Postal Politics
by Dr. Charles Guy

Congressional plans to reform the U.S. Postal Service prescribe the wrong medicine for the ailing USPS. That is because lawmakers have misdiagnosed the problem, attributing the Postal Services financial woes to a fall-off in the volume of mail. This fall-off of hard copy mail is widely presumed to be the long expected consequence of the ongoing electronic revolution.

You can hardly blame the lawmakers, though, since nearly every recent analysis of the Postal Service has cited a drop in mail volume as a major factor in the organizations decline.

The Presidents Commission on the USPS reported in 2003 that First-Class Mail volumes appear to be on the brink of long-term decline as more Americans take advantage of cheaper electronic alternatives. The Government Accountability Office recently agreed.

And when Postmaster General John Potter testified before a Congressional panel last year, he told lawmakers that this combination of factors declining mail volume contrasted with the costs of a still-growing service network resulted in a net loss in three of the last four years

In fact, these assessments are misleading.

Its true that e-mail and online transactions have made a big dent in mail use by individuals, but the jury is still out on whether overall mail volume is in long-term decline. While the volume of First-Class Mail ranging from bills to letters and greeting cards did fall steadily from 2000 to 2004, the volume of standard mail mostly advertising steadily rose.

Even more notably, this year the decline of First-Class Mail appears to have reversed, or at least stalled. First-Class Mail volume at the end of the third quarter showed a slight increase over volume for the first three quarters of 2004. The volume of standard mail was up as well. A recent study by Pitney Bowes a large maker of postal equipment finds this rebirth of mail usage unsurprising and expects the trend to continue.

Moreover, even when the high revenue component of First-Class Mail -- non-presorted mail does fall, theres no reason overall USPS profitability should be adversely affected, because the costs associated with processing First-Class Mail should be managed down as well as has occurred over the post 2000 period.

As it so happens, the Postal Service is afflicted with several serious problems, but none of these are new or a consequence of declining mail volume.

Most important is a rate of productivity growth that lags the private sector. According to the Bureau of Labor Statistics, the Postal Services labor productivity rose by 40 percent from 1970 to 2000, while in the manufacturing sector it increased by 149 percent.

Moreover, overall productivity total factor productivity remained essentially flat through 2000 despite massive capital investments in mail processing equipment. The steady increase in overall productivity Postmaster General John Potter and his team have achieved since 2000, perhaps stimulated by the fall in mail volume, is a marked and impressive turnaround in performance.

One may rightly question if the pressure to achieve further productivity increases will be nearly as strong should the resumption of mail volume growth continue. The first key to maintaining this mail growth is small and infrequent postage rate increases, which can only be achieved if overall USPS productivity continues to increase. The second is to cut labor costs. This can best be done by successfully negotiating or arbitrating reductions in the 25 percent wage premium postal employees currently enjoy over their private sector counterparts.

Current Congressional reform measures focus on granting USPS leadership the greater pricing flexibility they seek in other words, the freedom to raise rates with less regulatory oversight. This is supposed to make up for earnings lost due to a presumed further fall-off in First-Class Mail.

Effective reform must recognize that the Postal Services current problems run much deeper than a short-term decline in First Class mail volume. USPS needs to focus on cutting costs and boosting productivity, not raising prices. It would be a tremendous missed opportunity if policymakers declared victory on postal reform before that can be accomplished.

Charles Guy, Ph.D., is Adjunct Fellow with the Lexington Institute and former Director of the USPS Office of Economics, Strategic Planning. This originally appeared as an Institute Issue Brief.

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