END THE POSTAL MONOPOLY (1985)

note:  below is a conversion of the  (PDF) file
James C. Miller III

Earlier this year, the cost of mailing a first-class letter went from 20 cents to 22 cents. It was the third increase in four years, the seventh since the Post Office became the independent US. Postal Service in 1970. As usual, politicians decried the inefficiency of postal delivery and promised to "do something." But few seemed willing to consider the one action likely to have a real effect on the efficiency of the U.S. postal system: let others compete in the delivery of first-class mail.

The Evolution of the Postal Monopoly

While the Constitution provides Congress with the power "to establish post offices and post roads," it does not require that the carriage of mail be a monopoly, much less a government monopoly. Throughout the first half of the 19th century, however, Congress enacted ever move restrictive measures limiting the private carriage of mail. For example, an 1825 statute that reserved to the federal government the exclusive right to carry letters for hire in vehicles over post roads was amended two years later to prevent private carriage on horseback or foot. This presumably made life difficult for the Pony Express, which although often used as a symbol of U.S. mail service, was a creature of private enterprise.

Finally, Congress passed the Postal Act of 1845—the so-called private express statutes—which directly prohibited private companies from carrying letters for hire.’ These statutes (with a few modifications) remain the law today. They grant the government a monopoly in the delivery of letters (first-class mail). The monopoly does not extend to newspapers and magazines (second-class mail), direct-mail advertising (third-class mail), or parcels (fourth-class mail).

The standard economic rationale for production by a regulated franchise monopoly, whether privately or publicly owned, is that, under certain technical conditions, production may be accomplished at least cost by a single firm. Government may wish to impose maximum rate-of-return regulation on such "natural monopolies" in an attempt to reduce the allocative efficiency costs associated with unregulated monopolies. But even in the case of a proven natural monopoly, economists are ambivalent about the desirability of regulation because of its direct and indirect costs.4

Most importantly, if mail service were a natural monopoly, competitors would find it very difficult to provide the same level of service at the same or lower cost.6 Consequently, the Postal Service’s position would be secure without legal protection.

The Economic Costs of the Postal Monopoly

The Postal Service provides a classic illustration of the problems inherent in trying to determine efficient prices and hold down costs for a regulated monopoly.

The existence of large common costs in enterprises like the Postal Service makes it impossible to allocate total costs to individual services in a nonarbitrary manner. This makes ratemaking very difficult. While it is conceptually possible to determine efficient prices by looking at both cost and demand conditions, the necessary information is typically not available in sufficient detail. As a result, there is no reason to believe that prices will be efficient—even before allowing for the influence of a variety of political pressures that make themselves felt during the ratemaking process.

Moreover, with restricted entity, an inefficient rate structure is easy to maintain, because new firms cannot enter in response to a price that is set too high. Thus, cross-subsidization, which is virtually impossible under competitive conditions, occurs with some frequency in regulated industries. It is, in fact, a major source of the economic inefficiency associated with the Postal Service. In addition, postal costs are generally higher because the Postal Service faces only limited incentives to produce in the least-cost manner.

Because of the problems involved in allocating costs, precise quantitative estimates of cross-subsidies within the postal system are difficult to obtain, It is generally conceded, however, that high-density urban service subsidizes low-density rural service. It is also alleged that first-class mail in general subsidizes some or all of the other classes.

The subsidy from urban to rural users arises primarily because the Postal Service charges the same rate for all first-class mail, regardless of the distance the mail travels and the costs of delivering it. Some first-class mail is therefore overpriced and some is under-priced. Consequently, as the Postal Service itself has stated, "if the Private Express Statutes were repealed, private enterprise ... would be free to move into the most economically attractive market’ One of those areas would undoubtedly be transaction mail—bills, bank statements, and so forth. This mail, which tends to be generated by a few, high-volume local business mailers (for example, banks, utilities, and department stores) and tends to be destined for high-density areas, is relatively inexpensive to deliver. If entry were permitted, the price for delivering transaction mail (which constitutes a significant portion of first-class mail) would fall. This is what the competitive process is all about, notwithstanding the fact that the Postal Service refers to it as "cream-skimming."°Such cream-skimming opportunities only occur when prices exceed costs. The existence

of such opportunities is therefore evidence that current pricing misallocates resources." Whether there is an additional subsidy going from first-class mail  to other classes is an issue of some contention. However, the Postal Rate Commission’s chief administrative law judge concluded that such a subsidy did exist, and that "the Postal Service has become a tax-collecting agency collecting money from first-class mailers to distribute to other favored classes." If this is the case, entering firms would be able to lower the average price charged for first-class mail.

