***Institute for Research on the Economics of Taxation (IRET)***

Michael Schuyler

Senior Economist

Institute for Research on the Economics of Taxation

Statement Submitted to

President\'s Commission on the United States Postal Service

# February 12, 2003

***1710 Rhode Island Avenue, N.W., 11^th^ floor, Washington, D.C.
20036***

## Phone: (202) 463-1400 Internet: www.iret.org

**SUMMARY**

The Postal Service\'s financial problems are largely due to its costs,
which are high and which it finds hard to control. Especially worthy of
the Commission\'s attention are numerous federal mandates and pressures
that significantly drive up postal expenditures. These include universal
service mandates, postal wages and benefits that exceed those of
comparable workers in the private sector, and restrictions on
rationalizing the number and location of postal facilities. The
Commission should be skeptical of arguments frequently made by the
Postal Service over the years that, due to its weak bottom line, it must
be allowed to set postal rates with less regulatory oversight and that
it needs to expand. At a private-sector company, of course, poor
financial results would be a strong signal ***not*** to expand. If the
Commission concludes that the Postal Service is likely to need financial
assistance in the future for core operations within the postal monopoly,
it should recognize that explicit payments would lead to greater
accountability and better decisionmaking than increased reliance on
hidden subsidies.

My name is Michael Schuyler. I am a senior economist with the Institute
for Research on the Economics of Taxation (IRET). The President\'s
Commission on the United States Postal Service is engaged in an
important task, and I thank it for accepting this statement.

The Commission was established because of concern about the Postal
Service\'s finances. After reporting positive net income for the five
fiscal years from 1995 to 1999, the Postal Service has lost more than
\$2.5 billion in the last three fiscal years. While the agency forecasts
that it will have a small positive net income this year, many are
concerned about the agency\'s longer term finances.

In carrying out its work, the Commission has a broad mandate to examine
the Postal Service\'s costs, prices, the legal and regulatory structure
under which it operates, and what level of mail service it should
provide to fulfill its universal service obligation. ***Indeed, the
concept and definition of universal service should be subjected to
scrutiny and not taken for granted.***

The Postal Service is currently a government-owned enterprise with
monopolies on both non-urgent letter delivery and mailbox use. As a
monopoly, it is less subject to market discipline than other businesses.
Consequently, ***when addressing the Postal Service\'s problems, the
Commission should endeavor to make recommendations that protect both
postal consumers and taxpayers, and which do not damage the economy.***

As the Commission has noted, it has the opportunity to rethink what role
the Postal Service should play in the 21st century. In asking how to
help the Postal Service financially, the Commission should not assume as
a given that the agency\'s role in the future ought to be what it was in
the past.

**Money Problems**

After several years of positive net income in the last half of the
1990s, the Postal Service slipped into the red in 2000. It spilled more
red ink in 2001, and in 2002 the agency held its loss to \$676 million
only through a burst of determined cost cutting and a mid-2002 postal
rate increase (its third since the start of 1999).

Some of the adversity is temporary, due to the one-two punch of the
recession and the anthrax attacks. Fortunately, the recession\'s
negative effect on mail volume will reverse, perhaps with a
several-month lag, as the economy moves into recovery, and the damage
inflicted on mail volume and costs by the anthrax assault will tend to
dissipate, provided that there is no new attack.

A longer term worry is that electronic alternatives may eventually
produce a sustained drop in mail volume. The Postal Service is
especially concerned about electronic diversion of financial statements
and payments, which have been among its cash cows.

However, looking only at recent events misses red flags that have been
flying for decades. In the 31 years since the U.S. Postal Service was
formed from the old Post Office Department, the organization has
reported losses in 20 years and positive net income in only 11
years.[^1] The tendency of the Postal Service to fall short of its
break-even target is a chronic problem, not a new one.

