Postal Service privatization

I’m still working my way through some of lectures within “Modern Economic Issues”, by Robert Whaples. If economics is the dismal science then nothing could be more dismal than an economics lecture on the U.S. postal service. It turns out that postal workers made about $60,000 per year (back in 2006 when the lectures were recorded) either to sit at a desk at a post office or to walk/drive around and deliver the mail. At the time this was about 30 percent more than private-industry counterparts and their pensions and other benefits further elevate the 574,000 workers (wikipedia) above what they might make absent the unionization and monopoly of the post office.

One thing that was interesting about the talk was the discussion about what has happened in countries where the postal service was privatized and/or subjected to competition. The fact that productivity in the privatized postal services went up 30-40 percent was not surprising to me. What surprised me was the countries that had privatized. Americans like to think of ourselves as a relatively free market society whereas Europe, especially Scandinavia, is the land of socialism. Yet countries such as Sweden,Denmark,  Finland, Germany, Holland, and the UK have privatized or opened up to competition and the EU is somehow going to push the rest of the countries along (assuming they have money/energy left over from all of their bailouts!).

It is fascinating to me how, despite the large role that government plays in American life, Americans (including myself) still have a huge mental bias toward thinking of this country as somehow an example of the free enterprise system. I recently went to a party and talked to an MIT PhD in engineering who thought that government in the U.S. collected only about 20 percent of the nation’s total income in taxes and that this was a vastly smaller percentage than Europeans paid. The number that he had was about right, when restricted to federal income taxes, but it ignored taxation by state and local governments. A guy who writes a property tax check twice a year to the City of Cambridge had simply forgotten to add that in. A guy whose pay check every month indicates money withheld for the Commonwealth of Massachusetts had forgotten about state spending.

17 thoughts on “Postal Service privatization

  1. How do you get private companies to serve rural areas, which the U.S. has far more of than those countries you mention? Hasn’t this been an ongoing issue regarding cellular coverage?

  2. From the link you included to Wikipedia:

    “The USPS has not directly received taxpayer-dollars since the early 1980s with the minor exception of subsidies for costs associated with the disabled and overseas voters. Since the 2006 all-time peak mail volume,[7] after which Congress passed the Postal Accountability and Enhancement Act”,[8] (which mandated $5.5 billion per year to be paid into an account to pre-fund retiree health-care, 75 years into the future, a requirement unique among organizations and businesses in the U.S.[9]), revenue dropped sharply due to recession-influenced[10] declining mail volume,[11] prompting the postal service to look to other sources of revenue while cutting costs to reduce its budget deficit.[12]”

    USPS competes against FedEx, UPS, OnTrac, DHL and many others. I’m not going to argue with the fact that Tax rates including state taxes are on par with the rest of the world, but I know I’ve never thought to myself, “Hmmm, taxes are really high, I guess I won’t bother trying to get rich.”

    @Gary Bloom, it’s been an ongoing problem with rural areas regarding cell phone coverage, broadband coverage, land line telephone coverage, and grid electricity. In the hay day of American Socialism, we created the Rural Electric Administration and the FCC to assure that all Americans had access to these services. The history of the USPS goes back a little bit further, it’s written into the constitution; Article I, Section 8, Clause 7.

  3. Even with the obvious high pay of the workers and supposed low productivity the postal service rates for small packages are more than competitive with UPS and FedEx. Letters a major bargain. If it wasn’t for the Postal Accountability and Enhancement Act of 2006 the USPS would actually be profitable. The act seems to have been designed to destroy the post office, at least to those of us cynical of congresses motives.

    The fact that it can charge rates lower than the private companies and still support an inefficient work force says there’s a whole lot of profit being taken by the private companies’ management and shareholders.

    Why is it wrong when the workers make more, but perfectly fine when management and shareholders take large salaries and dividends? As consumers of the services we’re paying about the same or less when we use the USPS.

  4. Frank Sanchez quoted:
    “The USPS has not directly received taxpayer-dollars since the early 1980s with the minor exception of subsidies for costs associated with the disabled and overseas voters. ‘

    This is a myth perpetuated by the post office bureaucrats and the letter carrier’s union. See the discussion on John Stossel’s blog on Sept. 1, 2009:
    “The Post Office doesn’t have to pay state or local taxes, and it gets to borrow billions from the government at reduced rates ($10.2 billion, by the end of this year (2009), according to the GAO.) Last year, the FTC found that the Post Office received implicit subsidies of $34 to $117 million — and that’s not counting the monopoly, its biggest benefit.”

