Statement to The Presidential Commission on The United States Postal
Service

Submitted by Citizens Against Government Waste

Wednesday, February 12, 2003

 

On behalf of our one million members and supporters nationwide, Citizens
Against Government Waste (CAGW) appreciates the opportunity to submit a
statement to the President's Commission on the United States Postal
Service (USPS). We commend President Bush for discerning the need for
such a commission and for conferring on its members a broad mandate to
review and make recommendations on all aspects of USPS operations.

The USPS is a \$67 billion quasi-government entity with close to 900,000
employees, a far-flung infrastructure and an extensive transportation
system. It has a government-sanctioned monopoly on first-class letter
mail delivery and the control of individual and business letter boxes.
Its operations permeate virtually every aspect of American life. But,
the USPS has begun to experience stagnating, even decreasing, volume in
first-class (or monopoly) mail delivery. Viewed alongside the agency's
historically high (and growing) fixed cost structure, USPS officials
recognize that the agency now faces the daunting task of reinventing
itself to meet the needs of a 21^st^ century society.

In April 2002, the USPS released its long-awaited Transformation Plan.
In it, the agency purports to have exhaustively reviewed all the options
for reform and settled on the \"commercial government enterprise" (CGE)
model as the most viable.

There are those who argue persuasively that the USPS is already a
government-sponsored enterprise and therein lies the root of its many
problems. The mere act of transforming the USPS from one type of
quasi-government entity into another and coming up with a new label for
it does not fulfill President Bush's call for bold, imaginative
initiatives that depart from the status quo while protecting both
ratepayers and taxpayers. CAGW believes that the USPS Transformation
Plan dismissed the privatization model too quickly.

To the extent that the commercial government enterprise model may be
gaining currency, commissioners should be aware of the dangers inherent
in the CGE model. Indeed, it is CAGW's contention that, if
market-oriented reforms are not enacted, consumers and taxpayers might
actually be better off with the status quo rather than the CGE model
sought by the USPS.

Over the years, the federal government has created a number of
quasi-government entities. As a rule, these entities are chartered by
Congress to perform a public purpose or correct some sort of failure in
the free market in an industry Congress deems nationally significant.
Quasi-government entities are not officially part of the government and
though they differ in legal structure and mission, to one degree or
another they all share one common characteristic: they are endowed with
special exemptions and subsidies to perform a public mission, such as
tax and regulatory exemptions, access to credit at discount rates, and
some monopoly control over the goods or services provided within
congressionally-mandated parameters.

By far, the most critical feature of these benefits packages is the
existence of the charter itself. The imprimatur of the federal
government is a valuable commodity. It is interpreted as proof that
these entities are "too big to fail," and that they enjoy the backing of
the federal taxpayers. This perception motivates the behavior of the
government-sponsored entities and the markets in which they operate,
while causing a ripple effect throughout the economy as a whole.

Essentially, the CGE model the USPS seeks would preserve its monopoly
control over the delivery of first-class letter mail and exclusive
access to home and business letter boxes, tax and regulatory exemptions,
and the ability to borrow money from the Treasury at a discount. At the
same time, USPS wants Congress to repeal most of the most restrictive
aspects of the current postal statutes. Postal officials want to shed
the agency's \"break-even\" requirement, weaken the oversight of the
Postal Rate Commission (PRC) so it can raise rates more easily, and have
the ability to enter new lines of business without prior PRC review. In
other words, the USPS believes that the long-term solution to its
financial troubles is to acquire all the perks of being a private,
commercial business, but wants Congress, the first-class letter mailers,
and ultimately the taxpayers to continue to shield it from the rough and
tumble world of full-fledged market competition, and backstop it in case
of financial collapse.

The problem with this model, whether one calls it a commercial
government enterprise, a government-sponsored enterprise, or a
government corporation is that it privatizes all the profits and
socializes all the risk. In a CGE model, since the federal government
and taxpayers are accurately perceived as the financial safety net,
there is little incentive to behave in an efficient manner by keeping
costs down to maximize profit.

Since government-sponsored entities have often been created to fulfill a
critical and underserved national need, the Commission has a unique
opportunity, albeit a brief one, to deliberate on the question of
whether delivering the mail is still an inherently governmental
function. It is true that, at the time of the nation's founding, we were
a loosely-knit collection of colonies with disparate, often conflicting
interests. However, by partially privatizing the USPS in 1970, Congress
telegraphed its understanding that delivery of the mail is no longer an
inherently governmental function. Many of the operations that make up
today's postal operations, including transportation, sorting, bundling,
and logistical functions, are routinely performed efficiently and
cost-effectively in the private sector. A former U.S. postmaster general
remarked in 1977 that he "didn't see any reason why the government ought
to be in a business which private industry is willing and able to care
of." Indeed, the USPS itself understands that private sector companies
perform much of this work more efficiently than it can, since the agency
has increasingly resorted to \"work-sharing\" contracts.

Though the efficient and timely delivery of hard-copy letter mail
remains vital to the national interest, the existence of today's postal
service and the charter that created it should not be viewed as a result
of a market failure. On the contrary, the private market has never had
an opportunity to develop the systems and services necessary to respond
to the need for mail service. The postal statutes constitute an ironclad
barrier to any party interested in entering and competing in that
market.

