Postal Privatization

1. Postal Privatization APWU Training October 23, 2010 Roland Zullo Institute for Research on Labor Employment and the Economy University of Michigan

2. Lessons From History Every public service that we enjoy today began as a private service. The reason private services converted to public is that the private model failed. • Schools: public school systems were created during the 19th century from demands by the working class for access to advanced education. • Water: the Croton Aqueduct system in NYC was built to supply fresh water in 1837 following the cholera epidemic of 1832. • Protective services (police and fire): funded by user fees that led to corruption and destructive forms of competition. • Transit: private transit existed until the automobile and suburb growth eliminated the market beginning in the 1950s.

3. What Have We Learned? Three reasons to have and preserve public service: • Universal access (schools, transit) • Minimize corruption (police protection) • Minimize negative externalities (water, fire fighting) Privatization compromises all three objectives. In general, our bias should be to preserve public services as publicly funded and managed services. For postal service, the first question to ask is…

4. Q: Should All Citizens Have Access to the Service? • Market systems invite the hunt for profitable sub-sets of a population. Those who can pay receive the good or service. • Universalism demands that all members of a population have access to a good or service. Implications: in a market system, the scope and quality of goods and services varies greatly across the population. Nearly always the wealthy and privileged receive superior goods and services. What about postal service?

5. Choosing Universalism • Rural households: initially, payment was based on distance travelled. A uniform letter rate was enacted by Congress in 1863. What this meant is that industrial regions (North) were increasingly subsidizing rural regions (South). • Fixed routes & fixed times are necessary to create a reliable and universal service. The USPS cannot ignore routes that are not profitable and must regularly carry non-optimal loads. • High sorting costs: mail can originate from anywhere to be delivered everywhere. The geographic breadth of the service means that sorting is complicated and costly. In general, the demands of universalism require that the USPS holds a monopoly on ‘profitable’ areas of service in order to pay for ‘unprofitable’ areas. Otherwise, the USPS cannot fill its mission without government subsidy.

6. Socio-Political Objectives Officially founded in 1775, the U.S. Postal Service was considered vital for the growth of the nation: a communication service that would unify the states, spur commerce, and facilitate our young democracy. Purpose was larger than delivering mail: • Subsidized newspaper delivery to inform and educate voters. Depending on the distance, sending a newspaper could be free or very low cost (especially when compared to the weight of a letter). • Franking (free mail service) for congress, other political officials, and postmasters. • Subsidizing transportation: contracts with horse-drawn coaches, trains, steamships and airplanes. In 1896, the prospect of rural delivery incentivized states to build roads and bridges. • In 1972, the USPS takes passport applications nationwide.

7. Early Postal Privatization The burdens of universalism and the broad social mission meant that the price of postage rates were inflated for some areas of the service. Predictably, private providers rushed into those markets. • Contracts with private carriers were expensive and meant to subsidize the growth in transportation. • Private inter-city delivery occurred in 1839. Private firms restricted their business to cities that exchanged large volumes of mail, were proximate (NYC, Boston, Philadelphia), or were along shipping lines (cities along the Great Lakes). • Private intra-city delivery first occurred in 1842 in NYC, and later in Philadelphia. These services featured door-to-door delivery. • Restricted items: delivery of money and packages. Letters were not as profitable.

8. Private Sector Innovations • Payment by weight (as opposed to by distance) • Prepayment (as opposed to C.O.D.) eliminated costs due to non-deliverable mail (adopted by USPS in 1856). • Postage stamps (adopted by USPS in 1894) • Door-to-door delivery. In part, these innovations were enabled by the narrow niche market of the private firms. All were adopted by the USPS. But remember also…

9. Private Sector Failures • Private firms did go out of business. Between 1851 and 1860 the USPS took over many private intra-city delivery companies. • Pony express (1860) lasted about 18 months. • Parcel post, adopted in 1912, competed for customers from private express companies (over fierce lobbying). • React Postal Service of Salt Lake City (1982) conducted a local sort and delivery service through 7-11 stores. The APWU challenged React in court, and while React won the case on appeal, by 1985 React was out of business. Conclusions: 1. Private firms failed in service areas that did not have lucrative markets (e.g. pony express). 2. The USPS competed in service areas that were held by private companies (e.g. parcel post). 3. Contemporary privatization includes the attempt to sell USPS products and services without having to pay for union labor.

10. Worksharing Volume discounts for mailers that presort, pre-barcode and drop-ship mail pieces. • First class mail discounts introduced in 1979. • Parcel post discounts introduced in 1991. • Explosive growth in alternative mail service providers. • Over 80 percent of mail volume is discounted. • Discounts set at “avoided costs” and thus, make no contribution to fixed overhead. • Fixed overhead for USPS is estimated at 60%. Postal Accountability and Enhancement Act (2006) changed the mandate of USPS from breakeven to retain earnings. Opportunity for setting worksharing discounts at less than avoidable costs.

11. USPS and Political Corruption Non-competitive contracts. Postmaster abuse of franking privileges. Stamp forfeiting. Patronage system: jobs were given to friends of those elected into power. • Identification of “star” private carriers. • Revoke franking privileges and socializing stamp production. • Labor relations: • Pendleton Act (1883): postal workers are civil servants and competitive examinations required for clerks and carriers. • Lloyd-LaFollette Act (1912): outlawed gag orders for USPS employees, provided just cause and union recognition. • Kennedy’s Executive Order 10988 (1962): limited collective bargaining rights. • Postal Reorganization Act (1970): effective collective bargaining.

12. Privatization in the Digital Age Challenge: first class mail has historically subsidized other USPS delivery services. Rising use of the internet is resulting in a decline in first-class volume. What to do? Two views… • Cut service delivery (from 6 to 5 days) • Raise prices on newspapers & magazines • Eliminate labor inefficiencies such as standby time • Privatize sections of the service. • Fix accounting irregularities • Charge private entities that use USPS platforms • Allow USPS to apply for Medicare Part D subsidy. • Expand services (e.g. vote by mail, internet for rural areas, banking). Leverage the physical presence the USPS has in the community to become the provider of Federal government services.