Postal Reform Bill: Don’t Give the Postal Service a Blank Check on Package Delivery

Section 202 of the postal-reform bill, which could end up hiding significant costs, should be dropped.

Whenever Congress stands poised to do something bipartisan, watch your wallet. The devil is often in the details. So it is with the Postal Service Reform Act of 2021. Section 202 of the bill threatens to let the Postal Service hide the costs of its package-delivery service in ways that could end up subsidizing Amazon and other package shippers at the expense of letter mail. That is partly a result of ambiguous language in the bill, but it also reflects a deeper identity crisis over the decline in the Postal Service’s letter-mail business and its drive to replace that business with package delivery. Section 202 should be rewritten to remove or clarify its proposal for an “integrated network” uniting mail and packages.

Playing Monopoly

The Postal Service became an “independent establishment” of the federal government in the Postal Reorganization Act of 1970 (PRA), which replaced the old cabinet-level Post Office Department. The idea of the PRA was that the Postal Service should be economically self-sufficient without congressional subsidies. To do that, its costs and revenues should break even. But it continues to be saddled with legal obligations to deliver letter mail (which today consists mainly of bills and other commercial mail) to every American, including many rural routes that are big money-losers. It also carries the costs of a unionized workforce, a particular expense for a business so labor-intensive that it employs over half a million permanent employees.

Under the PRA, as modified in 2006, Postal Service business is structurally divided into two business sectors: (1) regulated “market dominant” products over which it has a legal monopoly and (2) competitive products. The monopoly products, broken into various classifications of mail, are not free to charge any price the Postal Service wants. Instead, like a power utility, the Postal Service must submit a “rate case” with proposed postage prices to its own captive regulator, the Postal Regulatory Commission (the “Commission”). In theory, the Commission’s job is to ensure that the rates charged are tied to the costs of providing the service.

The Postal Service has much more legal latitude in setting the prices for its competitive products, such as package delivery and Express Mail. These compete in a crowded market with package and express-delivery services such as UPS, Federal Express, and DHL. The package line of business originated with Congress. The Postal Service has been mandated to carry packages since 1912, back when the big player in packages was Sears, not Amazon.

Where this gets tricky is that the Postal Service has a lot of costs that are not obviously attributed to one product or another, including executive and administrative compensation, fixed labor costs, post offices, sorting facilities, trucks, and airplanes. Variable costs include things such as fuel and labor overtime. The D.C. Circuit has allowed even some variable costs to be included in “institutional” costs. Creative accounting can and does shift a lot of the expenses into institutional costs that are not attributed to any one product. How to pay for those? As American Enterprise Institute postal expert Kevin Kosar noted in 2018:

Last year, USPS’s total operational costs were $72.4 billion and its attributable costs were only $41.6 billion. That leaves $30.8 in institutional costs, or 42.5 percent of the agency’s overhead. How those institutional costs should be attributed to parcels and other classes of mail has been hotly contested for years, and the method used determines whether individual products are profitable.

Under current law, set forth in 39 U.S.C. §§ 3622 & 3633 (including significant revisions in 2006), the Commission’s rate regulation of market-dominant products is supposed to “allocate the total institutional costs of the Postal Service appropriately between market-dominant and competitive products,” and the Commission is directed to issue regulations that

(1) prohibit the subsidization of competitive products by market-dominant products;

(2) ensure that each competitive product covers its costs attributable; and

(3) ensure that all competitive products collectively cover what the Commission determines to be an appropriate share of the institutional costs of the Postal Service.

In short, it is the Commission’s job to make sure that the Postal Service isn’t gouging its monopoly customers by saddling them with more than their share of the costs of running the institution as a whole, while allowing the Postal Service to undercut its private-sector competitors in the package-delivery market by having the package-delivery service get a free ride. Skeptics argue that the Commission has not been effective in carrying out this mandate, in part because Postal Service accounting has been too opaque.

Interested Groups

As usual in Washington regulatory battles, it is important to keep a scorecard of who has interests at stake. Two constituencies obviously want the package-delivery business to bear more of the Postal Service’s costs. One is the mailers and creators of mail, including banks and insurers, greeting-card companies, senders of charitable and political mail, and companies that still send physical catalogues, fliers, and coupons. They want to keep mail rates low. The other is UPS, FedEx, DHL, and other competitors who want to keep the Postal Service’s package rates higher so that they are not undersold. The biggest group in favor of keeping package prices low is the Package Coalition, consisting of Amazon, eBay, Home Shopping Network, QVC, and other large-scale shippers of packages. All of these players invest heavily in lobbying Congress and litigating rate cases before the Commission and the D.C. Circuit in order to protect their own interests.