The USPS has regularly dismissed the idea that there could be a
competitive, customer-oriented private market for delivering mail,
especially the \"last mile\" delivery. However, in the few instances
where the door was opened a crack (urgent mail delivery and overnight
parcels, for example), the results quickly and decisively contradicted
the notion that there would be few takers. There is no telling what kind
of exciting logistical and technical developments could result allowing
competition in mail delivery.

There are dozens of examples of industries that furnish other essential,
even life-and-death, services that \"bind\" the nation together. Most of
them have never had a long-term government-protected monopoly to support
them in those endeavors. Grocery stores collect and distribute food;
pharmacies have created an efficient, accessible system to help
Americans obtain important medicines; fuel is available at gas stations
dotting the country. All of these industries contribute to the cohesion
of the nation and none of them depend upon a government monopoly and a
host of taxpayer subsidies. In fact, these industries succeed while
paying taxes and complying with a host of regulatory requirements.

It is clear that delivering mail no longer requires a government
monopoly. The question is, where should the lines of the government's
involvement be drawn at the dawn of the 21^st^ century?

Postal officials often characterize e-commerce and electronic bill
payment as "electronic diversion," implying that these developments are
unfairly challenging their market share. The Internet is simply another
step in an ongoing communications revolution. It saves billions of
dollars for individuals and businesses of every size and will continue
growing, opening up new avenues for commerce. It has offered individual
consumers, businesses, and advertisers the first opportunity in decades
to choose an alternative to the postal service and they are voting in
droves with their keyboards.

Postal officials have already dipped a toe into the e-commerce market
and have lost tens of millions of dollars. Adoption of a CGE model would
explicitly encourage today's inefficient and wasteful postal service to
dabble indiscriminately in the Internet and e-commerce market, which is
clearly where it wants to go. If the USPS is allowed to retain its
monopoly and solidifies the perception that the taxpayers back it
financially, first-class ratepayers and taxpayers could be left holding
the bag for its commercial business failures.

At one time, telephones and fax machines were the "next new thing" in
communications, but no one seriously suggested that the USPS should
become a telephone or fax company. There is no inevitable, inseparable
linkage between the USPS and the Internet or e-commerce. There is no
reason to accept at face value the assertion that the solution to the
USPS financial problems lies in "growing the business" in a misguided
effort to keep pace or compete with the Internet and e-commerce.

The USPS is able to expend tens of millions on experiments in e-commerce
with little or no repercussions because it does not experience the true
cost of its commercial misadventures in the way a fully private company
does. The USPS' CGE proposal, which would unleash it to leverage its
government privileges to compete unfairly against private companies and
free it to raise rates more easily, would do nothing to correct that
perverse incentive. Loss and failure would not be a concern if the USPS
continued to have a lock on captive first-class mailers to
cross-subsidize those losses.

One of the most disconcerting features of current government-sponsored
entities is that they lack transparency and accountability, an issue
that is very much on the minds of Americans in the aftermath of a series
of high-profile and destructive corporate scandals. While the PRC is a
relatively weak regulator, the cumbersome rate-setting process currently
required by law does impose a modicum of fiscal discipline upon the
USPS. Generally, rate cases offer consumers and taxpayers the only
opportunities to scrutinize postal financial data and hear the postal
service offer analysis of its management of the agency and its cost and
revenue projections. The CGE model would short-circuit that process,
weakening one of the ratepayers' few oversight mechanisms, at a time
when what is needed is increased transparency and accountability.

A congressional charter with special protectionist features is a blunt
political and legislative tool. No matter how well-drafted the language
of a government charter, it has virtually no ability to react readily to
changes in the world of commerce. The language of a government charter
can be interpreted to rationalize almost any activity the
government-sponsored entity decides to engage in. A government charter
is no substitute for a business plan that weighs financial risks and
rewards and can be altered quickly and creatively to meet the demands of
rapidly evolving business climates and changes in consumer tastes. Worse
yet, a government charter resides in the hands of politicians, whose
interests, motivations and actions are sometimes subject to the whims of
partisan politics and the pressure of special interest lobbyists.

In the months to come, CAGW urges the Commission to take another look at
the potential benefits of free-market reforms for the USPS. The agency's
current proposal, the commercial government enterprise, is a step in the
wrong direction. It would permit further liberalization of its
commercial activities without first enacting cost-cutting and
productivity measures, and would preserve its monopoly, shield it from
real competition, and potentially place taxpayers and ratepayers in
harm's way. A CGE could actually turn out to be an even worse deal for
consumers and taxpayers than the current system. These expansions must
not be granted in the hope that the USPS will choose to become more
market-oriented later on. History has shown that government-sponsored
entities rarely choose to privatize themselves, preferring to operate
with little risk to themselves, in their government-chartered safe
havens. Government-sponsored entities become extremely difficult to rein
in as time marches on.

The first step toward reform of the USPS should be the enactment of cost
control measures, complete divestiture of its commercial, non-letter
mail activities, increased flexibility in its dealings with labor, a
refocusing of its resources on core business functions, and streamlining
of its vast infrastructure. The Commission also has a unique opportunity
to allow the private sector to begin performing many of the functions
currently controlled by the postal service, perhaps even lifting
barriers to competition in monopoly areas.

As commissioners debate the future of the USPS, CAGW urges them to
consider all the conceivable free-market options available for mail
delivery. As federal resources are stretched to the limit for national
security and defense needs and other essential priorities, the taxpayers
do not need the burden of a new government sponsored entity.