The postal system is a particularly good source (in the event that one is needed) for evidence that private enterprise performs better than government enterprise and that competitive markets perform better than monopolies.

The costs of the Postal Service are significantly higher than they should be because the incentive to hold down costs—most notably, labor costs—is limited. Postal workers are paid far more than is necessary to retain their services. Because entry into postal markets is restricted, the Postal Service is able to pass those higher costs along to its customers.

Higher costs also result from failure to innovate. For example, as of 1974, the Postal Service still shipped all of its parcels in bags, which resulted in high breakage rates and handling costs. When the United Parcel Service (UPS)—a private competitor—introduced mechanization and containerization, breakage was reduced and handling costs lowered. As a result, the Postal Service has steadily lost business to UPS.’5

The success of private express mail service is also indicative of the benefits of competition. Despite the threat of suit by the Postal Service, numerous private carriers developed in the 1960s and 1970s,specializing in the rapid and reliable transportation of commercial documents. In 1973 the Postal Service responded and established its own express delivery service called "Express Mail." Despite attempts to expand the postal monopoly to include express mail services, private services now compete openly and freely. Indeed, private companies such as Federal Express and Purolator deliver overnight to more cities than does the Postal Service.

Fears of Higher Prices and Reduced Service

If repeal of the private express statutes will reduce rates for some postal services, will it also raise rates for others P This is a major fear, particularly for residents of rural areas. There are, however, two reasons for believing that such fears are exaggerated. First, if competition reduces the overall level costs, this will benefit everyone, including consumers of high-cost services. Second, our

experience with the deregulation of trucking and airlines suggests that fears of significant reductions in rural service due to postal deregulation are probably unfounded. Some small cities are no longer served by large jets, but commuter airlines have used smaller planes to serve small communities at far lower costs. Thousands of new companies have gone into trucking, and as a result trucking service to rural areas has improved.

If we can obtain airline and trucking service throughout the country without a government monopoly, competition canal so work for letter delivery. The configuration of service may change somewhat, but surely everyone would have access to affordable mail delivery. If a subsidy is deemed necessary, it might be patterned after the small-community air service program implemented along with airline deregulation. This program now subsidizes air service to communities at an annual cost of $51 million. This cost has declined significantly since the program began in 1978, and the program scheduled to be phased out. Yet, on the whole air service to small communities has improved since deregulation.

The cost of the small-community air service program has been running at about 0.2 percent of total domestic airline revenues. The analogous figure for the Postal Service would be $26 million—a paltry sum for ensuring that there will be universal mail delivery, and for enabling the benefits that competition would bring to this industry.

Conclusion

The burden of showing that the postal monopoly is necessary or desirable has not been met. All the available evidence suggests that competition in the market for first-class letter delivery would create substantial benefits. If the private-express statutes were repealed, existing mail firms would expand and new ones would enter the market, Probably just as important, the spur of competition would mean improvements in the Postal Service itself Private enterprise will get the mail delivered —just as it did in the Old West.

It's Time to Free the Mails 

James C. Miller III

Suggest that mail service might be improved by ending the government’s monopoly over the delivery of letter mail, and most postal officials react as Oscar Wilde reacted when a producer suggested changes in one of his plays. Wilde clutched his manuscript in mock terror and exclaimed: “Changes? Impossible! Who am I to tamper with a masterpiece!”

To its friends, at least, the Postal Service is a masterpiece—a marvelous mechanical toy, performing its functions with clockwork regularity and precision. Admittedly, the machinery breaks down every now and then, but it takes only a little tinkering—or a modest increase in the price of a first-class stamp—to put things right.