Concentrating on the recent (hopefully temporary) drop in mail volume
may create the misleading impression that the Postal Service\'s
financial problems are primarily revenue and volume related. In fact,
since the Postal Service was established, year-over-year revenues rose
in 19 out of 20 money-losing years, and year-over year volume grew in 18
of those 20 years. For example, the 1980s was a period of rapid volume
and revenue growth for the agency. From 1980 to 1989, mail volume surged
by more than 50% and revenues more than doubled. Nevertheless, the
Postal Service lost money in five of those ten years, and if not for
\$8.5 billion of Congressional appropriations during that decade[^2], it
would have lost money in all but one year.

Moreover, even if --- contrary to fact --- the Postal Service\'s volume
and revenues were highly erratic, that is the sort of volatility with
which private-sector businesses must cope if they are to survive and
prosper. For instance, the Postal Service often compares itself to
Fortune 500 companies. For the years from 1997 and 2001, the percent of
companies in the Fortune 500 that reported year-to-year drops in sales
ranged from 15% to 42% and averaged 23%.[^3] Many of the drops were
large, sudden, and unexpected. In comparison, sheltered by its
government monopolies on non-urgent letter deliver and mailbox use, the
Postal Service\'s declines in revenues and volume have been few, far
between, and mild. Although electronic alternatives to mail may be
slowly weakening its monopoly, the monopoly remains a powerful force and
the Postal Service can count on a revenue base that is much more secure
than that of most private-sector businesses.

The Postal Service\'s frequent deficits, despite revenues and volume
that have grown over time and have only rarely failed to increase from
one year to the next, indicate that the agency\'s financial woes should
not be blamed on its revenues.

The real problem is on the cost side. The Postal Service\'s costs are
too high and the agency has trouble keeping them under control. For
example, why does it cost the Postal Service 24 cents to sell \$1 of
stamps at a post office counter (according to the agency\'s numbers),
but just 10 cents when a contract postal unit sells the stamps?[^4]
Moreover, on those occasions when the organization is in the black
because revenues (temporarily) exceed costs, costs usually rise quickly
to close the gap. For instance, the agency went from positive net income
in 1995 to a loss by 2000 because, although revenues increased every
year during that period (at a respectable average pace of 3.5%
annually), costs climbed every year at a faster rate.[^5]

Federal Mandates Have Contributed To The Postal Service\'s High Costs

Government enterprises usually have trouble managing their costs.
Government ownership and operation create incentives that often
subordinate cost issues to political and bureaucratic goals. For this
reason, the Postal Service may not have been as consistently vigilant in
managing its costs as it should have been. Accordingly, the Commission
should closely examine business practices that are within the Postal
Service\'s control.

But the Commission may be able to make an even larger contribution if it
also looks carefully at the numerous burdens that the federal government
places on the Postal Service. The federal government\'s various demands
on the Postal Service have a price tag that totals billions of dollars
every year. The Postal Service regularly complains that Congressional
mandates in areas like service standards, the location of facilities,
and employee compensation and work rules seriously limit its ability to
manage costs.

There are two reasons for the Commission to evaluate such claims. First,
the potential cost savings are large, even from relatively small changes
in federal requirements. Second, an outside body like the Commission may
be better able than the Postal Service itself to persuade Congress to
modify the ground rules in some of these areas, if it thinks the changes
are justified.

Consider some of the mandates the federal government imposes on the
Postal Service:

[*Uniform rates*.]{.underline} The Postal Service must provide mail
delivery to all addresses at uniform rates. Deliveries are particularly
costly in remote areas and high crime areas. To cover the cost of
universal service in high-cost areas without having to enact an explicit
on-budget federal subsidy, the government grants the Postal Service a
monopoly, and gives it tax exempt status and other disguised assistance.
The monopoly allows the Postal Service to overcharge low-cost consumers
to cover the expenses of servicing high-cost consumers. This is a
cross-subsidy from one group of postal customers within the monopoly to
another. The subsidy is not explicit and apparent, but it is still
there.

