Postal Death Spiral Denial

In March I wrote a post explaining how and why the US Postal Service hadUSPS Stamp begun to slowly circle the drain. It had the impact on policy makers that my more clever posts usually do, which is to say none at all. So here I am trying again.

The USPS is a business (term used loosely) with high fixed costs and a variable income. That means that what it costs to run the operation is not particularly tied to the amount of business being done. It is a setup that is typical of transportation companies, not just postal services but also, for example, airlines. (And telecoms and media companies, BTW.)

When revenues are growing, all is well. Incremental income is mostly profit, since the overhead has been paid for. But when the trend is in the other direction, an irreversible death spiral often results.

In the USPS case, they have a massive overhead that cannot be reduced fast enough. Partly this is due to legal constraints, they are, for example, not allowed to close branches merely to save money, but mostly it is due to the fundamental nature of a postal service. It costs about the same to have a letter carrier deliver one envelope to you as it does to deliver ten.

What the USPS needs to charge per item delivered is, basically, the cost of running the whole system divided by the number of items mailed. As that number shrinks, the rates for mailing stuff has to go up. And that becomes a dismal feedback loop, since higher rates cause volumes to drop further, necessitating even higher rates, and so on.

Much as I like to imagine myself as uniquely insightful, I do not think this dynamic is particularly subtle or complicated. This past April, my favorite government agency, the GAO (of gas powered alarm clock fame) started a report on the USPS with the words “USPS’s business model is not viable”.

And yet, the USPS leadership, the various lobbying and pressure groups concerned, and the media, are all exhibiting a complacency about the future of the postal service that makes the Greek protesters seem like a horde of humorless bean-counting CPAs.

This has come to the forefront recently as the USPS officially announced that it was seeking a rate increase in early 2011. In the press release, the Postmaster General said “These proposed rate adjustments are moderate and part of a fair and balanced approach to insuring mail service for all Americans well into the future.”

The rate increase is projected to raise about $3 billion a year, assuming no further erosion in volumes. The USPS expects to lose $7 billion next year. Other parts of the “fair and balanced approach” include such things as abolishing Saturday delivery and closing offices, both of which would require Congressional action.

Mailers, predictably, objected to the plan. From the AP:

"This proposed rate increase amounts to another tax imposed on Americans at a time when the economy can least afford it," said Tony Conway, executive director of the Alliance of Nonprofit Mailers, a group representing charities and other organizations.

"Consumers everywhere will pay more for the letters and packages they need to send; businesses – large and small – will suffer and even more jobs will be lost," complained Conway, who was designated spokesman for the Affordable Mail Alliance, a coalition of businesses, charities and other mailers formed to oppose the increase.

This can really only be described as wholly disconnected from reality. And by failing to point this out, the media isn’t helping any. The ought-to-be-obvious truth is that the USPS is hopelessly bankrupt and in the early but irreversible stages of collapse.

The full opening paragraph of the GAO report that I quoted above reads

USPS’s business model is not viable due to USPS’s inability to reduce costs sufficiently in response to continuing mail volume and revenue declines. Mail volume declined 36 billion pieces (17 percent) over the last 3 fiscal years (2007 through 2009) with the recession accelerating shifts to electronic communications and payments. USPS lost nearly $12 billion over this period, despite achieving billions in cost savings by reducing its career workforce by over 84,000 employees, reducing capital investments, and raising rates. However, USPS had difficulty in eliminating costly excess capacity, and its revenue initiatives have had limited results. USPS also is nearing its $15 billion borrowing limit with the U.S. Treasury and has unfunded pension and retiree health obligations and other liabilities of about $90 billion. In 2009, Congress reduced USPS’s retiree health benefit payment by $4 billion to address a looming cash shortfall, but USPS still recorded a loss of $3.8 billion. Given its financial problems and outlook, USPS cannot support its current level of service and operations. USPS projects that volume will decline by about 27 billion pieces over the next decade, while revenues will stagnate; costs will rise; and, without major changes, cumulative losses could exceed $238 billion.

