Wednesday, March 06, 2013

Benny Explains – Post Office Edition

The post office “posted” a $16B loss in 2012 and everyone with a podium is talking about how to fix it.  Obviously, one of the main reasons the USPS is losing money now is because volumes are dropping. Email has replaced letter writing and online bill pay continues to crush the check writing industry. 
 
The obvious solution to falling revenue is cutting costs.  This requires cutting delivery hours, busting unions, cutting benefits. In fact, these are not solutions to the “problem” but instead solutions to the symptoms. I put “problem” in quotes because unless you want to change the entire nature of what the post office actually does, there may not be a problem at all. 

To help “solve” the problem, the post office decided to cut Saturday service, which will save it some money, but that won’t fix the fundamental problems facing the post office.  Of course, today, “cost conscious small government republicans” passed a bill to keep Saturday service (but that’s another article on how they’d rather bust unions than actually cut costs).  Cutting Saturday service, cutting benefits, gutting unions, are all just attempts to treat the the symptoms of unprofitability, and they do not address the actual cause of the problems (or perhaps there are no problems).

Unions, Overpaid Employees, Out of Control Benefits are Not The Problem:
Fact: The USPS has had “high benefit” union employees for years, and yet it enjoyed a profit as recently as 2006. Technically, the post office was supposed to run at cost, not make a profit, and set prices in order to achieve that profitless goal.




Fact: The USPS would have been profitable every year until 2009, if not for a change in law in 2006 (before Dems took over), which required the USPS to prefund 75 years of pension benefits over a 10 year period. (Basically, the USPS has to put $ into a fund that will cover every current employees full pension - including 22 year olds - instead of putting that $ in over time). No other government agency was put under this onerous mandate to “overfund” billions of dollars a year. This law was designed for one specific reason. . . . It would turn a profitable organization with a large powerful union into a loss center, creating the political will to bust that union.  In hindsight, the USPS became unprofitable anyway, but this bill exaserbated the issue.
Fact:  While you may have heard that the USPS is bloated and has way too many employees, since 2000, the employee count has dropped from 900,000 to 600,000.  That is substantial.



Fact: The United Parcel Service (UPS), the USPS’s largest "competitor," has 400,000 employees of which 250,000 are unionized employees. This company generated $5B of cash flow last year and it is worth $80B. (You will understand later why I put "competitor" in quotes)

However, If we exclude the impact of the pension accounting change, and the fact that employee costs have been cut substantially, the USPS was still unprofitable in 2012. Why?

The actual problems at the USPS are due to its very nature as a government entity, which gives it monopoly power over your mailbox and subsequently government regulation of that monopoly. It has nothing to do with overpaid employees, pensions, or unions. 

Basically, there are 3 structural reasons (which have nothing to do with employees) that explain why the post office is not profitable. They are easily fixable … as long as you change the definition of what the post office is and does.

First: The post office doesn’t set its prices. The price of sending a letter or package is set by the Postal RegulatoryCommission, which is an independent establishment of the executive branch.  It actually has to accept or reject (which it does sometimes) any rate increase request from the USPS. Thus, as a consequence of the “monopoly” the USPS is given over our mailboxes, it can’t set its own prices. Sending a letter in this country is so absurdly cheap. Think about it, you can send a letter from NY to Hawaii for 46c and it will get there in 3 days. If you tried to send that letter via FedEx, it would cost you $46 or 100x more (UPS is $39)! Any for profit entity would use dynamic pricing, charging more for distance, and location.  A for profit company with mailbox access would likely charge something like, $1 for a letter in the same city, $2 in the same state, $4 to another city within 200 miles, $10 to a rural area within 200 miles and $20 for everywhere else.  Bang, profits…But if you want 46c letters to anywhere in the country, then you’ve got to be ok with huge (Subsidized? Socialized?) losses at the post office.

Second: The post office must deliver to every mailbox every day. Do you know how absurd that is? Half of the USPS routes are unprofitable, yet by law the USPS must deliver mail. In a city, one mailperson delivers to 10,000 mailboxes. In a small rural area, that drops to about 200. Assuming 2 pieces of mail a day (USPS delivered 68 trillion 1st class letters in 2012 = ~2 per day per household assuming 100M US households), those rural routes generate only $62,000 in revenue, barely enough to cover 1 salary let alone any transportation and overhead costs. Similar to how city customers subsidize telephone access for rural customers through USF fees (Universal Service Fund) on your phone bill, profitable city postal customers are subsidizing rural cost centers.  Any for-profit company would just cut every unprofitable rural route and easily make $$$…. But if you don’t want half of the country to be cut off from the “daily deliver to your own personal mailbox” system, then you’ve got to be ok with huge losses at the post office.

Third: The post office is legally not allowed to compete with for profit companies. The post office is a government monopoly which gives it sole access to your mailbox. As a regulated monopoly, it is not legally allowed to compete. FedEx and UPS were born from this restriction. They figured out which part of USPS services were the most profitable (shipments) and stole that business. When FedEx created overnight delivery, the USPS couldn’t respond with their own offer and just lost business. "Competitors" can see if something the USPS does works well, and poach it while the USPS is not allowed to do the same.  If the USPS was allowed to actually compete with FedEx and UPS, of course it would be profitable. It would offer overnight rates, and cushioned envelopes, and worldwide 3 day delivery. FedEx and UPS both have unionized employees as well, and FedEx is worth $34B while UPS is worth $80B. But if you want to give the USPS its monopoly power, unregulated, then FedEx and UPS will be less profitable, will lay off employees, and smaller delivery services may go out of business. 

The next time someone screams “unions!” “pensions!” “overpaid employees!” just tell them  that with a few simple changes, the US Postal Service would be very profitable.  However, if they want 46c mail to be delivered to every house in the US every day by a company that legally isn’t allowed to compete, then yes, that company is going to have to be subsidized by the government. Ask them which of the three structural flaws they’d like to get rid of. 

3 comments:

Jeff C. said...

Nice analysis - a bit off-topic but what do you think about USPS paying Lance Armstrong (or anyone for that matter) to be a spokesman and how do you feel about them trying to get that money back?

Meistro said...

Jeff: I have no problem with the USPS marketing through Lance Armstrong or anyone else for that matter.

I don't know who was harmed by Lance taking drugs. The USPS got great exposure and publicity, exactly what they paid for. Lance got his $. The Tour De France made a HUGE amount of $ because lance was so famous and popular. Even though he was a cheat, you can not argue the USPS was harmed by that cheating and thus there is no way they deserve the money back!

Jeff said...

http://www.cnn.com/2013/04/23/justice/justice-case-armstrong/index.html - anchored at 100MM, shooting for something lower, no doubt...