*[Frequency of delivery.]{.underline}* The Postal Service provides mail
delivery six days a week. That sixth delivery day is expensive.
According to a rough estimate from the Postal Service, moving to
five-day-a-week delivery would produce cost savings of \$800 million to
\$1.1 billion yearly.[^6] Moving to delivery every other day would
presumably save still more. Yet, on those occasions when the Postal
Service has mused about eliminating the sixth delivery day, the
political firestorms have been intense. This is clearly not an area
where the Postal Service can take action on its own.

*[Employee compensation.]{.underline}* Approximately 80% of the Postal
Service\'s costs are labor related. Federal law directs that postal
workers are to receive wages and benefits comparable to those of similar
workers in the private-sector[^7]. Empirical evidence indicates,
however, that postal workers actually receive substantially higher wages
and benefits.[^8] Although the above-market compensation, which is known
as the postal pay premium, is contrary to the federal policy of pay
comparability stated in law, it is actually a consequence, albeit
unintended, of the federally mandated pay-determination process. If the
Postal Service and one of its unions cannot reach a collective
bargaining agreement, there is binding arbitration: a third-party
arbitrator, who has no direct responsibility for the Postal Service\'s
finances and the postal rates needed to cover labor and other costs,
determines wages, some benefits, and various work rules. Generous
arbitration awards can sharply raise labor costs, and the mere threat of
arbitration may induce the Postal Service to accede to demands in labor
negotiations that it would otherwise reject. Further weakening the
Postal Service\'s position, some valuable benefits are specified in law,
which means they have already been granted before negotiations begin.
Because labor compensation is such a large share of Postal Service
expenses, the postal pay premium is a very big-ticket item, probably
adding \$5 billion to \$10 billion each year to the Postal Service\'s
costs.[^9]

High productivity could offset, in whole or part, high pay. But, in
fact, postal productivity has, on average, lagged that in the private
sector. Restrictive work rules diminish the productivity of postal
employees in many cases.

It should be understood that just as the postal monopoly creates a need
for regulating postal rates, so it creates a need to regulate postal
wages and benefits. A Postal Service with a statutory monopoly in
combination with strong postal unions with which the agency must deal
produces what is known as a bilateral monopoly.[^10] If there were no
regulation of prices and pay, the Postal Service would likely charge
monopoly prices to consumers in its protected market in order to capture
monopoly profits that it could use for its own purposes. Postal unions,
meanwhile, would try to seize the monopoly profits for their members by
demanding increases in wages and benefits until no monopoly profits
remained with the Postal Service. In a bilateral monopoly, it is
indeterminate who will ultimately secure the monopoly profits. It could
be the Postal Service or the postal unions or some splitting of the
spoils. In any event, customers within the monopoly would be
overcharged, forced to pay monopoly prices instead of the
as‑low‑as‑possible prices that are the government\'s declared policy.

The Postal Rate Commission attempts as well as it can to prevent the
Postal Service from capturing monopoly profits for itself. But that
leaves the postal unions. Unless wages and benefits are effectively
controlled, they may rise so high that the Postal Service needs to
charge monopoly‑level postal rates to consumers within the statutory
monopoly just so it can pay its workforce. In the legislation that
established the Postal Service, binding arbitration was the method
chosen to keep labor compensation in check. Given the monopoly, binding
arbitration may be better than nothing, and it may prevent postal unions
from capturing as much of the potential monopoly profits as they could
otherwise. Nevertheless, arbitrators appear to have regularly issued
awards whose benefits exceed the pay comparability standard called for
under the law. That is, the presence of a substantial postal wage
premium is evidence that binding arbitration, as it operates under
current rules, has been a partial failure and has allowed postal unions
to capture some of the monopoly profits for their members. Better
control of postal wages and benefits is needed for the protection of
consumers within the postal monopoly.[^11] ***Postal arbitrators should
be told to bear more firmly in mind the burden they place on postal
customers when they ratify pay hikes.***

*[Small, money-losing post offices]{.underline}**.*** Federal law
instructs the Postal Service never to close a small post office solely
because it is losing money.[^12] But many small post offices do lose
money, and keeping them open is expensive

*[Other closings and consolidations.]{.underline}* The law does not bar
all post office closings, but it specifies that no post office can be
closed unless a complicated, time-consuming process is followed. In
addition, political pressures are often applied when the closing of a
post office is being considered, which further hinders efforts to
rationalize the network of post offices. Similarly, political objections
have complicated efforts to rationalize the network of mail processing
plants and to reduce mail transportation costs. Since the anthrax
attacks, a sense of urgency has lowered some of the political barriers
that previously existed. This has allowed the Postal Service to
undertake more consolidation than would have been politically feasible
previously, and the cost savings are significant. Further progress,
however, may depend on the Commission giving its imprimatur to the
effort.

