Fixing Aunt Minnie’s Postal Problem?

In late December, as the 109th Congress concluded, President Bush signed a measure aimed at reforming the U.S. Postal Service.

Described as “a monumental achievement” by prominent supporters like Rep. John McHugh (R-NY), many proponents of the measure believe it will bring the Postal Service into the 21st century.

The legislation gives USPS more leeway to outsource work to the private sector in exchange for fair mailing discounts. It gives the Treasury Department the opportunity to build a firewall between competitive and monopoly-protected services. And it tasks a strong regulator to protect individual consumers from being saddled with the costs of excessive discounts to business mailers.

Despite the new legislation’s good intentions, however, it will be up to the Postal Service’s leaders to effectively safeguard consumers from subsidizing big mailers, as we are doing now.

That’s a critical concern because Aunt Minnie — the individual First Class stamp buyer — is the only major USPS customer who did not have a heavy-hitting lobbyists angling on her behalf during all the legislative horse-trading.

Unfortunately, all monopolies – especially government ones – have a strong incentive to raise prices excessively on captive consumers. There is evidence that USPS is doing just that to Aunt Minnie. The Post Office also appears to be using its First Class monopoly – and the price of stamps — to subsidize areas of its business where it competes with private industry.

“The most recent data — from 2005 — indicate that the Postal Service’s monopoly has pushed up mail rates and markups over cost for those within the monopoly, especially First Class mail users,” according to Michael Schuyler, senior economist at the Institute for Research on the Economics of Taxation.

Schuyler goes on to note “while First Class and Standard mail provided 78.8 percent of sales, they made 90.3% of the overhead contributions generated by mail and services. Meanwhile, all other products and services furnished only 21.2% of revenues and just 9.7% of overhead contributions.”

It’s also worth noting that single piece, First Class mail has a cost coverage of 171 percent. That’s higher than most other categories of mail, including catalogues and magazines, which have a cost coverage of 116 percent. It’s also higher than Standard mail, which has a cost coverage of 159 percent.

That means that Aunt Minnie certainly seems to be paying more than her fair share. Are postal players with more clout – i.e., unions, bulk mailers, newspapers, and catalog retailers, et al – getting a deal at the expense of individual consumers?

With roughly 40 percent of costs attributed to institutional overhead, the Postal Service’s accounting is too murky to know for certain. But it’s something consumers need to watch closely.

Another problem is that the new legislation — despite many positive aspects — makes it easier for USPS to raise First Class stamp prices provided it stays within the rate of inflation. Even before the legislation was passed, rates were already racing upwards.

It has been less than a year since stamp prices increased to 39 cents. And USPS has already requested a new increase to 42 cents. USPS is expected to begin hiking prices annually as of 2009. That does not bode well for the ordinary consumer, who cannot negotiate worksharing deals like the bulk mailers.

To its credit — under the direction of Postmaster General John Potter — the Postal Service has implemented a number of smart reforms that make it easier to keep costs down. USPS management has shrunk the workforce through voluntary retirements, started to rebuild its postal sorting and distribution network, which will save money by consolidating some processing centers into fewer, larger facilities.

In light of these reforms and the new postal legislation, the USPS appears to be starting down the right track. From the White House to Congress, from the unions to the junk mailers, everyone seems satisfied with the way things are going.

Let’s just remember to look out for Aunt Minnie.

Don Soifer is executive director of the Consumer Postal Council in Arlington, Va.