Peter Orszag: The Only Way To Save The Postal Service Is To Privatize it
The President's former Budget Director joins the ranks of those calling for Postal privatization.
Peter Orszag, formerly President Obama’s Director of the Office Of Management And Budget, argues in a column for Bloomberg that the problems facing the United States Postal Service are so severe that the only way to fix it is to privatize it:
Those who believe in the usefulness of government must be vigilant about making sure all its activities are vital ones, since the unnecessary ones undermine public confidence. With this in mind, Congress should now privatize the U.S. Postal Service.
Further evidence for why this should happen came last week, when the Postal Service announced that it would be unable to meet billions of dollars in payments that are coming due in August and September for future retiree health benefits. Privatization is not always the best way to improve efficiency, but the problems facing the Postal Service will be difficult to address if it remains within the government, and there is no longer any sound reason for it not to go private.
The Postal Service faces three problems: First, Congress has not given it the permission it needs to cut costs and raise revenue — and lawmakers seem unable to approve even modest reforms. Second, its market has been declining for years, as e- mail, electronic payment and other alternatives to traditional mail have grown. Third, the economic slump has caused a further drop-off in mail volumes.
Orszag then goes on to address the most prominent counterarguments against privatization:
Three counterarguments caution against privatization, but none of them is convincing. The first is that Congress could simply unshackle the agency. Legislation is currently pending in both the Senate and the House that would give Postal Service management additional flexibility. In an increasingly polarized Congress, however, it is not clear if or when this legislation will be enacted. And even if it were passed soon, it would probably provide only temporary help.
The second argument against privatization is that only a public-sector post office can provide universal service. Yet in sectors from telecommunications to electricity, universal service does not require government ownership. Privatization could come with the obligation to provide universal service. FedEx Corp. and United Parcel Service Inc. already deliver to almost all U.S. addresses. For the hard-to-reach, unprofitable routes, a subsidy could be provided. This would be more economical than the vast and opaque cross-subsidies now used to ensure universal service.
The final argument involves the postal unions, and this one is not so easy to dismiss. Labor compensation accounts for about 80 percent of Postal Service costs — a much higher share than at FedEx or UPS. No one would argue that, in the midst of a weak labor market, a large share of the Postal Service workforce should immediately be shed. But it is also true that the agency will one day need far fewer workers. Private ownership could facilitate more generous buyout packages and other measures to ease the transition to a leaner workforce.
That last point is one that the Postal Workers unions and their supporters are either ignoring completely or willfully choosing to not accept. In the past twenty years alone, the march of technology has made major inroads into the core of the USPS’s revenue stream. That is only going to continue. In addition to FedEx and UPS, the USPS will soon find itself competing against same-day delivery services offered by companies like Amazon. Indeed, Amazon is already talking about establishing such services in major metropolitan areas and, while it will require a major undertaking and is likely still several years off, it is going to come at some point. To some extent, that’s going to eat into the business of FedEx and UPS as well as the Postal Service, but the potential loss of a major package delivery customer is something that should cause deep concern, especially since it will be accompanied by continued drop offs in volume from business and residential customers switching to electronic means of communication and handling financial transactions. If the USPS continues to exist in its current quasi-governmental form it will be far less able to adjust to these changes than FedEx and UPS.
It’s also worth noting that a good part of the USPS’s current fiscal problems can be traced directly to the interference of Congress. Back in 2006, Congress passed a law requiring the Postal Service to assume the burden of paying for the health care benefits retired Postal workers decades in advance. This amounted to an additional $5.5 billion in payments that the USPS, already dealing with the declining revenue caused by declining mail volume, had to find a way to pay. USPS management had no say in this decision, and it was largely another in the decade-long series of budget gimmicks that Congress had invented to make the deficit appear smaller than it actually was. No private company would have ever had to assume this kind of burden.