**Transparent Federal Funding Would Lead to Better Decisionmaking**

The most transparent way to finance the extra costs that special federal
requirements place on the Postal Service would be through explicit
payments as part of the federal budget. Transparent federal funding
would improve accountability in Washington by forcing elected officials
to acknowledge that the special obligations they place on the Postal
Service do have costs. Transparency would remind elected officials and
voters that the costs exist and should be weighed against benefits when
deciding which requirements are worthwhile and which should be modified.

**Indirect Financing Through Special Powers and Privileges Hides the
Costs and Distorts Market Signals**

Universal service, continued operation of inefficient post offices and
processing facilities, pay-determination procedures that result in high
wages and benefits, and other federal requirements constitute a long and
expensive list of federal mandates. To keep the costs of these mandates
off the federal books, the federal government provides its Postal
Service with an array of hidden, off-budget government subsidies and the
granting of a monopoly. Although the subsidies and monopoly are worth
billions of dollars annually, they never appear explicitly in the
federal budget. These subsidies help the Postal Service survive, despite
high costs that are due in part to federal requirements. Even a partial
list of its special powers and privileges is long[^13]:

-   The Postal Service\'s crown jewel is its government-granted mail
    monopoly. Because of that monopoly, households and businesses are
    forced to go through the U.S. Postal Service if they want to send or
    receive non-urgent letters or make use of mailboxes. The monopoly is
    often defended as being the funding device for uniform rates, which
    says, in effect, that there is massive cross-subsidization within
    the monopoly: some customers are charged much more than they cost
    the Postal Service in order to provide below-cost service to other
    customers. Another way to express this is that a considerable
    portion of the universal service obligation is an unfunded federal
    mandate. The monopoly allows the Postal Service to shift much of the
    cost to a subset of ratepayers.

-   The Postal Service enjoys an array of tax breaks that includes:
    exemption from federal, state, and local income taxes; exemption
    from property taxes on all the real estate it owns; exemption from
    inventory and gross receipts taxes in localities that impose such
    taxes; and exemption from having to charge state and local sales
    taxes. Although being exempt from income taxes is not particularly
    valuable for an organization that usually loses money, the other
    exemptions are valuable.

-   The Postal Service has a special low-interest-rate credit line
    directly into the U.S. Treasury for up to \$15 billion.

-   The Postal Service\'s owner, the federal government, never demands a
    market rate of return (or any positive monetary repayment) on the
    billions of dollars of equity it has invested in the organization.

-   The Postal Service enjoys a de facto federal guarantee against
    bankruptcy.

-   The Postal Service does not pay state motor-vehicle licensing fees
    and is immune from parking tickets and related expenses.

-   The Postal Service is not bound by local zoning laws and related
    restrictions and expenses (although it does have a policy of
    cooperating with local zoning authorities).

-   The Postal Service is at least partially shielded from normal
    antitrust laws (although a recent Federal Appeals Court decision
    ruled against the agency\'s position that it has broad protection
    from antitrust liability based on sovereign immunity.[^14])