    As noted by Stossel, in package delivery, where the post office competes directly with private business, the USPS has just 16% of the market.

  5. The German postal service was split up and privatized in the mid-1990s. The state still indirectly owns about 25% of the postal part. In my experience it has been very efficient, although a little expensive. What is amazing to me, is the US has on a per-capita basis, more people working for the US federal government than Germany has working for the German federal government. German passenger rail and postal service are both partially privatized, and better run that the US. Germany has no minimum wage, and its GDP per capita is only 8% lower than the US. source If you work in Germany, have private health insurance, and don’t pay taxes to the Church, the payroll/income tax rate is very close to what you pay in California.

  6. Americans are woefully ignorant of how badly they are being screwed (See George Carlins American dream comment:

    When I finished my PhD, I considered post-doc positions in the USA and Europe. I got an offer in California, for a post-doc position that paid about $38k. I then calculated all the taxes and health insurance I would have to pay for the position in California: Fed Income tax, FICA taxes, State taxes, property taxes, healthcare premiums, etc… the total percentage came to about 45%. I had an offer in Vienna Austria, for 50k euros, with all the taxes/healthcare included, it came out to be 38%. Not only do I save on taxes/healthcare, but I get something for my taxes! Excellent public transportation (it costs only 360 euros/yr), excellent healthcare, and SAFETY on the streets. What do I get for the taxes in California and the Federal govt? Nothing really. Vienna taught me how a real city can be run – affordable and highest quality of life in the world. And this is coming from a libertarian who was very skeptical about socialism.

  7. I lived in Sweden and the privatisation of the post office sent it down the drain. Customer service plummeted, most post offices closed. Now the post offices are handled in newsagents or supermarkets, whose main business is not serving the postal customers. The profit margins are thin on postage, so most of these businesses providing postal services have no incentive to provide a good service (they still have a monopoly). So yes — more efficient, but only in profit terms by closing down offices and laying off employees.

    On the other hand, in nearby Norway the postal service is still state-run but has taken cues from the Swedish experience. It is completely broken. The worst of the private and public sectors. Not only there is no package delivery to the home, the postage prices are ridiculously high (the equivalent of a first-class stamp in the US for postage in Norway is about $1.75).

  8. Gary: How could the supposedly unique and enormous challenge of rural areas be handled in the U.S.? First, the fact that you asked the question shows an interesting American mental bias. We like to think of our country as vast and unsettled. In fact, however, with 34 people per square km, we’re in the middle of

    Sweden has 23 people per square km using a competitive postal system. Finland has 18 (i.e., is about half as densely populated as the U.S.). The country that was perhaps the first to privatize, New Zealand, is less than half the population density of the U.S., at 16 people per square km.

    Why can’t we get good cell phone coverage in the U.S.? Namibia has a population density of 3 people per square km and coverage is great there (in my experience). Occam’s Razor would suggest that Americans are simply not very good at building cellular networks compared to Namibians, Finns, Swedes, et al.

    Back to your main point of how universal service can be achieved in a country with varying population densities, Whaples describes several approaches. The first is to do nothing. UPS and Fedex have delivery networks that are very comparable to that of the USPS. Another is regulation, which is what the European countries do, though really it turns out not to be expensive to serve rural customers because mail is delivered to roadside boxes rather than to the front door. (And, after all, few people choose to live in a house or town that is not served by the public road network.) Another approach is to charge junk mail shippers different rates to deliver their advertisements to different addresses, the result of which is presumably that people who live in cities will get more junk mail than those who live in the country.

  9. Speaking as someone who lives in Holland, if you privatize the USPS, be prepared for the concept of ‘first class mail’ to essentially, *die*. Which is perfectly appropriate in a market where there are perfectly fine digital alternatives.

    I’ve noticed that Americans tend to complain about the “junk they get in the mail.” I get none. I don’t get many bills, letters or post cards either. Why? Once reliability dropped, thanks to cost-cutting measures, companies started to send bills and invoices by email. It’s quicker, more cost-effective, and more reliable.

    Some companies sent a polite message if I wanted to stop receiving paper mail from them “to save the environment.” Others, like my bank, bluntly informed me that if I wanted to continue to receive my bank statement (comparable to an American credit card statement) by paper mail, I would have to pay a hefty fee for the privilege.