When you think about it, there really isn’t any good argument against cutting the last cords between the United States Government and the USPS. Why, for example, does the USPS need to get permission of Congress to make what is essentially a business decision such as closing underused Post Office locations or ending delivery on Saturdays? Why should Congress have the authority to name Post Offices? (Answer: Congressman like to take credit or naming things). The Constitution gives Congress the authority to “establish Post Offices and post roads,” but it doesn’t require Congress to have authority over the operation over a Continent-wide postal service. Indeed, other nations have already gone the privatization route with no serious impact on service and many beneficial effects, which is not surprising considering that competition is typically beneficial. This isn’t the police or fire department we’re talking about. It’s delivering pieces of paper, a task that is likely to become far less burdensome as more and more communications shifts into the electronic world. There’s no reason why the Federal Government needs to be involved in it at all.
Back in May, Joe Nocera pointed out back in May, Congressional meddling in USPS business decisions just makes the situation worse:
Last year, the post office announced an ambitious cost-cutting plan, including the closure of 3,700 rural post offices, for potential savings of $6.5 billion. The Senate reacted by insisting on a six-month moratorium, during which it was supposed to come up with a bill that would fix the problems. It passed the bill, all right — one that grudgingly gives the post office a bit more wiggle room but also continues to tie its hands in a hundred different ways. (It does, however, eliminate the prefunding requirement.)
A parallel House bill, which has not yet reached the floor, would allow for rural post office closings — but only after they’d been vetted by a commission, similar to the way Congress allows the military to close bases. Meanwhile, the Postal Service is doing what it can. Last week, it unveiled a rural post office strategy that would only save it $500 million, and, just a few days ago, it said it would begin consolidating its big mail-processing centers. But, without legislation, there are severe limits to what it can do to save itself.
There is nothing ideological about fixing the post office. It’s not like the debt ceiling. The Internet notwithstanding, the country still needs a viable Postal Service. What is mainly required is for Congress to get out of the way and allow it to begin truly operating like a real business.
Matthew Yglesias poses an interesting privatization possibility:
Given that the U.S. government has no particular need to raise funds through asset sales, it seems to me that most of the goals of this initiative could be easily achieved by turning the USPS into a worker-owned firm. In other words, you “privatize” it by selling its shares for $0 to people who work there. Then you get Congress out of the way. That accomplishes the most important real public policy benefit of postal privatization, which is that it would encourage USPS to manage its real estate portfolio rationally. Right now that can’t be done because the decision-making is all political and no congressman wants to see any post offices closed down in his district. A worker-owned Postal Service would also be in a position to shut down hugely money-losing routes unless local governments coughed up subsidy for mail service.
Then beyond that the worker-owned Postal Service could do what it likes. It could sell itself to private investors, creating a one-time windfall for workers at the cost of job losses. Or it could maintain a large staff at the cost of depressing the value of the equity the workers own.
The idea of worker buyouts of firms isn’t new. I remember it happening in the 1970s in New Jersey when the machine tool factory that a neighbor worked at, which was on the verge of bankruptcy, ended up being bought out by the workers. Given the state of the economy and such, I can’t say that the buyout was a blooming success but the company did last for several years longer than it otherwise would have. Other worker buyouts have been far more successful. In the case of the USPS, there’s no reason to object to a worker buyout especially since it’s rather unclear who in the private sector would want to take up the business under current conditions. Obviously, there’d have to be professional managers hired to operate the business, and it’s likely that parts of the USPS’s business would be sold off. But, at the very least, it would be a way to give the entity a chance to compete without having at least one hand tied behind its back by the necessity of getting Congressional approval for what seem from the outside to be rather obvious business decisions.
Over at The Huffington Post, Dave Jamieson notes some of the objections to the end of the traditional USPS:
If the postal service cuts back or disappears altogether, there are two big competitors seemingly waiting in the wings. As Rep. John Mica (R-Fla.), who pushed a plan to privatize Amtrak service, said at a hearing last year: “The postal service is becoming a dinosaur and will soon be extinct … I usually use FedEx or UPS.”
Those shipping giants may have a combined U.S. workforce comparable to that of the U.S. Postal Service, but they probably wouldn’t fill the void left by the agency. It’s doubtful that UPS and FedEx would be interested in delivering letters, postcards and bills. With web-centric people winnowing down their mail piles, the profits to be made on first-class mail are dwindling.
Besides, they don’t have the universal network that the postal service has in place, and it wouldn’t make sense for them to try to start going door to door making nickel-and-dime deliveries. Unlike the postal service, the private shipping companies have built networks designed for more specialized, high-dollar shipping, not first-class mail.