The heavy reliance on disguised state aid as a funding mechanism is
troubling for several reasons. It conceals the true costs of various
obligations placed on the Postal Service, which makes it harder to reach
good decisions in the political process about whether various
requirements are worth their costs. The subsidies also distort market
price signals, which causes a misallocation of resources and lessened
productivity. For example, when some consumers within the postal
monopoly are forced to subsidize other customers within the monopoly,
those providing the subsidies are encouraged by the prices they face to
use too little mail service and look too hard for non-postal
alternatives. Further, the monopoly invites misuse in a manner that is
contrary to policy, but tempting nevertheless. Because there are strong
size-related rewards in government organizations, it is attractive to
expand if at all possible.[^15] One way to do that is to charge
customers within the monopoly a little more (they have difficulty going
elsewhere) in order to subsidize the sale of more goods and services
outside the monopoly. The Postal Service denies that cross-subsidization
from the monopoly into competitive markets ever happens, but it is
suggestive that revenues from first-class mail users cover a
disproportionate share of the organization\'s costs.[^16] That is,
although the Postal Service claims that expansion into non-core
operations would help cover the cost of universal service within its
core market, support and cross-subsidies appear to go in the opposite
direction.

Furthermore, some of the other subsidies may lead to cases where those
in the Postal Service genuinely think the organization can do well in
competitive markets outside of its monopoly, even though it would
actually be significantly less efficient than the private-sector
businesses it would displace. Unlike private-sector businesses, the
Postal Service is excused from paying many taxes and government fees,
and is not expected to earn a market rate of return but can call itself
successful merely for breaking even. Because of its implicit subsidies,
the Postal Service can be satisfied with an expected pre-tax return
10%-20% lower than that of a private-sector business. That is a problem
for the economy. When the Postal Service displaces private-sector
businesses that had higher pre-tax returns, the economy\'s productivity
declines.

In addition, the subsidies hurt the Treasuries of federal, state, and
local governments due to reduced tax collections. After all, the Postal
Service uses its multiple tax exemptions to escape paying many of the
taxes that private businesses carrying out the same operations would
have to pay. The more the Postal Service expands, the greater the
revenue loss to governments, and to maintain a given level of government
spending, the more governments must borrow or collect through higher
taxes on other taxpayers.

**What the Commission Should Do: Help the Postal Service Lower Its
Costs**

[Redefine universal service.]{.underline}

Many of the federal requirements that drive up the Postal Service\'s
costs cannot be tackled unless Congress is persuaded that changes are
needed. The Commission can play a crucial role by examining these
requirements to see if some of them are not worth the costs they add,
and then building a consensus for reform.

For example, one of the Commission\'s assignments is to examine how
\"universal service\" should be defined in the future. It should not
regard the current interpretation of universal service as sacrosanct.
The Commission might evaluate the pros and cons of proposals that have
been floated previously, such as not requiring six‑day‑a‑week mail
delivery. That particular change would solve what postal officials claim
is a serious problem. Recently (and perhaps temporarily) the number of
addresses has grown more quickly than the volume of mail, which reduces
the number of pieces of mail per delivery. The Postal Service complains
that fewer pieces of mail per delivery raises its unit costs. Slightly
reducing the frequency of mail delivery, say from six times weekly to
five, would more than offset that, so that, on net, pieces of mail per
delivery would rise.

If the Commission is willing to think (just slightly) outside the box,
it might consider ideas like defining universal service as a basic level
of delivery service that is relatively uniform at all addresses but
breaking from the one‑size‑fits‑all mold by permitting the Postal
Service to offer enhanced delivery services to customers willing to pay
more. For example, cable TV companies usually offer basic service for
one price and provide premium services at higher prices. Local telephone
companies normally offer a basic \"lifeline\" service at a reduced
price. Similarly, many banks offer an economy‑priced basic checking
account and charge more for checking accounts with enhanced options.

[Closing and consolidating post offices and other
facilities.]{.underline}

The cost saving would also be large if some of the current political
obstacles to consolidating and rationalizing the number of post offices
and the national network of mail processing facilities were eased.

Bring postal wages and benefits closer to those in the private sector
(i.e., narrow the postal pay premium).

Still bigger cost saving could be realized by changing how postal wages
and benefits are set. Although the political opposition to any changes
in the pay determination process would be strong, it should be
remembered that a well crafted reform to bring postal pay into closer
alignment with private-sector pay would be fully consistent with the pay
comparability policy currently stated in law.

