Comments of

**James L. Gattuso**

**Research Fellow in Regulatory Policy**

**The Heritage Foundation**

**to**

**The President's Commission on the United States Postal Service**

**February 12, 2003**

In accordance with the procedures adopted by the Commission at its
January 8, 2003 public meeting, I respectfully submit these comments to
the President's Commission on the United States Postal Service.

This Commission, established in December by President Bush, is charged
with "articulating a proposed vision for the future of the United States
Postal Service" and recommending reforms needed to "ensure the viability
of postal services." This is a daunting task. In the wake of
technological changes that are fundamentally changing the way Americans
communicate, the Postal Service is an increasingly troubled
organization. As the General Accounting Office stated in a report last
year: "A transformation \[is needed\] if USPS is to remain viable in the
21^st^ century."[^1]

In the long term, it is not clear what role the physical delivery of
mail will have in U.S. society. What is clear is that that role is
changing, and the USPS will have to change as well. This certainly means
a leaner, more efficient organization, and one with more flexibility to
adapt to market conditions. Perhaps most importantly, it should also
mean an organization without the special protections -- including the
monopoly on letter mail -- that have in the past dulled the postal
services ability and incentive to react to change.

**The challenge from the Internet.** The challenge to the Postal Service
from electronic communications is real and growing. Despite the economic
downturn among high-tech firms over the past few years, the Internet's
usage and popularity has continued to grow. According to a recent report
by Jupiter Media Metrix, half the population, some 142 Americans were
online in 2001, with the number projected to rise to 211 million by
2006.[^2] And the single most popular use of the Internet is e-mail,
used by 84 percent. An increasing number are also using the Internet for
transactions which may have previously taken place through the Postal
Service, with 39.1 using the Internet to make purchases, and 17.9
percent banking online.[^3]

One after another, forms of communication are moving into cyberspace and
away from the post office. For many office workers, it's a rare day when
they stick a stamp on an envelope, instead of simply pressing the "send"
button on a computer. Even official communications are moving on-line.
(These comments, for instance, will be sent to the Commission
electronically, and not through the mail.) Outside the office, more and
more communications are taking place electronically as well. Once
unthinkable, today it's not even unusual to receive a greeting card by
e-mail. With increasing numbers of American subscribing to always-on,
high-speed Internet access services, these trends may accelerate.

Ironically, the other great challenge facing the Postal Service --
security -- may also be accelerating this trend. The anthrax attacks of
2001 drove large numbers of Americans away from the mail, forcing them
to find alternative ways to communicate. Having found them, they may
never come back. In Washington, large portions of Capitol Hill and the
executive branch have been without normal mail deli very for months, yet
life has gone on much as before.

**Decreasing mail volume.** This shift has already shown itself in
postal volume statistics. As shown in briefing prepared for this
Commission by Richard Strasser, the chief financial officer of the
Postal Service, total mail volume has decreased for the past two years
by some five billion pieces, from 208 to 203 billion. First-class,
single piece letter volume has dropped by almost 10 percent since 1998,
from 54.3 to 49.3 billion pieces.[^4] The bottom line effect has been a
series of deficits for the Postal Service (although a surplus is
expected this year).

The Postal Service's analysis of types of mail is also telling.
"Nonhousehold to nonhousehold" (presumably business to business mail)
has dropped from 37 percent to 26 percent of total volume from 1987 to
2001. Household to household (presumably personal mail) has remained
relatively insignificant, at 7 percent in 2001. That leaves mail between
households and nonhouseholds, presumably businesses to individuals with
a dominant 67 percent of volume. That segment may also melt away as
electronic bill payment and other new services become more common. [^5]

**USPS Transformation Plan.** To its credit, the Postal Service
recognizes that it is in trouble, and that it needs to significantly
change. To this end, it announced last April a comprehensive
"transformation plan" proposing a wide-ranging set of reforms. It has
already begun to implement many of the management reforms in the plan,
such as cost savings. This is good news, but -- as the General
Accounting Office pointed out in a recent report -- there is still
reason for concern.[^6] Among other things, GAO points out that
historically, USPS has had difficulty sustaining cost savings,
employee-related costs are expected to continue increasing, and that
many of the cost savings were gained through a freeze on capital
spending rather than long-term policy changes.

