may be much harder to achieve.

Unless the Postal Service finds a way to reduce labor costs, further price increases will be inevitable. In all probability, these rate hikes will eventually substantially outpace inflation.

Such increases will, in turn, hasten the decline in First Class Mail volume – traditionally the most lucrative segment of the postal market. To prevent this downhill spiral from accelerating, Postal Service leaders must lay out alternatives that could ensure a stable financial future.

One obvious strategy is to try to achieve – either by settlement with labor unions or through arbitration – a reduction in the rate of wage increases and a removal of no-layoff provisions. The ability to eliminate some jobs would allow postal managers to take full advantage of productivity-boosting technology.

Another option would be to implement a regional wage system that takes cost-of-living differences into account when determining postal pay. This strategy, standard practice at private companies and many government agencies, holds the possibility of enormous savings for the USPS.

Finally, the USPS ought to look upon increasing oversight of its operations as an opportunity. Postal Service leaders recently withdrew their support for Congressional postal reform efforts largely because the reformers would have created a stronger, independent oversight authority. Enhanced financial oversight, though, could help the USPS with the all-important task of cost control.

To be sure, the Postal Service has taken an important savings measure recently. By redesigning its distribution network, it plans to eliminate as many as 250 mail processing centers, consolidating their operations into fewer, larger facilities. At least 10 consolidations are expected to take place by June of this year.

Yet while this kind of streamlining is important, the Postal Service is still not taking advantage of its best current options. The USPS should view its ongoing labor negotiations as a chance to make a strong case for cost reduction.

In the 1980s, the Postal Service missed a major opportunity, failing to increase productivity even as mail volume was growing rapidly. It would be a shame – and an expensive mistake – to miss a critical opportunity again.

Despite its monopoly on letter delivery, Postal Service management should not – and cannot – look to solve its financial difficulties simply by increasing the price of stamps every year. It needs to start controlling its costs more aggressively.

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