It is an open secret in Washington that the United States Postal Service needs reform. But recent calls for government-mandated price hikes should not be one of them. Like any business facing market headwinds and unsustainable losses, the Postal Service must adapt.
The venerable USPS has been losing market share to competitors like UPS and FedEx for years. The advent of the internet has gutted postage revenues from “snail mail” since the 1990s. Online advertising has dramatically reduced printed catalog deliveries. And market forecasters see rising costs and tens of billions of dollars in deficits looming on the horizon.
One short-sighted approach is to mandate that the Post Office dramatically increase its fees for parcel delivery. Not only will this not work, it could leave rural and extra-urban residents in a lurch at the very time when more and more Americans are relying on online shopping services.
Instead, the USPS needs to pursue long-overdue structural reforms, cost cutting, consolidation and streamlining to make the Postal Service more efficient. Here’s the truth: Competitive markets require firms to both retain their current customers and attract new ones – not repel them. Price increases will only cause existing shipping customers to take their business elsewhere and that will hit consumers in their wallets.
Plus, fewer customers will mean fewer revenues leading to a death spiral for the USPS. Instead, Congress and the Postal Service leadership should work together to make mail service profitable by focusing on the reforms that will make it less costly to operate.
An obvious place to begin is a look at labor costs for the roughly 500,000 postal workers. These employees represented by seven different labor unions make up nearly 80% of the Postal Service’s operating costs – a far greater percentage than its competitors. The Postal Service currently offers wage and benefit premiums above and beyond those received by private sector competitors and other federal employees. They are unaffordable and must be renegotiated along with the “no layoff” clauses in the collective bargaining agreements that severely restrict management’s options and flexibility.
The Postal Service should push aggressively to make a more nimble and dynamic workforce, reduce personnel costs and make benefits more consistent with other federal agencies. That includes renegotiating health care coverage agreements for its retirees.
All U.S. companies pre-fund pension benefits. But the USPS is the only one required to pre-fund retiree health care benefits. The Postal Service should be provided with the flexibility to modify health care benefits and budget accordingly.
As part of a broader streamlining and consolidation effort, the Postal Service should look to close redundant post offices and distribution centers, and find ways to expand partnerships with private sector carriers to enhance efficiency and reduce costs. Underused post offices and centers are not cost-effective and pull resources from more efficient operations. The Post Service should separate the proverbial wheat from the chaff.
Balance sheets, of course, itemize costs and revenues, and even while it restructures and reduces costs, the Postal Service can look to boost revenues. Management should explore new revenue streams and identify competitive advantages. As a government service provider, for example, the Postal Service can introduce new government services at its retail locations to create a more convenient “shopping” experience and location for those services. UPS and FedEx can’t.
Calls from Washington to force the Postal Service to raise its parcel delivery rates artificially above market prices for Amazon and other online merchants should go unheeded. As online shopping continues its upward trend, the Postal Service should be looking to increase not decrease its share of the parcel delivery market. Parcel delivery is perhaps the Postal Service’s most profitable component, accounting for only 5% of its volume but about 30% of its revenue. That leaves plenty of room for volume growth in a profitable sector.
Economics 101 and the stubborn laws of supply-and-demand teach us that artificially raising delivery rates will have an opposite and adverse effect. Higher delivery rates will reduce consumer demand as cost-conscious customers simply give their shipping dollars to the private sector competition. Artificially high prices set by fiat rather than the market will shrink market share, not increase it.
Except for Americans who live in high-income dense metropolitan areas (which private shippers can support efficiently), price increases for shipping will be hard on U.S. household budgets.
The Postal Service and those in Washington looking to improve it should work within the basic laws of economics, not against them. Overdue labor reforms, exploring synergies and efficiencies, and exploiting inherent market advantages are the keys to rebalancing the budget at the local post office. Federally mandated price increases that scare customers into the waiting arms of the competition will only make success less likely.
Horace Cooper is a senior fellow with the Market Institute, a conservative, free-market nonprofit agency.