    The next step, of course, was for the board to split the postal service into a profitable package delivery company, and a very unprofitable company that only delivered first-class mail. This company is now locked in a vicious cycle. It has to raise prices just to preserve its cash flow. But this makes their services less attractive.

    Theoretically, any of the other package delivery companies could offer first class mail delivery. None of them seem to think it’s worth their time.

    The only organisations that still send paper mail are the ones that can’t take the liberty to assume that their customers are able to use the internet, and small (semi-)government organisations that can’t afford the up-front investment necessary to develop an online interface for customers.

    Perhaps this is the way of the free market, but while the privacy of my paper mail is protected by a constitutional guarantee, my email is not. Postmen have to swear a solemn oath not to open letters, but I don’t think Google requires this of the Gmail staff. And finally, while it’s infeasible for a dishonest postman to open and read all the letters he delivers, a sysadmin at an ISP can automate this very easily.

  10. Philg:

    The devil is in the details.

    I lived in Europe for most of the 1990s. I’ve seen successful privatizations (the privatization of telecoms in Germany) and I’ve seen completely disastrous ones (for example, the privatization of the rail system in Britain led to a decline in the quality of public transport, and lower investment in infrastructure causing several major rail accidents).

    Regarding your last point about taxes.
    In the U.S. there are a lot of hidden fees (call them taxes if you want). For example, we don’t have universal day care and we don’t have free university education. So this inevitably must come out of our own pockets should we choose to have children.

    When I was in Germany one could get a reasonably decent University education without paying any matriculation fees (aka tuition). Furthermore, students could ride on the local transit system for free and the national system at a reduced cost. There is now some tuition, I don’t recall what it is, perhaps 1000 Euros/yr. Moreover, the rate of income taxation in Germany is really not all that much higher than in the US—only a few percentage points. Yet one gets a whole lot more for the taxes one pays, such as decent public transport, roads without potholes and low cost education.

  11. phig: ” We like to think of our country as vast and unsettled. In fact, however, with 34 people per square km, we’re in the middle of …
    Sweden has 23 people per square km using a competitive postal system. Finland has 18 (i.e., is about half as densely populated as the U.S.).”

    Finland has 5.4 million people with “with the majority concentrated in its southern regions”, with 1 million living a single metro area.

    Sweden has 9.4 million people with 85% living in “urban” areas.

    The two countries are also many times smaller than the US.

    The US has 315 million people with 82% residing in cities and suburbs”, i.e., not just “urban”.There are 10 cities with populations greater than 1 million, which account for about 22 million people. Something like 10 Oslos/Helsinkis spread across a whole continent.

    Overall population density is a poor statistic to use.

  12. Dave: shows that there is nothing special about the U.S. in terms of urbanization compared to countries with private postal services. Thus your argument boils down to “most other countries are smaller than the U.S. so it is easy for them to do stuff but it is hard for us.”

    Naively one would think that it isn’t any harder to run a delivery service in country with a larger and more dense population (like the U.S. compared to Finland or Sweden) because the larger population results in more revenue. And one would also naively think that the larger population and larger market would make a country a more likely place for competition. A country with 300 people surely could not support more than one postal service, for example.

    If your assumption is true, i.e., that the size of the U.S. makes us incapable of doing stuff that smaller countries can do easily, then that does not augur well for the future of the U.S., India, China, Indonesia, and Brazil. It would make a lot more sense for companies to build factories in small countries that can take advantage of the inherent efficiencies that you have identified. Those small countries aren’t trapped, for example, in suffering a $70 billion per year drain on their economy by their monopoly post offices (the $70 billion figure is what Whaples cited as the consensus estimate on how much the USPS costs American consumers in higher prices).

  13. Phil: to your specific point that UPS and FedEx have the same rural delivery network as the USPS, I heard on an episode of Stuff You Should Know recently that there are agreements between the USPS and the other package/express mail carriers where the USPS handles the “last mile” of delivery for more rural carriers (in exchange for space on UPS and FedEx cargo aircraft and/or cash). So, the notion that people who live in very remote locations would continue to be served as well by private carriers as they are by the USPS, for first class mail at any rate, seems unlikely.