But this argument is wearing thin. Mounting criticism of the Postal Service has forced its apologists to make more convincing excuses.

Increasingly, they have tried to lay the blame at other doorsteps—including mine. Incredible as it may seem, 0MB is being blamed for what’s wrong with the Postal Service today. Let’s look at these allegations, and then let’s look at the facts.

Postal Service Blames OMB First, OMB is accused of trying to “micro-manage” the U.S. Postal Service. Now how in the world can we do that? OMB has no apportionment power over the Postal Service. Nor have we authority to approve or disapprove the Postal Service’s budget submissions to Congress. Nor have we any control over the Postal Service’s legislative proposals. Nor over its testimony. Nor over its personnel. Nor over the rules and regulations the agency promulgates. So where do

The author is Director of the U.S. Office of Management and Budget. This article is based on a speech he gave at the Cato Institute’s conference on “Privatization and the Postal Monopoly,” April 7, 1988, in Washington, D.C. the friends of the Postal Service get this notion that 0MB is trying to “micro-manage” the agency?

Second, in response to public outcry over cutbacks in window hours and collections, friends of the Postal Service have alleged that OMB is responsible for these inconveniences. Vincent R. Sombrotto, President of the National Association of Letter Carriers, said in a recent letter to the Wall Street Journal (5 April 1988): “The serious cutbacks were engineered by 0MB Director James Miller III.” But if0MB has no direct control over the Postal Service, how could this be true?

Of course, the friends of the Postal Service have a ready answer to that one as well. If0MB has not dictated precise cutbacks, they say, we have “forced” the savings that are making the cutbacks necessary.

For example, Moe Biller, President of the American Postal Workers Union, AFL-CIO, said in a recent letter to the Washington Post (2

April1988): “[R]ecentPostal Service reductions. . .have been imposed by budget cuts engineered by President Reagan and his hatchet man—Budget Director James Miller III.”

Let’s be very clear on this point: when we concluded the bipartisan budget negotiations last November, it was understood that the House Post Office and Civil Service Committee, in cooperation with the Senate Governmental Affairs Committee, would pony up $850 million in outlay reductions for each of the two years covered by the agreement. OMB’s role in this matter was not to dictate where the savings came from, but whether they could be “scored”—or, in other words, realized.

Predictably, the Postal Service played the “Washington Monument Game.” It shortened window hours 10 percent; it stopped collecting mail on Sundays; and it eliminated the Sunday sorting of outgoing mail. A letter-writing campaign has been launched. Organized labor is running ads. The avowed object of this propaganda barrage is to end the alleged “micro-management” of the Postal Service by the executive branch.

The real object, however, is more disturbing. What these people want is nothing less than the elimination of effective Congressional oversight and exemption from budgetary discipline. In plain terms, they want to put the agency “off budget.” They don’t think that the federal government’s need to reduce the deficit should affect them in the least.

Well, we’lI see about that. The postal unions have long been accustomed to getting their way with Congress, but do they really think that Congress is going to roll over and play dead on this one? Do they really think the administration is going to stop looking at ways  by which improved mail service might be provided at lower costs? Now, I can’t speak for Congress, but I can tell you that the answer up at our end of Pennsylvania Avenue is, “Not on your life!”

Private Alternatives to Postal Cutbacks

So what’s to be done about the Postal Service? First, let’s address those cutbacks in service. Believe it or not, those drastic cutbacks I just cited are being blamed on a reduction in operating expenses of less than 1 percent! Less than 1 percent! Whom does the Postal Service think it’s kidding? And this is not to mention the other cutbacks they claim they are being “forced” to make. Doesn’t the Postal Service realize that, on average, American industry reduces costs by almost 2 percent every year? Why can’t the Postal Service do the same?

Rather than close windows, let mailboxes fill, and allow sorting tables to groan under the weight of unsorted letters over the weekend, the Postal Service ought to consider the suggestions for savings made by the General Accounting Office, the Grace Commission, the Privatization Commission, numerous academic studies, and the U.S. Postal Service itself.