Donald Trump was a particularly vocal proponent of the theory that the Postal Service was effectively subsidizing Amazon by keeping package costs artificially low. With Trump, much of this sentiment seemed driven by his feud with the Washington Post, which is owned by Amazon founder Jeff Bezos. At the time, Josh Barro argued that the Postal Service was, in fact, profiting from parcel deliveries. The removal of Trump’s noisy advocacy may make it easier to get bipartisan support for postal reform that elides this subject, but his absence should not protect the bill from responsible scrutiny.

Here’s the Mail, It’s Doomed to Fail

The interests of the Postal Service’s management and unions are a bit more complex. The unions have two main incentives in Postal Service pricing: to avoid downward pressures on costs and to ensure a steady stream of revenues in the future, regardless of where those revenues come from.

Postmaster General Louis DeJoy came to the organization from the logistics business rather than inside of government. DeJoy has become something of a partisan lightning rod, especially during the conspiracy-theory panic over election mail in the summer of 2020, and the postal unions have tended to paint him as a cold-hearted Scrooge oppressing the working man. Even if you buy into all of that, however, DeJoy is largely aligned with the unions in wanting to expand the Postal Service’s package business rather than let the dramatic decline in letter mail cause a rethinking that ends with a significantly smaller Postal Service.

That decline is really dramatic, and it has no end in sight. Yes, reports of the demise of letters have been exaggerated as far back as the advent of the telegraph. But eventually, the wolf comes. First-class letter-mail volume rose nearly every year from 1933 until its peak at 103.7 billion pieces in 2001; even before the pandemic, it had dropped almost in half, to 54.9 billion pieces in 2019, and fell off to 52.6 billion in 2020. Overall mail volume peaked at 213.1 billion in 2006, but fell off to 142.6 billion in 2019, then to 129.1 billion in 2020. The Postal Service’s 2020 Annual Report makes no attempt to whitewash the grim forecast for these trends:

The Postal Service anticipates that the volume of First Class Mail will continue to decline in future years with the ongoing migration to electronic communication and transactional alternatives resulting from technological changes. . . . Declines in hard-copy reading and advertising shifts away from print have depressed [the periodical] segment for several years. . . . Marketing Mail is expected to see somewhat depressed volumes and a downward shift due to accelerated electronic diversion and the ongoing effects of the pandemic.

In short, the demand for the public service that the Postal Service exists to provide is evaporating. In a sane world, that would lead to rethinking the entire enterprise — not eliminating it, but reducing its costs, its workforce, and the scope of its service obligations to match demand. Instead, DeJoy’s strategy is to expand package delivery — a service in which private-sector companies already provide services to the free market — in order to prop up revenue. Packages made up nearly a third of Postal Service revenue in 2019, before the pandemic, and soared to 39 percent in 2020.

DeJoy’s Plan

Critics suggest that this is a fool’s errand, as DeJoy’s ten-year plan projects $24 billion in revenue growth from “package growth, new competitive products and pricing changes” while “investing $40 billion in our network, technology, and people” over the same time period. It is a bit unclear how either of these numbers are allocated across the mail and package businesses. Moreover, DeJoy also projects $34 billion in cost savings in “mail processing, transportation, retail, delivery, and administrative efficiency,” some of which are presumably also expected to be products of the additional investment. Still, projecting that you will spend $16 billion more in new investments than you expect in new revenue is not a promising strategy.

Of course, a business sometimes has to make investments just to retain the business it has. Amazon, for example, is moving an increasing share of its package delivery business in-house. It has bought millions of trucks, starting with a fleet of zero, in the nine years it has taken the Postal Service’s cumbersome government-procurement system to develop a new truck to replace its existing fleet. Designing a mail truck should not be rocket science; Americans built 200,000 Studebaker trucks just for the Soviet war effort between 1941 and 1945.

