The Postal Service’s Business Strategy: Spend Savings Now, Raise Rates Later

Issue Brief

When is a penny saved not a penny earned? When the penny isn’t really saved at all, but rather “reinvested in other areas.” And so it goes with the U.S. Postal Service’s recently-announced reductions in labor hours.

The Service’s FY 2003 performance plan indicates new reductions of 30 million labor hours. This would ostensibly produce an increase in labor productivity of 1.9 percent, certainly a step in the right direction.

However, upon closer examination, total system productivity, (technically speaking, “total factor productivity”), is projected to increase by only 0.7 percent. Thus, over one-half of the anticipated savings from work hour reductions in FY 2003 are to be “reinvested” in other areas, rather than truly saved.

The bottom line result is that net income for FY 2003 is expected to be only $600 million, even despite the extra revenue from higher postage rates implemented June 30, 2002. Were the work hour savings not simply reallocated, net income would be expected to be well over $1 billion for FY 2003 and the next postage rate increase delayed longer.

With mail volume continuing to decline across the board following the frequent postage rate increases of the past few years, and a continued weak economy, the Postal Service can ill afford another postage increase in the near future. However, the USPS’s recently-revealed FY 2003 performance plan increases the likelihood that another postage increase may be forthcoming sooner, rather than later.

In fiscal years 2000 and 2001 both labor productivity and total factor productivity increased substantially, with cumulative work-hour reductions expected to be 111 million hours through FY 2002. While these reductions and cuts in non-labor costs were not enough to avert the Service’s growing deficits, they were a good sign.

With its simultaneous announcement that the USPS intends to file for its first negotiated service agreement, it would appear the business strategy is to attempt to grow mail volume — and presumably revenue — to compensate for the loss of these “reinvested” savings. But this strategy has not produced beneficial results in the past. With its newly-appointed, business-oriented members, the Postal Board of Governors should review its business strategy carefully. A return to financial health, and less frequent postage increases, can only be achieved if reductions in the workforce create true savings passed through to the Postal Service’s bottom line.

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