    It seem clear to me that the problem with the USPS is the bizarre hybrid private/public entity it is. They have a constitutional mandate to provide service to everybody rather than to whom it’s profitable to serve. Congress doesn’t give them a budget to do this and wants them to survive off of revenues, like a private company, because we all know private companies are more efficient. But Congress also controls their prices. And their schedules (c.f. the recent fight over Saturday mail delivery). And makes them do things that no other private company would choose to do, like prefunding their retirement benefits accounts (which seems like a wise thing to do, but puts them at a huge competitive disadvantage). If we’re going to retain the federal mandate for guaranteed mail service then we should bite the bullet, make it a true federal entity, and pay the taxes to support it. After all, making sure everybody has access to cheap first class mail seems like a better “mission” than being able to blow up people halfway around the world at will, and I doubt a fully-funded USPS would cost as much as our military does.

  14. The comparison of the United States Postal (USPS) Service to foreign postal services is inapt. USPS delivers to more addresses — 152+ million and growing — over a wider geographic area than other postal services, and, in fact, delivers 40% of the entire World’s mail. Furthermore, USPS is the most efficient postal service in the World, delivering that 40% with 10% of the World’s postal workers. Furthermore, USPS charges much lower postage than most other countries’ postal services. It is equally inapt to attempt to compare USPS to its private sector competitors. USPS delivers 160+ billion items per year, to 152+ million addresses. FedEx and UPS — combined — delivery 7 billion items to 30 million addresses, consigning a substantial (and growing) portion of those to USPS for “the first and last mile.” Without USPS, the vast majority of Americans — those at the 122+ million addresses not served by the private sector — would totally lack access to mail service, much less at an affordable price.

  15. A few things come to mind about rural service. If indeed, the raison d’etre for the USPS is that no one else will deliver to rural addresses, one ought to explore whether these rural addresses need 6 days/week delivery, or whether 1 day/week delivery would suffice for cheap, subsidized first class mail. If they wanted it sooner, perhaps they could use email, fax, or express mail.

    Furthermore, I haven’t run the numbers, but wouldn’t it make sense to use the same paradigm as phone service, where a tax (USF) on all phone bills goes to pay for rural service, without having a governmental telephone monopoly?

    @Tiago — so what if first-class mail costs $1.75 ? It may be good for the USA to pay $2 per first-class mail envelope if it makes first-class mail financially viable for privatization. If you don’t like the cost, don’t use it in favor of the free alternative — the Internet. The very real benefit is saving Mr. and Mrs. Taxpayer the subsidies doled out to the USPS.

  16. Jagadeesh: Delivery to rural addresses (boxes by roadside) is relatively new (see ).. In the old days Americans would go to the post office to pick up their mail and/or go to a post office box. If it turned out to be too expensive to continue curbside delivery probably what would happen is that the various competing postal services would establish relationships with grocery stores and other local retailers. People would pick up their mail when they picked up milk and eggs.

    GrannyBunny: The economist in the lecture did not attack the USPS for not being beneficial to Americans. He was summarizing the findings that the USPS pays at least a 30 percent premium to its workers (maybe a lot more depending on how one accounts for a defined benefit pension scheme), that labor represents 80 percent of the USPS costs, and that prices for all goods and services in the U.S. would be lower if the USPS paid private sector wages to its workers and was forced by competition to pass on those savings to postal consumers. Currently a minimum wage worker pays a little bit more for all of the things that he or she buys in order that a USPS worker can earn $100k/year, for example, when that worker would be earning just $75,000/year or so if employed by a private company. Some of the poorest Americans are therefore subsidizing USPS workers who earn above-average wages.

  17. So far the conversation completely ignores the primary reason why postal, and for that matter federal, jobs pay more than their private counterparts. The underlying reason is the preference given to veterans when applying for those positions. That’s right! The excess cost is really part of our necessary military costs. It solves the problem of keeping our veterans pacified. If we didn’t buy them off with $100,000 public jobs and made them take those $75,000 private sector jobs instead, they would organize and upset the Status Quo. That is the main lesson our political elite learned from WWII which was caused in large part by WWI veterans organizing and acquiring political power.

    This explains completely the reason why different measures work in Scandinavia which hasn’t been on the aggressive end of empire building for about 20 generations, than in the united states which aspires to rule the entire world.

    The debate so far, like many others of the same ilk, is just another exercise in sub-optimization because it oversimplifies the real world.

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