Beyond management issues, the Transformation Plan also proposes a number
of reforms aimed at providing USPS wider flexibility in its operations.
These include wider powers to raise capital and to set rates, as well as
expanding its lines of business to related field such as e-commerce,
transportation, and printing.

The case for increased flexibility is sound. In today's markets, access
to capital and the ability to price dynamically for varying consumer
demands (as firms in many historically regulated industries have found)
are critical. So too, is the ability to diversify lines of business,
especially for companies in declining businesses.

**Special protections.** In effect, the USPS is arguing for the same
business tools enjoyed by ordinary firms. The problem, however, is that
the USPS is no ordinary firm. It enjoys a wide range of perquisites and
protections tied to its government status, ranging from exemption from
taxation to implied guarantees from the U.S. Treasury.

Foremost among these is the legal monopoly on delivery of letter mail,
making competition with the Postal Service a criminal offense. Notably,
while such legal monopolies were once common, mail delivery is now one
of very few industries under such restrictions. Over the past 25 years,
legal restrictions on competition in most other protected industries --
ranging from telephone service and cable TV to air travel and trucking
\-- have been lifted.[^7]

Providing USPS with the operational flexibility it seeks without
addressing these special protections would create very real concerns
that the Postal Service could distort markets to the detriment of
consumers. Perhaps more importantly, eliminating special privileges and
protections would be good for the Postal Service itself. Insulation and
protection from market forces helped foster much of the system's
inefficiency in the first place, reducing its ability to respond to
today's challenges. The fundamental culture of the Postal Service needs
to change, and such change will be spurred by more -- rather than less
-- competition.

**Universal service.** It should be noted that additional competition is
not inconsistent with universal service obligations. In several other
industries where competition has been introduced, support for service in
high-cost areas has been continued by replacing cross-subsidies with
explicit subsidies. In the airline industry, for instance, the Essential
Air Service program was created by the Airline Deregulation Act of 1978
to fund service to small communities. On a much larger scale, the
Telecommunications Act of 1996 provided for an extensive system of
explicit subsidies to take the place of telecom cross-subsidies to rural
areas.

This is not to say that these subsidies themselves are necessary or
justified. Like postal subsidies, airline and telecommunications
subsidies provide support without reference to individual need. The
troubling result is that many poor consumers pay to support wealthier
consumers. Nevertheless, by making subsidies explicit, the issue of
universal service subsidy can be decoupled from the issue of competition
in an industry -- allowing each to be evaluated on its own merits.

**Conclusion.** This Commission has been given a difficult challenge: to
examine a extensive set of issues surrounding the Postal Service.
Members will no doubt be inundated with information regarding the
operational details of USPS and the mailing industry. At the same time,
however, the fundamental changes taking place in postal services calls
for a long-term assessment, and a focus on the fundamental basis under
which the USPS will operate. And this means a reevaluation of the Postal
Service's mission, its governmental status, and the competitive
protection it receives. These issues are certainly not without
controversy, but provide the best opportunity for the Commission to
deliver real benefits to U.S. consumers.

[^1]: General Accounting Office, "U.S. Postal Service: Deteriorating
    Financial Outlook Increases Need for Transformation, February 2002.

[^2]: As cited in William F. Adkinson, Jr., Jeffrey A. Eisenach, and
    Thomas M. Lenard, "The Digital Economy Fact Book," Progress and
    Freedom Foundation, 2002.

[^3]: U.S. Department of Commerce, Economics and Statistics
    Administration and National Telecommunications and Information
    Administration, "A Nation Online: How Americans Are Expanding Their
    Use of the Internet," (February 2002).

[^4]: "Briefing for the President's Commission on the United States
    Postal Service," January 8, 2003.

[^5]: *See*, Jackie Spinner, "The Check's Last Writes: Some Can't Tear
    Themselves Away, but Electronic Payments Are Gaining Fast," *The
    Washington Post*, February 9, 2003, H1.

[^6]: General Accounting Office, "Major Management Challenges and
    Program Risks: U.S. Postal Service, January 2003.

[^7]: For a summary of the consumer benefits of competition in these
    deregulated industries, s*ee,* Robert Crandall and Jerry Ellig,
    "Economic Deregulation and Consumer Choice: Lessons for the Electric
    Industry, Center for Market Processes (1997).