Economics & Research Blog
Dr. Joe Hits a Postal Nerve: Playing Football with Baseball Bats?
Last week I posted a commentary on the Economics and Research Center notes about the recent financial results announcement of the U.
By Dr. Joe Webb
Published: August 18, 2008
Last week I posted a commentary on the Economics and Research Center notes about the recent financial results announcement of the U.S. Postal Service. The post was up only an hour and I started to get responses. Some of the comments are below. For space considerations, I had to create composites or shortened versions of the comments, as many of the writers cited the same issues. I have made them anonymous, but I did respond to as many as I could personally. Even then, this is longer than a blog post should be, but since an Internet page is theoretically infinite, I have taken advantage of that.
Your article truly shows your age and ignorance when it comes to the USPS and pricing. Complaining about the ONLY self-sufficient Government Organization that does not use tax dollars is truly a waste of print and brain matter.
First things first: my age and my ignorance. For the former, I guess you have not looked at my picture or seen me lately. For the latter, my ignorance is born of experience.
In the 1970s and early 1980s, I ran a mail order business to pay for various college and other expenses. I did marginally well at it, but sold it when it became to much to handle despite its small size. I had become fascinated with direct marketing in 1978 when someone at the Direct Direct Marketing Association allowed Manhattan College's marketing department to send some students down to Direct Marketing Day seminars. I was the only one to go, and in that one day I learned about using response rate calculations, campaign planning, list purchasing, and the biggest question of the day: whether or not toll-free phone numbers could help your business. In the late 1980s and through the 1990s, our consulting business mailed anywhere from 5,000 to 30,000 mail questionnaires every year. We've used all kinds of mail services over the years, and I will never forget when the Harrisville, Rhode Island postmaster called us in 1990 and said “Your business reply envelope permit has been approved. Your permit number is zero, zero, one.” Yes, we were the only BRE account in all of Harrisville, Rhode Island, and ditto for our prepaid Express Mail account. We were big postal fish in what was more of a puddle than a pond.
The U.S. Postal Service still does receive taxpayer funding, but it has been reduced dramatically over the years. In the latest legislation, the USPS bears the full costs of its pensions. The Postal Service Fund, which reimburses the Service for costs of providing universal service to geographic areas that would otherwise not have them and services such as “free matter for the blind,” is the smallest in recent years, and will eventually be eliminated except for some very limited amounts. It took almost 40 years to get this far, but there remains some taxpayer support.
As far as a waste of brain matter, are you sure you're not part of my extended family? They've been saying that for years about me.
COMMENT #2 (from a USPS employee):
I was trying to reconcile your access to reports and comments from the Postmaster General and your misinformation about costs from other shipping couriers. Before the Postal Enhancement Act went info effect, we used to be more expensive in some areas than some of our competitors. But since the act went into effect and because they have an open pricing structure that allows them to change their prices any time they want to, they have become more expensive than us in both their base pricing and when you take into account their surcharges or a myriad of various "extras" like fuel, residential delivery, address corrections, pick up fees, Saturday delivery etc.
In my opinion, this is the biggest irony. My original comments were on a blog that was not printed, cited in an e-newsletter that would not likely be profitable in print form, and all of the comments to me sent via e-mail rather than in hard copy, with my responses sent in the same form, with a cost below a penny for each transmission. That is what is truly amazing. You can actually “put your two cents in” for less than two cents, actually a lot less that 42 cents, and have it delivered in seconds rather than days.
Until the Postal Service, and members of the printing industry, firmly grasp that their competitors are digital media and not UPS, FedEx, or DHL, they will be attempting to play a sport with the wrong implements. You can't play football with baseball bats, but that's what they seem to be trying.
The Postal Service needs to be freed from its regulatory shackles, especially its pricing. Pricing is not set by the market, but by its costs. Costs change in relation to the demand for goods. The USPS does not have the ability to detect demand in a free economic sense. When prices are set by customers who decide what the value of service is, only then will postal operations be truly rational to its mission.
You stated, “Perhaps [the decline in postal volume] was their price increases in the face of constant price reductions by their new competitors.” What sources are you getting your data from? Please refer to these links about fuel surcharges from FedEx, UPS, and DHL.
There is no fuel surcharge for digital media and communications, and the prices for it keep going down. In so many ways, it is virtually, if not totally, free.