That $90 billion in unfunded liabilities figure tells us that even the horrendous sounding $7 billion projected deficit is wishful thinking. All in, the USPS is losing something on the order of $1 billion a month, and it will only get worse. There can be no doubt about who will ultimately pick up the tab.

Instead of speaking blithely about mail service well into the future, the Postmaster General should be discussing plans for the orderly winding down and shutting of the system. Perhaps it could be drawn out for five or ten years, long enough to give everybody time to adjust habits accordingly.

10 Comments

  • By jim, July 7, 2010 @ 2:11 pm

    Congress needs to let the USPS close offices and change services appropriately. Right now they are requiring the post office to do a lot of stuff that is losing a lot of money then expecting them to not lose money.

    On the good side there will be a lot of postal workers retiring in the next 10 years so cutting their staffing won’t be that painful.

    The government has been playing a shell game with the USPS pension for a while.

    USPS recently claimed that its been required to over pay its pension by a total of $75B. Back in 2003 the USPS made a similar conclusion that they’d been made to over pay by $71B and the GAO agreed with them then. In fact the GAO estimated the overpayment to be $103B mostly cause congress expected USPS to pay the pensions for military service that postal workers had to the tune of $27B.

    Pension obligations are based on actuarial tables which can use various assumptions. Corporations game those numbers all the time. Change a couple assumptions and that $90B deficit might be a surplus.

  • By bex, July 7, 2010 @ 5:36 pm

    but if revenues continue to decline, they might not be able to pay pensions in the future… so overpayment might be the only option.

    yarp… thus beginith the death spiral…

  • By mightymouselives, July 7, 2010 @ 6:16 pm

    Right now, if I send a letter, does the PO make money or does it lose money?

  • By Steve, July 7, 2010 @ 7:18 pm

    According to Mr. Curmudgeon’s argument above, they make money on the letter you sent; but they lose money by being up to send that, and all the other letters (costs which are incurred whether you send your letter or not.)

  • By Neil, July 7, 2010 @ 7:19 pm

    I still maintain that the decline doesn’t have to be irreversible. The problem is that congress needs to get out of the way of management making good management decisions. Actual delivery costs are only a fraction of the systems costs, mostly their difficulty is in running lots of expensive retail outlets, instead of selling through outside retailers on a commission basis.

    The electronic economy should be an opportunity, as growth in package shipments have more than offset the decline in letters in most of the world. Only in the US can the post office not effectively compete and win the business over private couriers…who are indeed profitable.

  • By Investor Junkie, July 7, 2010 @ 7:38 pm

    “When you control the mail, you control information.”

    http://www.youtube.com/watch?v=Rg_4z2adv6Q&feature=related

    I guess Newman will need to find a new job. Who uses the mail these days?

    Frank you left out the union factor. My friend works for the USPS and the shit he tells me about the union and management drives me batty as an entrepreneur.

  • By Investor Junkie, July 7, 2010 @ 7:41 pm

    I also forgot about the “I like to cancel my mail” skit.

    http://www.youtube.com/watch?v=Hox-ni8geIw&feature=related

  • By shadox, July 8, 2010 @ 12:44 am

    Right on the money and very well written.

    If USPS completely shut down TODAY, the main impact on my family would be less junk mail to sort through. Except for our Netflix DVDs, we rarely get anything of interest via USPS. Email, online bill payment, and person to person electronic wire transfers are making USPS obsolete. When packages are involved, FedEx and UPS ground offer a service that is just as affordable.

    Do we absolutely need this agency?

  • By Kosmo @ The Casual Observer, July 8, 2010 @ 10:13 am

    I wonder how much money could be saved by switching to Monday/Wednesday/Friday delivery. Priority mail would still get delivered every day (maybe a dedicated person who covers priority mail for several mail routes), but other mail wouldn’t. Would it really be that big of a problem to wait an extra day for bills and catalogs?

  • By Brendan, July 8, 2010 @ 1:02 pm

    There is a simple solution:

    Run the post office for a profit even better would be to sell it and open the services up to competition.

    Then the loss making services would be cut and the organisation changed around.

    New Zealand did that in the late 1980s and surprise surprise the office started making money and has been doing that ever since.

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