COVID and the USPS

You may have heard that the Post Office is in the hospital with COVID-19. Part of the problem is that it has some pre-existing conditions. It enjoyed something of a sheltered and spoiled childhood. But that led it to becoming soft and flabby later in life. It has also endured capricious parenting—with regulations that have made its life more difficult. And it’s grown quite old, so it tends to be stuck on tradition and set in its ways.

Now, the U.S. Postal Service (USPS) wants a “bailout”. (Hey, who doesn’t?) It’s been subsidized by taxpayers for years, but things have gotten more serious. The Post Office would be on the way to the ICU and likely death—if not for its rich parents (the federal government—well, taxpayers).

The USPS lost $8.8 billion last year—and this year will be worse. It has been designated as an “essential business”, so it remains open during the lockdowns. Our current macroeconomic woes are making things more difficult. But its problems are clearly persistent and systemic: operating with chronic budget deficits and producing services inefficiently in a sector dramatically impacted by technological advance.

As with some other businesses, its flaws have been more clearly revealed by the crisis. The weaknesses are especially evident when struggling businesses are in sectors that haven’t been hit that hard. They ought to be ok, but are not. Government budgets and pensions are in a similar position. When governments have spent recklessly, then the tough times are that much tougher. You might say that economic downturns tend to reveal the “co-morbidities” in business and government.

Over the last decade, USPS revenues are down slightly. Prices are up and shipping volume has doubled. But marketing mail has dropped a bit; overall mail is down 15%; and 1^st class mail is down 30%. On the cost side of the ledger, the Post Office has the same number of workers as in 2013 and 6% more vehicles. It’s difficult to imagine that this makes good business sense in the face of stable revenues and advances in automation.

The Post Office has some inherent advantages. The government subsidizes shipping from overseas, especially China. It also subsidizes magazines and junk mail. (Thanks taxpayers!) And the USPS has been granted a monopoly in first-class mail. (Do you know that you don’t own “your” mailbox?) Having a monopoly is usually helpful for profitability!

But the USPS also faces two key problems. First, their employee compensation includes pensions and supplemental health care to Medicare in retirement. Most of the labor market has transitioned to “defined contribution” plans—where you and/or your company put money into a retirement account that you control. Among other advantages: if your company goes under, you still have your retirement account. But pensions and retirement health care are pay-as-you-go liabilities—promises by an employer to pay retirees as long as they live.

It’s easy to see why the private sector has moved away from these risky plans. But governments and their employees don’t face as much risk. They can bury the costs where the general public won’t pay much attention. And the government’s promises are seen as more secure, since they can tax us.

Beyond that, it’s not clear how such promises pensions should be financed. Actuaries can estimate how much will be needed and how much “should” be set aside—assuming life spans, rates of return, etc. But there is no simple answer to what percentage of anticipated future spending should be “in the bank” today or added each year. In 2006, Congress believed that these plans were dramatically underfunded and responded by drastically increasing the amount that the USPS had to pay into its funds—a significant part of its budget woes since then.

Second, the Post Office’s business model is obviously obsolete. Imagine that you were starting the USPS from scratch. You might offer home delivery for free—once maybe twice per week. (What mail do you receive at home that couldn’t wait a few days?) People could pay for more service if they want. Businesses would be offered a range of paid services. The Post Office wouldn’t receive any subsidies. And it would easily be profitable—with its monopoly in first-class mail and its monopoly power as one of a few companies in the package delivery industry.

Federal provision of mail services is actually encouraged in Article 1, Section 8 of the Constitution. But this doesn’t imply that the government must deliver mail—or do it so inefficiently. Without dramatic changes to its retirement benefits and its business model, it should not receive any more subsidies or a bailout.

UPDATES: 1.) A nice essay by Chris Edwards-- with a greater emphasis on privatization (fine with me) and noting that the USPS is exempt from federal, state, and local taxes. 2.) A good article on USPS real estate holdings / wealth-- which should be leveraged against financial problems and cash flow.