What if We Replaced the US Postal Service Two Years from Now?

Two notes before I begin: I will be in New York City next Wednesday, and maybe Tuesday or Thursday.  I will be meeting with potential investors.  If you would like to hear what I am up to, e-mail me, and maybe we can get together.

Also, if you have a moment, have a look at my friend Cody’s website that deals with applications for mobile devices.  He seems to have found an interesting new niche.

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When I was a kid, I remember reading a story about a business that started a letter delivery service in a major American city, I think it was Philadelphia.  They undercut the US Postal Service by about 20% or so, and they began to attract a decent amount of volume, such that government came and shut them down, because USPS has a monopoly on delivering non-urgent mail.

Unfortunately for USPS, it has a much larger lower cost competitor: the Internet, which is eating into its high margin businesses, forcing prices up as it tries to maintain its subsidy to activities that lose money.

The Internet improves and destroys.  The economics of newspapers has been destroyed by the internet.  Should we be surprised that the economics of a similar business, the Post Office, is suffering similar troubles?  Delivering paper mailings to addresses seems to be populated by junk mailers and a variety of businesses that could deliver via e-mail.  I get few personal letters for my family, and many of those could go via e-mail.

This is a system that is looking for a kick to get it to move from an unstable equilibrium, perpetually asking for price increases, and service decreases, to a stable equilibrium where people receive almost all mail traffic over the internet.  So, what if we replaced the postal service two years from now?

If there were two years of lead time, older folks would be forced to adapt to e-mail, and advertisers would find new means contacting clients.  Some clever businesses would buy up post office sites, perhaps UPS and Fedex, and augment their businesses.

It would be likely that the cost of purely local mail delivery would go down in densely populated areas, but that delivery outside of major urban areas would be considerably more expensive, and would depend on the location of both the sender and the receiver.

The price differences would become similar to the price of a person traveling from one place to another.  Is it hard and costly for you to go from point A to point B?  It would be the same for mail.  Sending a piece of mail from one low density area to another would be expensive.

Now, I don’t think the postal service will go away in two years.  But ten years down the road the answer might be different.  Here are two alternative visions of the future:

Now, I think Hassett is mistaken when he says, “We need only write regulations that require firms that compete for postal business to provide universal service.”  The US is a big place, with a lot of sparsely populated areas.  The countries that have privatized are typically more compact, making it possible to have netorks that deliver everywhere at a reasonable cost.  Universal service will come with astronomical pricing for low density deliveries.

But I think the Postmaster General is mistaken when he estimates the total amount of demand over the next ten years.  I think that more and more will go online, with many businesses making people pay extra to receive paper bills, statements, etc.  Paper mail is not only costly to deliver, but costly to create.

People will also evaluate the postal service on convenience as well.  As the number of days for delivery declines to five, and local post offices and local delivery diminish in rural areas, people will begin asking for more to be delivered via e-mail.

One final note: I find it tragic/comical that USPS does with its employee benefit plans what all companies and governments should do: fully fund them.  But now they are looking to raid the funds to support current services, and push back on the  Federal government to absorb more of certain shared costs.  I think it is amazing to call funding 30% of retiree healthcare and 80% of pensions to be “fully funded,” because those are the average levels of many corporations.  Raiding the funds may help today, but ten years out, as postal workers age and retire, this will place even more expense pressure on postage rates.

Eventually the economics of a situation prevails.  The proposed move with the employee benefit plan is desperate.  Eventually a significant change will have to be made to the US Postal Service.  It would probably be better to think about an integrated plan today, than let ten years elapse, and face a larger crisis.

Given the nature of the US, and the short-termism that plagues us today, I suspect that we get the crisis.