Eighty-five percent of every dollar that the USPS takes in, goes to labor costs. These costs are constantly rising due to collective bargaining. The USPS no longer receives a tax subsidy to operate, and works strictly off of the money it raises. Furthermore, the USPS does not work off of fixed costs either. When gasoline goes up just one cent in this country, it means an $8 million increase to the Postal Service. The USPS does NOT pass these costs on to the consumer as UPS and FedEx does in hidden surcharges. Let me finish by performing a simple illustration of inflation in this country. In 1945, what was the price of a cup of coffee? It was 5 cents. Today, you will pay anywhere from $1.25 to $3.00 for that same cup. How much was a newspaper? They were 3 to 5 cents. The New York Times costs how much today? The fact that for less than half a dollar, you can send a mailpiece from NY to Hawaii is AMAZING!
Thanks to the new postal legislation (passed in 2006), the USPS will now raise rates every May. You can bank on it. The good news is that the increases will be much more predictable and smaller in size than in the past. The new "Intelligent bar code technology" will allow advertising mailers the luxury of following a mailpiece throughout the postal system (from induction to delivery), helping to target customers more efficiently and profitably.
For a quasi-governmental agency that literally has it hands tied behind its back, I would say that the Postal Service is not only doing a great job under the circumstances, but will be here for a very long time to come.
Thanks to new postal legislation? Thanks? Really? By allowing postal rates to be set by the Bureau of Labor Statistics calculation of inflation means rather than consumer's needs and preferences for their services? This means that postal rates may very well go up 5% next year. Unlike other businesses, such as the printing industry, there is no ability to raise its prices in that manner. The printing industry has to compete with all other dollars in clients budgets, and as we know from the Producer Price Index data, the prices of printed goods have not kept up with inflation for many years. In fact, because mailing clients look at the total costs of a campaign, the rate of postal increase (and paper price increases, but that's another story), are crowding out the dollars available to printers.
More important, however, is that the costs of communications are constantly decreasing, as are the costs of the devices needed to access them. The devices are getting better and more robust as well, with more capabilities and greater reliability.
Hidden surcharges? The charges are plain to the eye. It's called an invoice and a rate book. Perhaps what is really meant is predictability of those prices. Floating surcharges are a problem, but there is actually great transparency about the process.
As for new bar code technology, I submit that if the postal service was a freely operating business that its adoption of technology would have been faster and deeper than it has historically been because of the urgency to compete and satisfy customers in a competitive marketplace. The primary reason for the success of UPS in recent years was that they stopped comparing themselves to the USPS and realized that FedEx was eating their lunch. UPS has made massive investments in technology, and their package tracking is rather incredible. When I ship something by Priority Mail with tracking, I will only find out days later that it was delivered, whereas with UPS, I can see when it's on the truck and exactly what day it will be delivered. Parcels and mail are quite different, but it's interesting to compare how moderately similar tasks are handled by different organizations.
As far as sending a letter to Hawaii for 42 cents, does that really matter any more when we can send information faster and cheaper? What's more amazing is that I can call Hawaii for free, using Skype and get video as part of the call. THAT's amazing.
As far as costs going up because of collective bargaining, there are two sides to the negotiations. Both of them have good reasons to perpetuate the current systems. The only vote the customer has is whether or not they use the service. Postal volume per household has been going down for years, so they obviously participate in that way. At some point the volume will get to the point where one of the sides will blink.
First of all the USPS has gone down the wrong path when they started looking at FedEx and UPS as competition. The main goal of the USPS is to provide universal service for communication to all residents of the United States. It is not a business but a service provided by the Federal government. To salvage the service changes like five day delivery for businesses and three day delivery for residential homes must be incorporated in any future solution.
There was a time when universal service could not be achieved in any other way. Today, with land line, cable, cellular, wifi, satellite, and other forms of technology (like WiMAX) soon to be deployed, there are choices that were never available. I wonder if anyone has calculated if it is actually cheaper to give computers and printers to rural customers. It might very well be worth doing so, and have semi-weekly deliveries of other goods. The option may not be viable at this very moment, but it might be, especially as Millenials grow older and more influential in their use of non-print communications.
And if that's the case, postal volume may just erode to a point where this discussion is meaningless in retrospect. Unless the Postal Service is deregulated, meaningless may well come sooner than anyone wants.