Asked where UPS stands on postal reform, Kara Ross, a company spokeswoman, says, “We think it’s important to have a strong postal service. They contract to us, and we contract to them.” Maury Donahue, a spokeswoman for FedEx, echoes that sentiment, saying in an email that the company “support[s] efforts to ensure that the Postal Service is able to successfully manage its business. We believe that a healthy Postal Service, the largest postal operator in the world, is important to America.”
Private corporations, of course, have no social obligations to the public the way the postal service does. Lose the postal service and you lose a considerable public asset, and maybe something more, says Ellen Dannin, a professor at Penn State’s Dickinson School of Law who follows privatization trends.
“If you are going to have one country, then you have to take actions that help keep you knitted together as a country,” says Dannin. “I think that we are really in danger of losing what I would call important citizenship values … We have a responsibility to one another to make [the postal service] function effectively.”
Some of these concerns are well-founded. The issues regarding rural delivery are ones that, at least for the near-term future, may require some form of government subsidy to the privatized entity. However, it seems exceedingly clear that the future of information delivery in this country is moving in an inexorably digital direction, and that the old model of the Post Office first conceived by Benjamin Franklin, which served us well for quite a long time, isn’t going to work any more.
Look, any one of us could fix the PO books in an afternoon. We’d do things like halting Saturday delivery, and changing rules for grandfathered to-door delivery.
My mom has a mail slot in her front door and a long walk to it. I have a post box on the road. My sister has a postbox in a neighborhood cluster. My sister actually has the most expensive house and the “worst” delivery. Why? Her house is the newest, that’s all.
The annoying thing for me here is that these are all actually simple problems to solve, but as part of our American dysfunction, someone wants us to believe “America can’t”
I think it is rooted in a failure mentality for government. A weird mentality spanning legislators who put interest groups first, people who can’t agree or problem solve, and people who frankly want government to fail visibly, so that privatization is the only answer.
“Some of these concerns are well-founded. The issues regarding rural delivery are ones that, at least for the near-term future, may require some form of government subsidy to the privatized entity”
Right now, as Dave Shuler pointed out somewhere, the USPS is the only service that delivers to every mailbox in the US — by law. I can certainly see a privatized postal service telling the folks in Snowshoe, Alaska, Sorry, we’re not delivering mail to you any more. (You’ll have to go to Nome, or some such, to get your mail — we know it’s 300 miles away, but like we said, sorry.)
Rural delivery will suffer — how could it not? (And what’s up with the subsidies stuff? What happened to your libertarianism?)
Well, maybe the first thing we could do is repeal the law that has the postal service contribute $5 Billion a year to the retirement fund. That might help.
“It’s also worth noting that a good part of the USPS’s current fiscal problems can be traced directly to the interference of Congress. Back in 2006, Congress passed a law requiring the Postal Service to assume the burden of paying for the health care benefits retired Postal workers decades in advance. This amounted to an additional $5.5 billion in payments that the USPS, already dealing with the declining revenue caused by declining mail volume, had to find a way to pay. USPS management had no say in this decision, and it was largely another in the decade-long series of budget gimmicks that Congress had invented to make the deficit appear smaller than it actually was. No private company would have ever had to assume this kind of burden.”
This is standard right-wing economic fraud – conjuring up ‘unfunded debts’ which are actually well-funded by future revenues. It’s done for Social Security to scare people, as well.
It’s like declaring bankruptcy because one is unable to fund one’s entire future living costs in a current out of pocket payment.
@sam: “Right now, as Dave Shuler pointed out somewhere, the USPS is the only service that delivers to every mailbox in the US — by law. I can certainly see a privatized postal service telling the folks in Snowshoe, Alaska, Sorry, we’re not delivering mail to you any more. (You’ll have to go to Nome, or some such, to get your mail — we know it’s 300 miles away, but like we said, sorry.)”
No, because the Senators from Alaska will say ‘No way!’, and there will be government subsidies for rural delivery.
But… but…. but…. If the Postal service is privatized, who is going to deliver the packages to rural customers? Seriously, UPS and Fed-Ex commonly drop off packages at rural post offices for delivery. First time I saw that happen, I got a case of the giggles that wouldn’t go away. The wife and I have a PO Box in town for the sake of security.
