USPS - The mailing business

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As it requests yet another 2-cent increase in stamp prices, the U.S. Postal Service presents a case study in the difficulty of government-run enterprise, especially in an ailing economy.

The USPS is not subsidized by taxes. Like any business, it must generate enough revenue through postage to cover its operating expenses - though it can borrow from the U.S. Treasury, as it is now doing to cover multi-billion dollar operating shortfalls.
What makes the post office different is its mandate: It must deliver the mail to every address in the U.S. In densely populated areas where mail delivery often finds multiple customers at one address, this mission is cheaper to fulfill than in rural areas, where individual addresses are miles apart. Thus, the postal service is granted a monopoly over mail delivery, so that private competitors cannot come in and cherry pick the lucrative markets, leaving only the expensive addresses and driving up the post office's cost per letter.

In practice, even amid these tough times, one must admit the system works rather well. For 44 (or even 46) cents, you put a letter in a box in your front yard and have it carried clear across the country in only a few days. If you live in a market that's easy to serve, your postage may be helping pay for delivery to people in more remote markets, but every time your grandma sends you a letter, you benefit from that same system. And, unlike a tax, no one pays unless they use it.

The economies of scale that make this possible are now changing rapidly. Like so many industries, the Internet is transforming the postal service's business model at a dizzying pace. The most consistent forms of business mail - bills, for example - are migrating onto websites, and direct e-mail has become a competitor of direct mail. With the damper on overall business activities amid the recession, mail volume has dropped 20 percent since 2007, and revenue has fallen accordingly.

In response, the Postal Service received a two-cent increase last year, and it is requesting another one now. Is raising prices the only option?

No, answers the Affordable Mail Alliance, a group of publishers, printers and other businesses that rely heavily on mail service and don't want to pay higher rates. The alliance argues that while volume has dropped, labor and capital costs have not been cut accordingly, and that more cost savings should be found. Postal workers' wages remain too high, the group argues, and the postal service maintains too many unnecessary post offices.

The postal service responds that it has cut thousands of jobs and that a substantial part of its deficit is due to overly stringent obligations to employee retirement. Its consideration of cutting Saturday delivery has received wide attention, and Sen. Chuck Grassley, R-Iowa, has suggested that Tuesday may actually be a lower-volume day and should be cut instead.

The Postal Regulatory Commission has three months to decide on the postage increase. Before passing any more cost increases to the consumer, the commission should make sure the postal service is doing everything possible to meet the needs of a new economy - just as any well-run business would.



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