[Business practices under the Postal Service\'s control.]{.underline}

The Commission should also examine the business practices that are under
the Postal Service\'s control. There is room for improvement. As one
example, the Postal Service might be urged by the Commission to contract
out more of its work. The Postal Service has already done some of this,
in effect, by vigorously pursuing worksharing arrangements that have
been determined by the independent Postal Rate Commission to save it
money and by contracting out some of its operations to private-sector
companies, but many additional opportunities remain. Federal, state, and
local governments have repeatedly found that labor costs fall and
productivity increases when governments open their activities to
competition between government and private-sector workers. The Bush
Administration has announced an initiative to open to public-private
competition many jobs now performed within the government. The
Commission could reinforce this initiative at the Postal Service, which
is the government agency with the most employees except for the Defense
Department.

**Privatization**

The experience with many state-owned enterprises in this country and
abroad has been that the greatest productivity gains and cost savings
can be achieved by privatizing the enterprises. The Commission should
examine this option. Privatization would be the best choice from an
economic perspective. The Commission should be aware, however, that for
privatization to work properly, the newly privatized business must be
put on a level playing field with other businesses. That means ending
the special privileges it possessed as a government enterprise. If those
subsidies remain on the books, the enterprise can use them to take
business away from other, more efficient companies, which reduces
productivity, distorts consumers\' choices, and may have other drawbacks
like increased risks for taxpayers and lost tax revenues for federal,
state, and local governments. Accordingly, if the Commission offers
privatization as an option, it should carefully explain how to reach the
goal of full privatization, which includes ending the newly privatized
firm\'s government-based special privileges.

**What Should the Commission Recommend If It Judges That the Postal
Service Cannot Break Even In its Core Mission of Delivering Non-Urgent
Letters Throughout the Nation at Reasonable Prices?**

First, the Commission should examine the many federally imposed
rigidities that increase the Postal Service\'s costs. Relaxing some of
these demands would be more than sufficient to allow the Postal Service
to break even in its core mission.

But what if the Commission fears that the political process will stymie
cost-saving reforms? Then the best choice is to finance the deficits in
the core market through explicit appropriations in the federal budget to
bring the costs into the open and foster better decisionmaking. For
additional transparency, the Postal Service\'s accounting should be
strengthened and it should be required to publicly release more
information about its operations.[^17] Any federal payments should be
confined to the Postal Service\'s core role. There is no good policy
reason to allow the Postal Service to operate outside its monopoly and
provide goods and services that are already offered by private-sector
businesses, and it would be even worse public policy to subsidize the
Postal Service to do so. In no event should the Commission recommend
additional indirect subsidies involving special government privileges.
They are not transparent, distort market signals, and misallocate
resources.

**The Postal Service Should Not Expand**

On many occasions over the years, the Postal Service has claimed that it
could strengthen its bottom line by expanding. Its argument is usually
couched in terms of economies of scale and scope. However, the
organization is already so large that it has captured virtually all
significant size-based economies.[^18]

In reality, a hidden, but central element of its business plan in any
expansion would be making greater use of its government subsidies (tax
exemptions, no need to earn market rate of return, low cost credit,
etc.) to try to take business away from more efficient private-sector
producers. Using open-ended hidden subsidies to finance expansion would
be bad for the economy and for federal, state, and local governments and
their taxpayers.

Moreover, the Postal Service is so inefficient that it would probably
still lose money if it offers new products outside its monopoly core,
despite the artificial cost advantages it enjoys because of its
subsidies. An additional concern is that bureaucratic rewards for
growing larger would tempt it to underprice its competitive-market
products in order to increase sales there, which increases the odds that
it will lose money if it expands. If that happens, consumers within the
postal monopoly would be forced to more heavily cross-subsidize the
Postal Service\'s competitive-market products, and taxpayers would be at
risk of having eventually to pay for an expensive Postal Service
bailout.

**Should Postal Rates Be Subject to Less Regulatory Oversight?**

The Postal Reorganization Act of 1970, which created the Postal Service,
also created an independent federal agency, the Postal Rate Commission
(PRC), to provide regulatory oversight. The Postal Service cannot change
postal rates and postal classifications on its own but must first seek
approval from the PRC.

