December 11, 2018

The report of the Task Force on the U.S. Postal System is available here.  We reported our negative reaction last week, and today we elaborate on our concerns.

1. Potential for piecemeal implementation- There is real danger that some ideas in the report will be implemented piecemeal while others are not. This is especially true when it comes to administrative versus legislative changes.  The odds of administrative changes being implemented by the Postal Regulatory Commission or the USPS Board of Governors are much higher than meaningful improvements being passed in legislation.  To its credit, the writers do recognize the dangers of partial implementation: “The Task Force believes that all components of the USPS’s business model must be reevaluated and redefined in order to produce a new and viable business model. Updating some components but not others, or updating different components in isolation of others, will not result in a coherent, sustainable strategy.”  But what will prevent well-meaning, if perhaps misguided, administrators from trying to implement their pieces?

2. Pricing always seems easier than cost control- The Task Force really bought into the USPS refrain that it needs “pricing freedom” to price according to market demand. It recommended getting rid of the price cap that is the only thing protecting captive mailers from price gouging: “The USPS should have the authority to charge market-based prices for both mail and package items that are not deemed ‘essential services.’  This will allow the USPS to optimize its income in order to fund its operations, capital expenditures, and long-term liabilities.”  The USPS and the Postal Regulatory Commission stand ready with a hair trigger to implement this recommendation, even though neither has any demonstrated ability to price to market demand.  Further, the marketplace stands ready to assert its legal right to the price cap based on the requirement in law: “The system for regulating rates and classes for market-dominant products shall include an annual limitation on the percentage changes in rates to be set by the Postal Regulatory Commission that will be equal to the change in the Consumer Price Index.”

3. Cost control recommendations not likely to happen- Without the discipline of the price cap, and with the retention of the mail monopoly, it is very unlikely cost control will happen to the degree needed. The starkest example of a non-starter is the recommendation that collective bargaining be ended and “the USPS more closely align wages for both its career and non-career workers with those of other federal employees, drawing from like examples in the broader labor market.”  Other recommendations rely on USPS leadership to take action that it has not demonstrated the will to do: “The USPS must pursue new cost-cutting strategies that will enable it to meet the changing realities of its business model. These should include evaluating modifications to delivery processing standards, and the expanded use of private sector partners in areas such as processing and sortation.”

4. Allowing government officials to decide which mail is “essential” based on content is unworkable- A cornerstone of the Task Force recommendations is that mail and packages would be divided into these two groups and mail that is deemed not essential would heavily subsidize the other mail with large price increases. Who would make the determination between the haves and have-nots, winners and losers?  Do the Governors want and have the ability to make the determination?  Congress?  The courts?  And how will the USPS check on the content of mail to determine its essentiality?  Attempts to discriminate based on mail content have almost always been very difficult and controversial.  Regulations on much less value-laden criteria such as personalization and merchandise or goods included in Marketing Mail have been very difficult to implement.  And what about legal precedent that the United States Postal Service is not to discriminate against different types of mailers?  The list goes on and on.

5. The Task Force bought into a doomsday scenario, yet presented data telling a more positive story- For example, the report confidently states: “…the decline in mail volume will exceed any potentially offsetting increases in package volume for the foreseeable future.” Yet the same report presents data in Table 2 on page 19 that shows only slightly declining total volume, slightly growing total revenue, and positive operating income for the last six years.  The only thing that drags the operating results into the red is the retiree health benefit charges.  And the Task Force understands what every other stakeholder does, that the RHB charge is vastly overstated: “…the Task Force believes that the obligation, including the $43 billion in pre-funding payments that the USPS failed to pay into the PSRHBF and the unfunded actuarial liability, must be restructured with the payments reamortized with a new actuarial calculation based on the population of employees at or near retirement age.”  We believe that there is a real risk in exaggerating the degree of the problem which leads to unattainable goals, rather than seeking a more doable incremental approach.

