Will Discredited Postal Service Get Next Great Bailout?

Monday, April 2nd, 2012 and is filed under Blog

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[Note: This column was the cover story for this week’s print edition of Human Events, which can be viewed online.]

It’s another month in Washington, and it’s yet another bailout. This time, taxpayers will be tapped for another $41 billion to subsidize the United States Postal Service, a flagging entity that is struggling against the tide of modern technology, despite its competitive advantage in the mail-carrying business.

Last week, the Senate held a cloture vote on a postal bailout bill (S. 1789). The cloture motion was easily defeated, but not before five Republicans and almost every Democrat supported the effort to begin debate on the bill. What is even more troubling is that most of the Democrats who voted “no” did so because they felt that even the infinitesimal structural reforms in the bill went too far. They wanted no strings attached to the bailout. This sentiment could pave the road for an even worse bill later this month.

Democrats have a serious problem with what is called “creative destruction” in a free marketplace and advancements in technology. For self-described progressives, they are quite regressive when it comes to efficiency in markets and the use of technology. They exhibit nostalgia for 14th Century energy technology and 20th Century banking technology. Hence, they don’t care too much for market progression. In concerted initiatives to hold back the tide of technology, they are quick to offer a helping hand to fading enterprises, especially those that are sponsored by the federal government. One such entity is the U.S. Postal Service.

In 1970, in response to a disruptive two-week strike by federal postal workers, Congress abolished the Post Office Department as a full cabinet-level department, and created the U.S. Postal Service, a quasi-private government-sponsored entity, referred to as a GSE. The Postal Service began working like a private entity in the sense that it self-financed its operations, but it was still a part of the federal government in every other respect. The USPS still enjoys tax-exempt status and a monopoly on first-class mail delivery. On the other hand, it is also encumbered by intractable government directives and the “universal service obligation,” a legal commitment that mandates that it provide service to everyone at reasonable rates.

Furthermore, its workers are entitled to the full array of federal employee compensation, including costly retirement healthcare benefits.

This muddled legal status, not unlike most other GSEs, has precluded the Postal Service from innovating to compete in this era of electronic communication like other private entities, leaving taxpayers on the hook to bail out an entity that could not compete without the government-sponsored monopoly.

In recent years, as the Postal Service has failed to remain profitable even as a government-sponsored monopoly, it has become clear that advocates of full privatization back in the middle of the 20th Century were quite prescient. It’s no secret that the U. S. Postal Service is on its way out. The transition to electronic communication has dramatically reduced the demand for its services. Consequently, USPS no longer generates enough revenue to function as a self-sufficient entity, particularly when it comes to paying employee retirement benefits. The Postal Service lost $25.4 billion between FY 2007 and FY 2011, and would have lost another $9.5 billion if not for the bailout in 2006.

As part of the 2006 agreement for USPS to recoup some of the money they had paid into the Treasury for their employees’ retirement health benefits, the Postal Service was required to prefund its future retirees’ health benefits with $5.6 billion per year to the Treasury for 10 years. Yet, Postal Service revenue has declined so precipitously over the past few years that Congress granted them a deferment from paying those prefunded obligations in 2009 and 2011.

Now, USPS is in such dire straits that it won’t be able to fulfill its current payroll obligations without further help from taxpayers. Supporters of the status quo inside and outside of Congress have concocted a scheme in which they are claiming that the USPS “overpaid” into the Treasury’s prefunded retirement account to the tune of $11.1 billion.

Last year, the GAO ruled that the Postal Service was wrong in their assertion that they overpaid for employee retirement benefits. After all, like anyone who pays a fixed amount into a pension fund with a variable rate of interest, there are ups and downs depending on the market. As such, any money recouped from the Treasury would engender more taxpayer funding. Don’t let them fool you with talk about “transfers” and “overpayments.” This is a pure bailout.

The Senate bailout bill, which is sponsored by Sen. Joe Lieberman (I-Conn.), would not only allow the USPS to recoup the $11.1 billion and use it as life support for its current operations, it would also re-amortize the entire prefunded payment structure, denying the Treasury of nearly $30 billion. Supporters of the bill refer to it as an intra-governmental transfer. In reality, it is a backhanded bailout.

In regard to immediate structural reforms, even Postmaster General Patrick Donahoe asked Congress for the flexibility to act more like a business and use innovation to restructure and cut costs. In order to continue operating at a limited capacity, which is what the free market would dictate in this circumstance, there is a plan to end Saturday delivery, to cut the workforce by about 220,000 employees and to close 3,700 local post offices and 252 processing centers. That’s how creative destruction and supply and demand work in the real world. That is not how it works in Washington.

Democratic nostalgia for the past is too potent to overcome. Democrats are completely averse to gradually winding down the Postal Service. Sen. Claire McCaskill (D-Mo.) has even suggested that people write more letters so that the USPS will have more work. The Senate bill does very little to afford the Postal Service the proper flexibility to cut and restructure its operations. It also continues Saturday delivery for several more years. The bill might have suffered a minor setback, but it will most likely come up again later this month, following the Easter recess.
Supporters of the Postal Service complain that the agency is hindered by the government’s requirement that it prepay retirement benefits. But supporters can’t have it both ways. If they want the agency to control its own destiny, it must be able to stand on its own two feet—without the competitive advantages of a government-sponsored monopoly and tax-exempt status. Only then will they get the opportunity to reboot and try to adapt to the new demands of a country that runs on electronic communications.

It’s time to let the wheels of economic progress spin. Let’s deal with the Postal Service the way we should have dealt with Fannie Mae and Freddie Mac. It’s time to privatize it or wind it down. Either way, taxpayers should not be exposed to more bailouts. For in truth, conservatives in this case are the real progressives.