From the start, the Postal Service has complained about this
arrangement. The Postal Service is correct that the rate setting process
is time consuming and expensive. That does not mean it is unwarranted,
however. The Postal Service is a monopolist. Unless held in check
through strong regulatory oversight, the monopoly gives it enormous
pricing power over consumers within the postal monopoly. Thus, while
current regulatory procedures are costly (but less costly than many
other federal requirements), there is a very good reason for having
them. Even if the PRC has not been fully able to prevent
cross‑subsidization from consumers within the postal monopoly to postal
products in competitive markets, the cross‑subsidies would be larger if
not for the PRC\'s efforts.

One may think of current regulatory oversight as the quid pro quo for
the postal monopoly. If the day ever comes when the Postal Service does
not have its monopoly and the associated monopoly power over consumers
within the monopoly, it should then be able to set prices on its own,
without regulatory supervision. Until then, however, the oversight
should remain in place.

The current type of regulation is known as cost‑of‑service regulation.
Some have suggested switching to what is known as a rate‑cap regime.
Rate‑cap regulation makes sense for a private‑sector monopolist, but for
it to work properly it requires the presence of private owners subject
to the profit motive. At a government monopoly, there is danger that
rate‑cap regulation would lead to greater cross‑subsidization from
consumers within the monopoly to other products, while failing to
achieve the hoped for efficiency gains.

Another proposal is that the Postal Service be allowed to change prices
on its own, subject to later challenge before the PRC. That suggested
change in regulatory oversight also has problems. First, it would weaken
regulatory oversight by shifting from having the Postal Service justify
postal rate changes to making postal consumers challenge the changes.
Even when challenges were ultimately successful, the Postal Service
would have had the rates it wanted in the meantime (although presumably
refunds could be ordered.) Second, because the Postal Service would
enter the regulatory review process with the postal rates it desires,
the PRC would lose much of its current leverage to pry cost information
from the Postal Service. With less information, the PRC would be less
able to spot cross‑subsidization from the monopoly to other products.

**Conclusion**

The Postal Service has demonstrated in the last year that cost control
efforts can quickly yield dramatic financial results. Many of the most
promising cost management reforms, however, cannot be used without
easing rigidities created by various federal mandates and pressures.

The Commission can make the greatest contribution to ensuring that the
Postal Service is financially viable in the long run, that it delivers
satisfactory service, and that it charges reasonable rates by
concentrating on cost issues. It should prod the Postal Service to stay
focused on cost management in the long run, and not regard cost cutting
as only a short run or medium run financial fix. It should examine how
federal mandates greatly increase the Postal Service\'s costs, compare
the mandates\' costs to the benefits they bring, and make the case to
Congress for relaxing the mandates with the highest costs and lowest
benefits.

[^1]: ^?^ U.S. Postal Service, *Annual Reports*, various issues. The
    period covered is fiscal years 1972 (when the Post Office Department
    officially became the Postal Service) to 2002.

[^2]: ^?^ U.S. Postal Service, *Annual Report*, various issues.

[^3]: ^?^ *Fortune Magazine*, April 27, 1998, April 26, 1999, April 17,
    2000, April 16, 2001, and April 15, 2002 issues. These percentages
    understate the sales declines because they do not include firms
    whose sales fell so much from the previous year that they dropped
    off the Fortune 500.

[^4]: ^?^ United States Postal Service, *United States Postal Service
    Transformation Plan*, April 2002, p. 15, accessed on the Internet at
    http://www.usps.com/strategicdirection/transform.htm.

[^5]: ^?^ U.S. Postal Service, *Annual Report*, 2001, pp. 48-49.

[^6]: ^?^ Postal Service, *Transformation Plan*, *op. cit.*, p. 69.

[^7]: ^?^ 39 USC, Sec. 101(c) and 39 USC, Sec. 1003(a).