6. The Task Force mixes up who is the customer- Merriam-Webster presents a widely accepted definition of a customer: “one that purchases a commodity or service.” Yet the task force report kind of misses the point when it focuses on the recipients of mail rather than those who purchase the service: “Households are by far the biggest user of the USPS – approximately 83 percent of USPS volume (mail and packages) is sent either to or from households.”  Yet it is well known that the vast majority of mail and packages is paid for by businesses and organizations rather than households.  Some have estimated 90 percent of USPS revenue comes from non-households.  The Task Force focus on households leads directly to its new business model proposal, that mail and packages deemed by the government as “essential” to the households that receive it would be subsidized by the other mailers and shippers.  [The specific example given is prescription drugs mailed to homes.] It is unclear how much the point of view of the rate-paying customers would be taken into account in the determination of essentiality.  In reality, the USPS business model has evolved without much administrative or legislative action by the government.  Businesses and organizations now largely fund the national infrastructure that benefits all Americans. Throwing a preponderance of the funders under the bus is not the best way forward, or a solution.

7. The proposal sounds like centralized government planning- The Task Force proposes to introduce a centralized planning model or a new “system subsidy model.” The report acknowledges that a subsidy model always implicit in our postal system “…is used to defray the higher costs of service to sparsely populated areas through revenues generated from more densely populated areas that have lower costs for service.”  But the Task Force sees the need for a new model because: “as mail volume has declined, the revenue from densely populated areas has become insufficient to offset the delivery costs in sparsely populated areas, leading to the USPS’s financial instability.”  The new model is described as a “competitive strategy” but sounds more like centralized government planning: “The competitive strategy – that of generating more revenue from commercial mail and packages in order to defray the cost of delivering socially important mail and packages that provide essential services – introduces a second form of internal subsidy that may be more important to the USPS’s future business model. Many of the Task Force’s proposed reforms to pricing, costing, and services are designed to create such a transfer of value from commercially oriented products to socially oriented essential services. To achieve financial stability, the USPS will need to maximize this new form of value transfer.” [Emphasis added.] (We express this concern even though we are sure that 9 out of 10 central planners would deem nonprofit mail to be essential.)

8. The report contradicts itself on the postal monopoly- In some sections the report says that the legal monopoly on mail delivery and access to mailboxes are diminishing in value and almost not worth the paper they are written on. Yet in another section it says that the mailbox monopoly is very valuable and should be “monetized” by selling access to private sector companies.  It reminds us of the internal contradiction when postal management says it no longer has a monopoly in fact because of alternatives to hard-copy mail, yet whenever ending the monopoly is raised, USPS fights like heck to keep it.

9. The Task Force says that lost mail volume is central to the USPS financial problems, yet proposes pricing increases that will drive away massive volumes- In fact, volume has stabilized in the 150 billion range during most of the era of the CPI price cap, post-recession. The report advocates jettisoning the CPI price cap and eliminating all postal categories of mail that their data show do not cover attributable cost.  The Task Force seems to make the dual mistake others have made.  First, it buys into historical USPS “elasticity” data that purports to predict how mailers will react in the future to price increases.  The history of the last decade has been low, somewhat predictable price increases due to the cap and historically low inflation.   Calculations based on that history would not be predictive of major price increases above inflation.   Second, the report seems to assume that much of the mail that remains must be stuck here and can be harvested with large price increases to fund “essential” mail.  The fact is that much remaining mail is very price sensitive and will be gone with above-inflation increases.  The negative outlooks repeated every quarter by USPS executives, and the doomsday outlook repeated in the Task Force report, lead many mailers to closely reexamine their longer-term commitment to mail.  Large price increases will seal the deal for many USPS customers.

10. The Task Force reports tries to do too much- It brings in many, maybe most, of the potential “solutions” that have been discussed in recent years. It mixes very high-level, general concepts (create a new business model) with very specific, low-value ideas (sell fishing and hunting licenses).  And the report brings in some new ideas that are overly theoretical and not very practical (transfer value from non-essential mail/packages to autocratically-defined “essential” mail/packages).  By buying into a doomsday outlook for the USPS, the Task Force tries to do too much, which often means nothing gets done.  A measured, incremental approach, starting with the bugaboo everyone seems to agree on, post-retirement health benefits funding, has a much better chance of succeeding.  Postal strategy must be built upon an optimistic outlook and doing everything possible to retain and grow mail and package volume.