It’s past time to free the U.S. Mail (from the taxpayers): Privatize it

William F. Shughart II's picture

The U.S. Postal Service is deeply in the red. Projecting a deficit of $238 billion over the next decade, its governors propose two solutions: halting Saturday delivery and raising stamp prices by 3 percent this year and 10 percent next.

According to the Postal Rate Commission, the savings from operating only five days a week and the extra revenue anticipated from a rate hike will, at long last, allow the USPS to achieve financial stability and stop the hemorrhaging of taxpayer funds.

But raising the price of first-class stamps once again and restricting mail service to weekdays will only accelerate the trend away from the USPS’s failed business model.

Why? Well, for starters, first-class mail is steadily being displaced by email as individuals and businesses shift their communications to the Internet.

Consequently, the service provided by the USPS is progressively being limited to so-called standard mail, such as magazines, newspapers, catalogs, and commercial flyers. Delivery of such “bulk mail” is much less profitable, on average, than letter mail.

Meanwhile, the USPS’s first-class monopoly has also lost ground to UPS, FedEx and other for-profit, private-sector companies.

Another important contributor to the USPS’s financial problems are the future liabilities it has taken on in the form of the generous pensions promised to postal service retirees. But contingent pension costs affect the balance sheets of private enterprises as well.

Primarily, though, the USPS routinely loses money because it is a publicly owned enterprise, rather than a privately owned one with stockholders who pay attention to the bottom line. It therefore has only weak incentives to control costs and to serve its customers well.

Higher rates and fewer delivery days will only serve to exacerbate these issues, but a solution is certainly available: privatize the pickup and delivery of first-class U.S. mail. Such a regime change has been quite successful in Germany and has been recommended for Canada.

In a November 2009 study published by Canada’s Frontier Centre for Public Policy analyzing the effects of liberalizing Deutsche Post, which got underway in 2000, author Adrian Vannahme found that postal rates fell substantially (by over 16 percent), service levels improved, and total employment actually increased.

Jobs were created by a liberalized German postal service because it became much more internationally competitive and thus began penetrating markets in other nations that had also scrapped their government postal monopolies.

A major concern of opponents of liberalization is that private, for-profit mail deliverers will bypass customers located in remote areas.

As the German model suggests, however, a private mail carrier bidding for the right to serve to New York City will also serve customers in, say, Kiln, Mississippi (Brett Favre’s hometown) as long as postage revenues exceed its overall average costs. (Such market cross-subsidies are common nowadays: the price of a stamp on a letter to your next-door neighbor is the same as one addressed to someone 3,000 miles away.)

The object of introducing competition is not to deny postal service to any customer. It is rather to ensure that mail services are supplied cost-effectively.

If not for the implicit guarantee, a la Fannie Mae and Freddie Mac, that the taxpayers will make good its losses, the USPS would have declared bankruptcy long ago.

The bottom line is that picking up and delivering the mail are not functions in which the public sector has – or should be expected to have – a comparative advantage over private enterprise. The experience of Deutsche Post proves that liberalizing the USPS is a proverbial win-win scenario.

[William F. Shughart II, a senior fellow of the Independent Institute, is F.A.P Barnard Distinguished Professor of Economics at the University of Mississippi.]

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