Are there any examples of successful large scale privately run post office systems among industrialized countries? There’s probably a reason why there is not a single one.
The reaction of UPS and FedEx is telling. No one, but no one , wants to go into the business of delivering first class mail to remote locations on Saturday. Privatization won’t solve that problem-nor any other problems affecting the Post Office. What’s needed is for Congress to get off its fundament and enact common sense reforms. But we probably need to elect some new Congress critters first.
It doesn’t just happen in rural areas. We used to use UPS for packages, but their method of delivering items to one of our properties in Bangor, Maine was to send it to New Hampshire, and then mail it, because they pulled out of Maine altogether.
Germany, Japan, Denmark, Sweden and Switzerland all have some level of postal privatization ranging from full-on privatization to giving the postal service more power to innovate and cut costs without having to adhere to political whim. Canada has been on the road to privatization for years.
@john personna: You seem to be mixing up the different types of problems faced by government.
At risk of gross over-simplifiaction, let’s group them into three main types:
1). Problems that lend themselves well to concrete “solutions,” which are tractable; in many cases, government is especially well-suited to solving some of these types of problems – e.g., building bridges.
2). Problems that are extremely complicated, not at all tractable, not really “solveable” by any instutition; we often ask government to solve these problems, anyway – e.g., reduce poverty.
3). Problems that arise when a good or service becomes less profitable and/or obsolete because of technological shifts, new efficiencies, changes in demands, etc. – e.g., home delivery of postcards and first-class “snail mail.”
I don’t really see how it would be simple to solve problem #3 above, unless you’re suggesting that USPS would sort of reivent and reconfigure itself to compete under changing market conditions. Still, I agree, the government is more likely to suceed in adjusting to the problems arising from #3 than solving hyper-complex socioeconomic problems.
Either way, any chance that the government making unrealistic promises about being able to solve hundreds of problems like #2 and #3 above contributed to this “failure mentality for government”? (Granted, we the People demanded that they solve such problems). Why not recommend that the government restore public confidence by concentrating on what it does best?
@Doug Mataconis: notice also that all of these countries have a far higher density of population than the US does.
`There’s a lot that hasn’t been thought about. At present, the assumption is that the US postal service delivers to every address in the US. This makes dumping a legal document (summons, etc. so forth) into the US mail considered an appropriate mechanism of delivery of certain legal documents and is so assumed under present legal codes. There’s going to have to be a lot of re-writing of state laws if the USPS is privatized and starts dropping delivery to rural areas because it isn’t cost effective.
By the way, UPS and FedEx don’t do the last mile stuff. They hand it over to the USPS to finish off the dirty work in rural areas.
So all those rural voters want to get rid of the post office? Just wait until stamps go up to $14/delivery….and they have to drive 100 miles to find the nearest pick-up place.
I predict a lot of bitching.
I would would cut back residential service to three a week (MWF or TThS) and not miss a thing.
However, I think this will be a ploy to steal worker’s already earned pensions. I don’t get the argument where fully funding pensions and retirement benefits at the point of earning them is a bad thing. Corporations underfund pensions all the time and then get their treasuries raided by the financial engineers (or pirates if you prefer), declare bankruptcy, thereby stealing the money from the employees.
Even the “full-on privatized” companies in your list are still at least plurality-owned by their respective governments (unlike UPS and FedEx). But bringing up other countries does raise a non-trivial question: what happens to international post?
Right now, almost every country in the world belongs to the Universal Postal Union with treaties or legislation binding their nationalized (or government-owned privatized) postal service into a vast, multi-lateral reciprocity agreement. This means that if I’m in Germany and I want to mail a letter to the US, I can do it by purchasing German postage and dropping it in a Deutsche Post box. I could also send a FedEx package from Germany to the US if I really want to, but only by going to a FedEx office in Germany and paying money directly to FedEx.
The US simply cannot abandon the Post Office and let the UPS and FedEx take up the slack without ruining this UPU reciprocity. And any privatized replacement for the UPS would need significant government involvement to ensure that the privatized entity honored deliveries with foreign postage and successfully passed on deliveries of foreign-addressed letters to the postal services of foreign nations.