For example, the Postal Service should contract more with retail stores for the sale of stamps, the posting of parcel post, and the acceptance of express mail. The public would have more postal windows without the need to build more post offices. The Postal Service should contract out larger volumes of mail to private firms for presorting.

Today, some 40 percent of first-class mail and 50 percent of third-class mail is sorted, not by the Postal Service, but by private industry. The Postal Service should expand the practice of contracting out rural mail delivery to private carriers. And soon. We estimate that these and other creative new approaches to mail service would more than cover the required savings and reductions in operating costs mandated by Congress in last year’s Reconciliation Act.

So much for the immediate problem; what should we do about the Postal Service over the longer term? Here I would agree that the Postal Service should be placed off-budget. But I think we should place the Postal Service off-budget by making it part of the private sector.

The Postal Service has been an independent corporation for nearly 20 years. There is no good reason why it should remain part of the U.S. Government, and no good reason why it should enjoy a monopoly over the delivery of letter mail—anymore than a single company should enjoy a monopoly over such services as banking, insurance, or telecommunications.

But the Postal Service and the postal unions want it both ways. They want to be an independent corporation when it comes to the budget process, but they feel they should be exempt from the belt tightening required of every other federal agency, including the Department of Defense. At the same time, they want to be a government-protected monopoly when it comes to letter mail, and they want to be a federal agency when it comes for federal subsidies and other federal benefits. For example, they want to retain the taxpayer payment for revenue foregone ($650 million in FY 1987), and subsidies for the unfunded portion of Federal retirement and health benefits ($2.5 billion in FY 1987). They also want to retain access to the Federal Financing Bank, which gives the Postal Service a 1 percent interest advantage, worth over $100 million in FY 1987.

A “Necessary” Monopoly? Advocates of the present system make the classic monopolist’s defense: necessity. If there were no postal monopoly, say the postal monopolists, nationwide delivery of the mail would be left to the caprices and uncertainties of the free market. Mail service would no longer be reliable. Amateurs and sharpers would move in. The business community would be hampered in its ability to transact business by letter. The economy would suffer. People would be laid off.

Calamities untold and manifold would befall the Republic! As an economist, I am skeptical of this argument: have these people never heard of United Parcel Service or Federal Express? If you  push them on this point, they’ll usually come back with the familiar “cream skimming” argument. Yes, they will say, United Parcel and Federal Express are all very well—in their place. But the delivery of letter mail is a special situation. If private carriers were permitted to compete for the delivery of letters, competition would be intense for the most profitable routes—i.e., those in highly populated areas—but thinly populated rural areas would be slighted or ignored. Since the Postal Service would be squeezed out of the more profitable routes, it would not be able to take care of the hinterlands. Great-Aunt Gertrude, who lives way up in Lonesome Valley, Montana, would no longer receive cards on Christmas and her birthday.

This argument is likewise unpersuasive. In point of fact, it has always been the private sector that has taken the lead in providing cheaper, faster, and more convenient mail delivery. And it has been the Postal Service that, more often than not, has impeded these efforts by invoking its legal monopoly.

If the Postal Service is really worried about Great-Aunt Gertrude and the other patrons who live on what are supposedly “unprofitable” routes, why won’t it allow competition in those markets as the Privatization Commission recommends? Why won’t it allow competition in the delivery of “junk mail”—another recommendation of the Privatization Commission? Is it that afraid of the energy and creativity ofthe private sector? Perhaps it is. After all, if private letter carriers can make money off the “milk”—letting the Postal Service “skim the cream”—then there is no longer any convincing argument against total privatization of the mails.

How to Privatize the Postal Service

All fears to the contrary notwithstanding, the Postal Service could survive and even prosper as a private corporation once all government controls were removed. But it would have to be truly private and able to compete on equal terms with other mail carriers. As long as the Postal Service remains a governmental entity, it cannot adjust its rates without lengthy administrative hearings; it cannot close unprofitable post offices or otherwise restructure its operations without risking the wrath of Congress; and it cannot tie pay to performance and make needed staffing changes because of the political clout of the postal unions. Thus, simply to repeal the private express statutes and allow private companies to compete with the Postal Service would be both unfair and uneconomical. First the umbilical cord to the Federal Government must be cut, and I believe this can be done.

