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.

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