Looking around Google, it seems most of these countries permit some kind of competition. We are talking about some distance from a full free market in postal services. Orsazag seems to be talking about something like a regulated government chartered corporation obligated to provide universal service.
@Scott: The biggest problem with the 2006 law requiring 75 years of prefunding is not the prefunding per se, as I agree with you, setting aside NPV equivilents of future costs as part of a compensation package is prudent management. And for a 20 year old kid who just sorted her first piece of mail this morning, it is prudent.
The problem is 2 fold:
1) The USPS is required to set aside money for the future medical costs of my week old boy if they decide to hire him in 2030 and he makes the USPS a career until 2087. That is a problem.
2) The time frame to get to full-funding for #1 (which is already ridiculuous) was under a decade instead of most of a generation which is the pace most private companies “attempt” to get their defined benefit plans fully funded.
If #1 was reduced to a 50 year or current employee requirement and #2 was stretch to a generation, cash flow would improve tremendously.
Doug Mataconis vs. Doug Mataconis, in the same post:
This is the ENTIRE reason neolibertarians have been calling for government services in the United States to be “run like a business” except a business that still suckles from the government teat. These private businesses simply want taxpayer money with no oversight being funneled to them. It’s no different from Medicare/Medicaid vouchers, public school choice vouchers, Social Security privatization, all of it.
This is graft and corruption, and it’s pretty simple to identify. Republicans have put onerous financial demands and exacting standards on post offices and schools in order to justify their claim that government doesn’t work. The solution is always a private entity that will swoop down and save the day but just happens to need some government subsidies in the short-term, which inevitably becomes the long term.
Privatize the power companies and watch the blackouts roll. Privatize the parking meters and watch the tickets triple in cost. Privatize the schools that only succeed when they cull the poor and the handicapped from their ranks, and have no need to meet government mandated standards. Privatize the airways and watch media conglomerates gobble up every media venue in sight, leading to monopoly power over advertising. Privatize the military and watch corruption, torture, and incompetence reign.
Privatize, cut regulation, attack unions, gut pensions, run it like a business, no transparency, exert monopoly control, but always have an unregulated, no oversight, taxpayer-funded subsidy to fall back on. Nice work if you can get it.
@Lit3Bolt: Excellent points, well articulated, but in certain respects you’re fighting against a privatization gospel (among conservatives and right-libertarians) that was more dominant 5-10 years ago than it is now.
I’m conservative-libertarian, but I agree that the transition from government service to corporatist-style “privatization” is often quite complicated, prone to corruption, and not usually than effective at increasing efficiencies. For one thing, as you suggest, privatization does not end up involving essentially private economic activities – either the government is the primary customer or the government – as a third party – is paying for the services on behalf of “private” customers.
To be fair, though, the dream of bringing “business-like efficiency” to governance has always been just as popular among a particular strand of progressives as it was among “pro-business conservatives.” Many of the functions of government simply do not work like those in the business world. Successes and efficiencies in one sphere do not necessarily translate into applications in the other. To acknowledge these types of realities, though, might also involve recognizing that just because of the rapidity and progression of great achievements in engineering, industry, the “hard” sciences, etc., we have no reason to expect a parallel rapidity or consistency of progress in the “human sciences.”
It’s not so much that we need more privatization, as we need government to concentrate on what it does best. That might include (subsidized) rural mail service. I think you can convince me that we need to preserve key public functions of the USPS, but we also cannot put our heads in the sand concerning the diminishing demands for “snail mail,” etc.
I think they key is that postmen are going to run certain routes every day. In my mom’s neighborhood they will walk right up to the door. In a more rural setting they might drive up to one of those spots with 30 or 40 mailboxes. In the least populated regions they may just require everyone to get a PO Box and come into town.
They run those routes, or fill those post boxes, every day. What technology has done is twofold. It has increased PO productivity, with machine reading and sorting. And it has changed the delivery mix.
The postcard itself doesn’t become less profitable. It becomes a different fraction of the delivery mix which all together must pay for the great delivery enterprise.
… which is why given the change in delivery mix, I see the appropriate response as changing modes of delivery. That is to get them back in line with content requirements.
@john personna: That seems like a reasonable solution to this problem – changing modes of delivery, such as greater emphasis on post office boxes and/or centralized drops in rural areas, maybe delivering four times per week instead of six, etc.