[^8]: ^?^ For a fuller discussion of this issue, notably a survey of
    empirical economic studies in the area, see Michael Schuyler, \"The
    Postal Wage Premium: No Wonder The Postal Service Loses Money,\"
    *IRET Congressional Advisory*, No.131, July 24, 2002, available on
    the Internet at ftp://ftp.iret.org/pub/ADVS-131.PDF. Saying that
    postal workers, on average, receive much higher compensation than
    similar private-sector workers does not, of course, mean that every
    postal worker or every category of postal workers obtains a premium
    compared to what he or she would receive in the private sector.

[^9]: ^?^ A rough estimate is that substantially reducing the postal pay
    premium would have saved the Postal Service \$8.1 billion in 2001
    alone. See Schuyler, \"The Postal Wage Premium: No Wonder The Postal
    Service Loses Money,\" *op. cit.*, for details about the estimate.

[^10]: ^?^ For a fuller discussion of this issue, see Stephen J. Entin,
    \"The Postal Service: A Monopoly That Loses Money,\" *IRET
    Congressional Advisory*, No. 130, June 3, 2002.

[^11]: ^?^ For a discussion of numerous ideas for reducing the disparity
    between postal pay and private-sector pay, see Michael Schuyler,
    \"How To Bring Postal Compensation Into Line With The Private
    Sector,\" *IRET Congressional Advisory*, No.132, August 28, 2002,
    available on the Internet at ftp://ftp.iret.org/pub/ADVS-132.PDF.

[^12]: ^?^ 39 USC, Sec. 101(b).

[^13]: ^?^ For rough estimates of the dollar magnitude of several of the
    Postal Service\'s hidden subsidies, see Michael Schuyler, *The
    Anti-Competitive Edge: Government Subsidies To Government
    Businesses: Case Studies Of The Postal Service, TVA, And Amtrak*
    (Washington, DC: Institute For Research On The Economics Of
    Taxation, 1999). The study does not estimate the value of the postal
    monopoly. The paper also provides estimates for many of the
    subsidies at TVA and Amtrak.

[^14]: ^?^ Flamingo Industries v. U.S. Postal Service, available on the
    Internet at http://www.ca9.uscourts.gov/
    ca9/newopinions.nsf/D971661C3CE8DF6488256C1E00030FEF/\$file/0115963.pdf?openelement.

[^15]: ^?^ Size can bring rewards in the private sector, too, but the
    profit motive provides a brake that is missing in the government
    sector. Expansion tends to be punished in the private sector when it
    hurts profits.

[^16]: ^?^ This issue is discussed more fully in Michael Schuyler,
    \"Does First-Class Mail Carry Too Much Overhead?\" *IRET
    Congressional Advisory*, No. 141, November 13, 2002, available on
    the Internet at ftp://ftp.iret.org/pub/ADVS-141.PDF.

[^17]: ^?^ For a fuller discussion of why greater financial transparency
    at the Postal Service is desirable, see Michael Schuyler,
    \"Transparency: Using Financial Openness At The Postal Service To
    Protect Consumers And Taxpayers,\" *IRET Congressional Advisory*,
    No. 125, March 27, 2002, available on the Internet at
    ftp://ftp.iret.org/pub/ADVS‑125.PDF; and Michael Schuyler, \"New GAO
    Study Indicates Need For More Financial Transparency At The Postal
    Service,\" *IRET Congressional Advisory*, No. 144, December 11,
    2002, available on the Internet at
    ftp://ftp.iret.org/pub/ADVS‑144.PDF.

[^18]: ^?^ This issue is examined much more fully in Michael Schuyler,
    *Wrong Delivery: The Postal Service In Competitive Markets*
    (Washington, DC: Institute for Research on the Economics of
    Taxation, 1998). To be sure, there are scale economies when mail
    carriers deliver more items with the characteristics of first- and
    third-class mail on each trip to the mailbox. Unfortunately for
    advocates of expansion, few other products have their
    characteristics. The most reliable way to increase how much is
    delivered per trip to the mailbox is to reduce the number of
    delivery days.