‘Reform’ on the Table

Congress is not facing the issue squarely, but it recognizes that the status quo is unsustainable. Largely identical versions of the Postal Service Reform Act were introduced in the House and Senate in mid May as H.R. 3076 and S. 1720, respectively. The broader agenda behind the bill is to shift to the taxpayer more of the Postal Service’s expenses for retiree health benefits. The 2006 bill required the Postal Service to pre-fund its liabilities for the health care of its retirees — a massive burden not required of private companies, but one that was prudent for Congress to demand because it expected that sooner or later, the Postal Service would just dump those costs on Congress. Now, it has. The bill creates a separate Postal Service Health Benefits Program, removing 2 million Postal workers and retirees from the existing Federal Employees Health Benefits Program. Current Postal workers will no longer be able to remain in the FEHBP in retirement, at the expense of the Postal Service, but will instead be forced into the Medicare system on the general taxpayer dime. Current Postal retirees will be given a choice between the two.

Section 202

Compared with the tectonic shift in health-care coverage, Section 202 of the bill seems comparatively innocuous:

The Postal Service shall maintain an integrated network for the delivery of market-dominant and competitive products (as defined in chapter 36 of this title). Delivery shall occur at least six days a week, except during weeks that include a Federal holiday or in emergency situations, such as natural disasters.

The wisdom of statutorily mandating delivery six days a week — previously Postal Service policy, but not cast in stone in Title 39 — during a time of plummeting demand for mail is questionable enough. But what is curious about Section 202 is the requirement of an “integrated network for the delivery of market-dominant and competitive products.” What does that mean? Maybe just a flourish with no legal consequence, in which case there is no harm to removing it from the statute.

But it might be a way to smuggle into the language of Title 39 a permanent disguise for the costs of package delivery, such that package costs cannot practicably be disentangled from mail costs by the Commission. The language was a late insertion to the bill, and was immediately hailed in a statement by the Package Coalition:

This bill is critical to ensuring that USPS continues to serve in its indispensable role in America’s economic infrastructure, delivering for Americans and small businesses at competitive prices with reliable service. Importantly, the legislation will preserve the service’s integrated delivery network, which delivers mail and packages six days a week.

That does seem like a lot of enthusiasm for an ambiguous flourish. Lexington Institute postal expert Paul Steidler argues that Section 202 would stifle the development of separate package routes and facilities, thus hurting transparency:

Package-only delivery routes would be counter to this proposed law. USPS’s plans to open 45 package-only annexes at the holiday season and avoid last year’s bottlenecks would similarly be prohibited. The language, while embraced by and benefitting package-shipping special interests, is unnecessary and harmful.

Under the Commission’s present formula, competitive products such as package delivery pay less than 10 percent of the Postal Service’s institutional costs despite producing 42 percent of revenue in 2020, so you can see why the mailers and the package competitors are eager to see more institutional costs shifted off the backs of the mailers, and why the package shippers do not want the Postal Service to start accruing more costs that are transparently attributable only to packages.

The proposed legislation tries to punt the issue back to the Commission, requiring in Section 203:

The Commission shall initiate a review of the [cost attribution] regulations . . . to determine whether revisions are appropriate to ensure that all direct and indirect costs attributable to competitive and market-dominant products are properly attributed to those products, including by considering the underlying methodologies in determining cost attribution and considering options to revise those methodologies.

Whether you think this is an adequate solution depends upon whether you think the Commission presently has adequate information with which to resolve this question and, moreover, that it can be trusted to get to the bottom of it. The Supreme Court held in 1983 that the Commission’s interpretation of the statutory rules — not the Postal Service’s — are entitled to deference under the Chevron doctrine, and that “Congress did not dictate a specific method for identifying causal relationship between costs and classes of mail.” Yet, in a 2020 case brought by UPS, the D.C. Circuit found that the Commission’s reading of the existing statute regarding cost attribution was “incomprehensible” and “defies reasoned decision-making.”

The safer course here is for Congress to delete the “integrated network” language and make explicit instead that the Postal Service has an affirmative burden of proof to make as transparent as possible to the Commission any costs that may reasonably be attributable to competitive products such as package delivery. Outside of a few distant rural corners such as Northern Alaska, America does not actually need a government agency to deliver packages. Congress should not make it easier for the Postal Service to compete with private companies just for the sake of organizational resistance to cutting costs.