It doesn’t matter if the idea is old or not. It’s entirely consistent with what happened in the last Republican administration prior to Democrats gaining control of Congress in 2006.
Also, Orszag is pulling some rhetorical sleight-of-hand here. Nearly everyone, conservative and liberal alike, progressive and libertarian alike, agree that the USPS could use some reforms, and some compromises could be hashed out. The problem is that Congress is not doing its Constitutionally mandated duty of maintaining the USPS.
So according to Orszag,
You see? Congress is not doing its job and cannot be depended to do its job, therefore the USPS is broken and only by privatization can we fix it.
If you take this argument to its logical conclusion, it is that we should take away control of the US government from Congress since we cannot depend on Congress to pass a budget, ratify a treaty, or basically manage anything at all.
Which, come to think about it, isn’t a bad argument.
However, Orszag seems to be more interested in “privatization!” as a panacea to all woes, rather than offering a practical solution how Federal, Constitutionally mandated entity should be made into a private corporation by the privatization magic wand. He also seems to think that the 80% labor cost of the USPS will simply be magically altered by The Free!Market!, reduced down to 60% or 45% for UPS and FedEx respectively, and the private corporation will simply and generously return the unused government funds back to the IRS. Ha. Ha.
It’s far more likely that Orszag is the latest charlatan who sees a large government employer with fat government pensions and is licking his chops for a piece of it. I wouldn’t be surprised if he was generously compensated for this op-ed by certain…interested parties.
I believe it would take a constitutional amendment to privatize it. It is clearly defined in the constitution.
Privatize it. Screw those who live in rural areas, like me.
He’s also the current Vice chairman of corporate and investment banking at Citigroup, but that’s the same thing.
Opponents of privitization worry quite a bit about getting ripped off. Citigroup vice chairman Orzag (not exactly a man without a dog in the fight) and fellow self dealers benefit from the cover they get from the political fight and take advantage of those making good faith pro market arguments.
Unfortunately, most libertarians aren’t smart enough to know that the purpose of their entire ideology is to provide intellectual rationalizations for corporate theft.
The discussion of privatizing the postal service always drives me crazy, in how it makes seemingly rational people say dumb things.
The notion that private companies will compete for the right to send an employee to every mailbox in the country on a daily basis and deliver a piece of mail anywhere in the United States for 45 cents is crazy.
Look at the evidence — FedEx and UPS provide similar services, but faster, for upwards of 20 times the price of First Class postage. And for that, they use the USPS for the last mile for a high percentage of their home deliveries.
Wake up, private companies are not going to do what the USPS does, not at any price.
@EMRVentures: There’s also a lot of stuff written into the legal codes assuming delivery by US Mail. Anyone care to start digging out all that stuff? Otherwise a lot of people are going to be unpleasantly surprised when they discover their house went through foreclosure and they were never informed about any of it, or the seizure and sale of their property for back taxes (ditto.)
You can mandate “service to all” when you try to privatize the system; that just means you’ll get a lot of bitching and moaning and complaining about how the Free Market can’t do its wonderful job and subsidies from the government are absolutely necessary.
I frankly can’t see how a government US Mail service is going to be less efficient than a privatized US Mail with tons of subsidies propping it up, several more layers of bureaucracy, and multi-million dollar salaries for the clowns at top.
@Doug Mataconis: “Germany, Japan, Denmark, Sweden and Switzerland all have some level of postal privatization ranging from full-on privatization to giving the postal service more power to innovate and cut costs without having to adhere to political whim. ”
Please note that ‘Germany, Japan, Denmark, Sweden and Switzerland all have some level of postal privatization ranging from full-on privatization to giving the postal service more power to innovate and cut costs without having to adhere to political whim. ‘ is not ‘privatization’ in an of itself.
@Ron Beasley: “I believe it would take a constitutional amendment to privatize it. It is clearly defined in the constitution. ”
The right has the answer to that – simply define ‘postal service’ as whatever the GOP wants this year. Like Medicare.
The other solution, of course, is to privatize it (meaning sell to well-connected bidders at a bargain price), and then subsidize it, and claim that the Constitution is fulfilled.