Saturday, July 16, 2016

Why the Rate Cap Isn't Killing the Postal Service

The rate cap is evil -- evil, I tell you!

A legislative reform that has arguably saved the U.S. Postal Service is increasingly coming under attack by wrong-headed postal officials and some of the postal unions.

The myth these whiners are spinning is that the inflation-based rate cap on most postal rates is a horrible evil that is holding the USPS back. These cap carpers describe the recent expiration of the USPS’s exigent surcharge as a moral outrage.

The Postal Service, they claim, should be able to enact higher rate increases so that it can cope with the loss of mail volume to digital alternatives.

But that’s not how the real world works. What the cap carpers (our Publishing Word of the Day) miss is that no business gets to paper over its problems by raising prices as much as it wants to – especially other businesses that suffered from the Digital Revolution. As Joe Schick, Director of Postal Affairs for major publication printer Quad/Graphics, wrote in response to a cap carp comment on a recent Dead Tree Edition article:

“While postal prices have been capped at CPI [Consumer Price Index] for Market Dominant Products over the last 10 years, postage as a percent of the total cost to produce and distribute magazines and catalogs has still increased from about 35% to 60%. That means the other segments (printing and paper) have seen price decreases, which is a big reason why there has been major consolidation in the industry.”

(I guess that means the printers didn’t get an “exigent” rate increase to help them recover from the recession, the way the Postal Service did.)

Before the rate cap and other postal reforms were enacted in 2006, changing postal rates was an arduous and unpredictable affair. After many months of legal proceedings, the new rates often bore little resemblance to what the Postal Service proposed.

The rates paid by individual mailers were wildly unpredictable, adding to the growing incentives for businesses to use digital alternatives to mail.

Postal reform simplified matters with a compromise: The Postal Service could raise rates once a year as it saw fit as long as it met one condition – that the average postage increase for each class of mail did not exceed changes in the CPI. That meant the Postal Service’s financial health would depend upon its ability to keep its costs in line with its revenues, not on its ability to influence elaborate regulatory processes.

The rate cap imposed a discipline on the Postal Service that forced it to shrink its costs structure and find new revenue sources in response to rapidly declining mail volume. Without the rate cap, the USPS would not have been so quick to implement early-retirement incentives, facility closures, the shift to a more flexible workforce, or growth of the package-delivery business.

The pre-rate-cap Postal Service would have responded by trying to push through large rate increases, a disastrous strategy that would have triggered an even greater loss of mail volume. The resulting financial collapse of the Postal Service would have ramped up the political pressure to make even more drastic changes in how mail is delivered.

The 2006 postal-reform law does include sections that hamstring the USPS’s finances, such as the interest-free loans to the federal government that are euphemistically referred to as prepaid retiree health expenses.

But limiting its rate increases – as happens with utilities and other regulated monopolies – was and is a perfectly reasonable reform. So stop the carping.

We're celebrating July with a Publishing Word of the Day series that includes the Postal Service's apparently creative use of the word "inadvertent" and its new moniker, the U.S. Parcel Service.


Gordon Glazer said...

What about the problematic initial setting of the rates as part of the "Shape Based Pricing" which tied costs to what was estimated at the time to process. The problem then was this starting point was a big sticker shock. Flats on average went up by 50% and Packages (including flats greater than 3/4") went up over 100%. That was hard for Industry to swallow all at once, subsequent increases hit publications especially hard and the USPS is still not fully capturing the cost to process those. As volumes change, less pieces per mail stop, less FCM vs. Std, with 1.5 million new stops each year, the fixed costs increase and need to be passed along. The Post is asking Congress to reinstate the Exigent increase that recently got rolled back, I for one agree, The Post is a great value compared to the rest of the world and is even more efficient than the privatized Posts, so stop Carping about increases.

Anonymous said...

The USPS is not doing itself any favors. Several years ago, they introduced EDDM without realizing that they would be robbing from their other mailing categories to fill the EDDM slot. They boast success on that program, but at what true costs. And just like the article states, how would any other normal company deal with this scenario of financial constraints. A normal company would get rid of dead weight (which can never happen at the USPS because of all the government and Union leadership), and lower costs. Then look at their pricing structure compared to their competition. In this case the USPS' competition has little to no costs, so in order to be competitive, maybe it needs to lower its prices. The marketplace is driven by supply and demand. The USPS has a lot of supply (in this case capacity to move mail), but it has lower demand than in the past. Based on that simple little economic bit of data, they need to lower their pricing.

The rate cap is a good thing for them as well as the mailers. They just need to get off their butts and make some really tough decisions. These decisions include changing the culture at the USPS from a typical quasi-government run business, to a financially independent entity. This will mean getting the Postal Workers to work smarter and harder. Not have a culture of just doing the minimum to get by so you don't make other workers look bad. And maybe even firing a bunch of people. There are many good people that I deal with at the USPS, but the culture is toxic and needs to change.