Renewed Mail Volume Growth No Panacea For Postal Service’s Financial Woes

Issue Brief

The Postal Service claims that its legislated business model is outdated and must be transformed. It blames its current financial crisis on what it sees as the decaying state of first-class letter mail. This mail, it argues, is its “cash cow” that funds its provision of universal service to the nation. Without a new business model that gives it more pricing flexibility, the Service says, the future of universal service is at risk.

Total first-class letter mail has, in fact, grown at a meager rate of only 1.1 percent on average in the last few years, and single piece letters — over 50 percent of total letters — have actually declined 1.3 percent on average. According to postal management, this slowdown in volume growth has a number of causes, including the recent economic slowdown, shifts in the economy to industries that use less mail, and electronic bill-paying. However, recent research indicates electronic bill-paying has not grown nearly as fast as predicted and that the typical electronic service is no faster than the mails and, in fact, is often ultimately paid by paper check.

Negotiated service agreements that offer discounts to large mailers are a favorite aggressive pricing tactic. But if the Postal Service were granted the new pricing flexibility it seeks, could aggressive pricing mitigate the Service’s financial problems and restore mail volume growth?

In fact, the Postal Service already conducted such an experiment in the mid-1990s. By offering discounts to mailers to make their mail compatible with automated mail sorting equipment, in addition to discounts for presorting the mail, it 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 per year, Postal Service management was able to achieve a productivity increase of only 4 percent for the entire decade. Mail volume growth alone will not resolve the Postal Service’s financial problems unless this growth is used to create productivity growth. A change in management focus and a commitment to reduce the labor force consistent with an outlook for slower mail volume growth will be absolutely necessary to any hopes the Postal Service has of restoring its financial viability.

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