Is the USPS Going Out of Business?

Imagine a business losing $1B a month. Its brand name is well known by consumers, but associated with bureaucratic inertia and occasional acts of workplace homicide. Management has a scheme to massively cut costs andUSPS Stamp modestly raise prices that, with luck, may return the company to break even five years from now.

Would you like to own a share of this outfit? Too late. You already do.

The inevitable, if not imminent, demise of the US Postal Service is one of the recurring themes here at BMA. Aside from affording me the opportunity to poke fun at Washington, and make predictions that are safely in far off in the future, I keep returning to the topic because it is an example of one of the core ideas of this blog, that vague and wishful thinking is no match for the reality of dollars and cents.

The Post Office is in serious trouble. If it were a normal corporation with private creditors it would almost certainly be in Chapter 11 by now. Deficits are large and getting larger. The top line is shrinking quickly.

Mail volumes are down 23% since 2007. And that decline is part of a long term trend, not some short-term effect of the Great Recession. Overall volumes peaked in 2006, but first class mail, which is is the real money maker for the USPS, peaked in 1999.

Moreover, it is a monopoly. These are not revenues lost to a competitor that they might someday win back. People have just reduced their usage of mail. It does not take much insight to see that technology is gradually, inexorably, eating away at this business.

The horrible truth is that there are very few applications for snail mail for which an electronic alternative would not be cheaper and faster. That most of us still use it as much as we do is driven more by laziness than a rational preference. As time goes on, we will all get around to using the USPS less. A lot less.

Recently, the Post Office backed down from a scheme to close 3,700 of its 36,500 locations. That would have saved $200M a year, implying that each to-be-closed office loses about $56K a year. The new plan is to significantly reduce the hours at 13,000 offices, which will save $500M a year. (Part-time offices mean part-time workers, and they do not get such expensive benefits.)

That sounds like a big step in the right direction until you remember that the USPS is losing $36M a day, so this will close the gap for just under two weeks out of the year. What about the rest of the red ink? Well, they have a plan.

Released in February, the five year “Plan to Profitability” lays out $20B in annual savings, of which about half will require legislative action. At first blush, it all seems plausible. Then doubt sets in.

Part of the savings turns out to be “revenue management” that is, raising rates, which seems to be based on the very optimistic idea that fist class volume is not affected by changes in price. They project a 14% decline in volume over the next five years (which would be a meaningful improvement over the past five years) but only a 7% decline in revenue.

And the single largest contributor to the $20B in annual savings is $7B on healthcare. To put that in perspective, there are currently 557,000 employees, so that is a savings of about $12,500 per employee per year. Of course, it is not current employees but retired ones that cost the real money. And here is the biggest slight of hand in the plan.

A few years back, Congress got this crazy idea that the USPS should “pre-fund” its future retiree healthcare obligations. In other words, instead of trusting that in decades to come they will be able to pay for retirees healthcare out of current revenues, they should set aside money now to match the liability. Turns out, that is a lot of money to set aside, more than $5B a year.

The Plan to Profitability fixes this by zeroing out the $5B line item. The unstated implication being that should the USPS someday be unable to cover healthcare costs for its retirees the Federal Government will.

The plan also includes drastically reducing the workforce by attrition (more than half of current employees are eligible for retirement) closing locations, and ending Saturday delivery. All things that an autonomous organization that could make its own decisions would have done years ago.

What is remarkable about all this is not that the USPS is in trouble. That is the natural order of things, the unstoppable march of capitalism’s creative destruction at work.

What is weird is how little anybody seems to notice. At 557,000 employees and 36,500 retail locations, the USPS is nothing short of gigantic. Just about every American uses its services. What would the media buzz be like if McDonald’s (420,000 employees, 33,500 locations world-wide) was in similarly dire straits? And remember GM’s (209,000 employees) bankruptcy and bailout?

The crisis at the USPS flies under the radar partly because of its twilight status, neither an independent corporation with shareholders and creditors, nor a government agency that appears in the Federal budget. But in a larger sense, the problems at the Post Office do not enter our consciousness because we all have a vague feeling that the PO has always been there and so always will.

The numbers just do not work. Wishful thinking aside, it is hard to see the USPS surviving in recognizable form without ten or even eleven digit annual subsidies from the Federal government, and it is not clear to me that Congress would go along with that. I would not.

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