Whither the Post Office and Its Universal Service Obligation? Posner

Becker is certainly correct that the U.S. Postal Service should be privatized. Although government is probably more efficient at providing some services than private enterprise is, such as the military, national security intelligence, the police, the judiciary, the central bank, and prisons, because the output of these services is so difficult to measure, there is no reason to think it any more efficient at providing postal service than it would be at providing telephone service or airline service. Its origins as a public service reflect government concern with conspiracies (and its desire therefore to be able to read letters in transit), the natural-monopoly character of postal service (multiple postal services would require duplication of delivery trucks, post offices, and sorting stations), and the desire to provide universal service at flat rates in order to improve information flow throughout the entire society (i.e., to achieve network externalities).

Later, when the telegraph and telephone were invented, it became recognized that these desiderata could be achieved without public ownership. AT&T until its breakup in the early 1980s had a de facto monopoly of telephone service, providing universal local service at flat rates subsidized by long-distance service and shielded by regulatory agencies (primarily the Federal Communications Commission) from competition by “cream skimmers” (competitors entering the service markets in which rates were kept artifically high in order to subsidize local service, especially local service in sparsely inhabited areas), but constrained in its ability to obtain monopoly profits by regulatory control of rates. 

This could have been the regime for postal service, and an important step in the direction of substituting a government-regulated for a government-owned postal service was the 1971 reform that converted the service from a Cabinet department to an independent agency that was to be self-financing (largely from the sale of stamps) rather than dependent on congressional appropriations. The universal service obligation remained, along with a legal monopoly of first- and third-class mail and of access to post boxes (as distinct from front-door mail slots), and continues to this day. 

But just as AT&T was eaten away by cream skimmers owing to liberalized regulation in the 1970s, so that by the beginning of the next decade it was ready to embrace a large measure of deregulation, so the postal service is being destroyed by competition from unregulated services, mainly email and other online services but also fax and Federal Express. Its revenues are plummeting faster than it has been able to cut costs. As a result, according to an article in today’s New York Times, “the [postal service] is so low on cash that it will not be able to make a $5.5 billion payment due this month and may have to shut down entirely this winter unless Congress takes emergency action to stabilize its finances.” The article discusses various economies, as well as congressional subsidy, that might save the postal service—but does not mention privatization as a possibility.

The postal service is hobbled in competing by its universal service obligation, which requires it to maintain post offices and fleets of delivery trucks in remote areas of  the country that generate little in the way of postal revenue, and to pick up and deliver mail six days a week. And since email, fax, and Federal Express service are available everywhere, the case for subsidizing postal service to remote areas is weak. 

The federal government could no doubt sell the postal service, just as states are busy selling turnpikes and bridges. If it sold it subject to the buyer’s assuming the universal service obligation, it would have to convey along with the postal service's physical assets its monopoly protections against cream skimming—the monopoly of first- and third-class mail and exclusive access to post boxes. But then little would have been achieved by the sale—not nothing, because the buyer would be more strongly motivated than government to seek economies, but not a lot. 

A sale without conditions would be different—the results would be radical: a large reduction in post offices and delivery trucks, and correspondingly large reductions in numbers of employees. But then what of the people living in remote areas? Email and fax are not a complete answer, because there is still a demand for letters, magazines, advertising brochures, and other items of snail mail. All these are things that can be delivered by Fed Ex or UPS, but the price for pick up and delivery in remote areas might be quite high. There is no good economic reason to subsidize people who decide to live in remote areas, but there would be political pressures to do so. 

As a practical matter, reform of the postal service should I think proceed in three stages over a period of years. In the first stage, the postal service should be allowed to charge double postage for mail to or from designated remote areas and to terminate Saturday mail service to and from those areas. In the second, the postal service should be sold to private enterprise but with the legal restrictions (universal service, in its modified form with double postage and no Saturday delivery in remote areas, and exclusive access to post boxes) intact. And in the third the legal restrictions should be removed and all postal service be open to competition.

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