Recently, two of my 0MB colleagues and I visited with a number of political leaders and privatization experts in Europe. They told us that their public-sector commercial operations have done very well when transferred to the private sector. One reason is that they have given employees a stake in the outcome. What they did was to give each employee a block of stock and incentives to purchase more. The result was that while the employee unions opposed the idea overwhelmingly, the employees took full advantage of stock ownership.

On the whole, we were told, these experiments were a great success. I think we should do something like that here with the Postal Service. The Privatization Commission, in fact, made just such a recommendation.

There is no good reason why this recommendation should not be implemented. The fundamental arguments for and against ending the postal monopoly have not changed in a century and a half. But by this time the accumulated evidence is conclusive: the privatizers and anti-monopolists have won the debate hands down. Practically all the great innovations in mail delivery have come from the private sector while the Postal Service, at best, has tried to catch up or, at worst, tried to stand in the way. We can now assert with confidence that the public has everything to gain from competition and little, if anything, to lose. In fact, the only losers I can imagine would be the cartoonists—who would no longer be able to get away with caricaturing the Postal Service as a giant snail. Victor Hugo once said that nothing can withstand an idea whose time has come. I say it’s time to free the mails!

The Republican leader submitted to Congress the names of James C. Miller III and Albert Casey for consideration to the BOG. Bush suggested that the addition of these two men would bring a greater fiscal responsibility to the Board.

Fiscal responsibility has little to do with the nominations, however. The name of this game is payback," as Bush attempted to reward these two for their work with the federal government under President Reagan. Mr. Miller has worked in Washington since the early 1980s, having served in several federal offices, most prominently as chairman of the Federal Trade Commission, director of the Office of Management and Budget, administrator of OMB’s Office of Information and Regulatory Affairs and member of President Reagan’s Cabinet. His term (on the Board of Governors) would expire in December 2010," according to the August 19, 2002, Federal Times.

"Casey, who briefly served as postmaster general during the Reagan administration, is a distinguished executive in residence at Southern Methodist University’s school of business. He won a seat on the board August 6 in a recess appointment by Bush. The Senate has not acted on Casey’s nomination, which was made in March. He will serve the remainder of a nine-year term expiring in December 2009," Dan Davidson, Times reporter, says.

Both men would come to the BOG table waving the "Privatize the Postal Service" flag. Mr. Miller was a privatization activist during his years as Director of the OMB. The National Association of Letter Carriers challenged Miller’s appointment in 1985 to the Director’s position. In the November 1985 Postal Record article, Repeal Postal Monopoly, Budget Director Says, the NALC laid Mr. Miller’s approach right on the line:

"James C. Miller III – President Reagan’s choice to succeed David Stockman as head of the Office of Management and Budget – believes repealing the Postal Service’s monopoly on first-class mail is a good idea, and would be one of his priorities as budget director."

George Gould, legislative and political assistant to President Vincent Sombrotto, argued the NALC’s position during a Senate hearing on the OMB appointment on September 24, 1985:

"Mr. Miller would divert business to private mail services, taking the cream of mail volume away from the Postal Service. In 1984, we processed over 131.5 billion pieces of mail– more than all other countries’ postal services combined. This volume helps us remain financially healthy," Mr. Gould said.

On October 4, 1985 the Senate approved Mr. Miller’s appointment by a vote of 90 to 2. Good ole’ boys really know how to stick together.

Mr. Miller has openly admitted he favors privatization, a plan that President Reagan supported as well. "In calling for privatization of mail delivery, Miller is echoing his boss, Ronald Reagan.

President Reagan has gone on record as opposing the postal monopoly. On September 10 he told reporters that he favors doing ‘anything we can do to hurry up the private delivery of mail in competition with the government."

Now, with his appointment to the BOG Miller is in a position to influence the future of the Postal Service.