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Can the U.S. Postal Service Survive in the 21st Century?
The U.S. Postal Service’s 50-year-old business model is broken—and we should no longer mail it in when it comes to fixing the USPS’s problems
By Kevin R. Kosar
The U.S. Postal Service (USPS) reported delivering 11.7 billion mailpieces and packages over the recent December holidays. Its delivery time averaged a mere 2.5 days, an improvement on last year’s 2.7-day delivery time. The Postal Service delivers to 163 million addresses scattered over the country’s 3.7 million square miles, as well as to Puerto Rico, the U.S. Virgin Islands and other territories. Moving that much mail and boxes is no small achievement.
The USPS’s performance in late 2022 was a far cry from its experience in 2020. A tidal wave of 1.1 billion parcels hit the agency that holiday season, ordered by consumers who shopped online rather than at malls and brick-and-mortar stores. The USPS’s workforce, depleted by COVID-19, was buried. On-time delivery cratered, and untold customers had their holiday cards and parcels delayed days and even weeks.
The Postal Service’s impressive 2022 performance was no accident. The agency has added 249 package-sorting machines to its network over the past two years, which has increased its processing capacity to 60 million boxes per day. At the behest of Postmaster General Louis DeJoy, the agency also added 20,000 full-time employees.
Yet for all the good news, the dark clouds that have hung over the agency for the past 15 years continue to loom. December holiday deliveries were 1.5 billion fewer than last year, and 3.3 billion fewer than five years earlier. The agency’s annual revenue was $2.2 billion less than its 2021 take. The Postal Service lost nearly $1 billion last year—less than its deficits of the previous 15 years, but a loss nonetheless.
The perennial losses leave the USPS unable to cover its long-term pension and retiree health benefits obligations, which amount to nearly $100 billion, or its $10 billion debt. The USPS has $20 billion in cash, but the agency needs $40 billion in capital investment to upgrade its dated facilities, vehicles and sorting equipment.
All of which means the U.S. Postal Service is facing an existential crisis. The agency was designed to be self-financing, but its business model is broken and has been so for more than 15 years. Congress has given aid to the USPS in recent years, but has largely left it up to the agency to figure a way out of the problem. Whether it can do that is anything but certain.
A Broken Business Model
The present-day U.S. Postal Service was created half a century ago from the mess that was the Post Office Department. For decades, that agency had suffered financial and operational problems, some due to Congress’ meddling in the agency’s hiring, logistics and pricing decisions. Employee-management relationships were fractious, ultimately erupting into a wildcat strike in 1970 that prompted President Richard Nixon to go on television to announce that he would call out the National Guard to handle the mail.
Enacted in 1970, the Postal Reorganization Act was transformative. The law reorganized the department into a self-funding “independent establishment of the executive branch.” Its business model was cribbed from other government corporations, such as the Tennessee Valley Authority: Grant the agency a monopoly on a profitable line of business, and give it operational freedom and some price-setting authority.
Thus, no longer would the agency go hat-in-hand to Congress for appropriations, receiving dollars and more operational mandates. Instead, the new USPS would fund itself by selling stamps—purchasers of postage, not taxpayers, would bear the costs. The law freed the agency from much red tape, empowering it to arrange its operations as it saw fit. When the Postal Service wanted to buy new vehicles or close facilities, it did not need to get congressional approval, as most agencies do.
Critically, the law created space between the agency and politicians. The postmaster general, or CEO of the USPS, ceased to be a presidential appointee confirmed by the Senate. Instead, he would be selected by the USPS’ Board of Governors. The price of postage would not be set by Congress; the USPS and the Postal Regulatory Commission (then Postal Rate Commission) would hash out stamp prices in keeping with broad statutory direction.
For sure, the Postal Reorganization Act saddled the agency with a lot of expensive policy goals. The USPS had to “provide postal services to bind the Nation together through the personal, educational, literary, and business correspondence of the people.” Congress also assigned a range of other objectives to the agency, including employing a unionized workforce that would be compensated at private sector rates, and setting a flat rate for letter mail. (That one can today send an envelope from anywhere to anywhere in the U.S., from Maine to Hawaii, for 63 cents is astonishing.)
However, rising mail volume and the quantities of highly profitable first class mail (which travels quickly and is sealed against inspection) enabled the USPS to mostly cover the costs of achieving its various policy mandates. At the turn of the century, the agency was a colossal operation with nearly 900,000 employees and 38,000 post offices and retail outlets. It delivered 207 billion mailpieces to 137 million addresses per year, and its $65 billion in revenue covered its operating costs.
Mostly, this government corporation business model worked decently. Neither the expansion of fax machines or inexpensive, nationwide long-distance calling made a noticeable dent in mail volume and the USPS’s revenues.
But then about 15 years ago, the agency’s self-funding model broke. Mail volume, which peaked at 213 billion pieces in 2006, plummeted. Partly, this was due to advertisers switching from mail to electric means to solicit and interact with customers. The American public had begun a rapid uptake of the internet and cell phones, which offered nearly costless and far more rapid communication (Figure 1).
Postmaster General John Potter saw the writing on the wall. He told Congress in early 2007 the agency’s “business model remains broken…. With the diversion of messages and transactions to the internet from the mail, we can no longer depend on printed volume growing at a rate sufficient to produce the revenue needed to cover the costs of an ever-expanding delivery network.” First class letter mail, the agency’s cash cow, had quit growing in volume in 2001, and was beginning to slide.
The decline of mail volume was accelerated further by the Great Recession, which began in late 2007. Business mailings to the public, which made up a large share of mail, fell sharply. In the past, recessions and depressions reduced mailpieces only temporarily. Once the economy revived, volume bounced back and restarted its inexorable growth.
Not this time. The economy recovered, but mail never came back. Total USPS volume was 127 billion pieces in 2022, which is 41% beneath the peak volume in 2006. First class fared even worse: Between 2001 and 2022, volume dropped 53%, from 103 billion to 48.9 billion.
The plunge in first class letter mail means that the mail that remains is mostly low-margin advertising mail, commonly called “junk mail,” along with magazines and catalogs. Many of these mail classes are under water—they cost the agency more to deliver than they bring in. Adding insult to injury, the law deems all of these mail classes monopoly (“market dominant”) products, and their prices cannot be raised more than the rate of inflation.
Less mail and less high margin mail means less revenue. Between 2007 and 2022, the number of addresses served by the USPS actually grew 6%, from 139 million to 163 million. But while the agency’s revenues peaked at $75 billion in 2008 (amounting to nearly $110 billion today when adjusted for inflation), the USPS brought in just $78.5 billion last year.
Today, the USPS’s half-century-old business model, which has a monopoly over letter mail as its keystone, is indisputably broken. The days when rising mail volumes and first class letters covered the rising costs of nationwide delivery and the various other objectives enshrined in the 1970 Postal Reorganization Act are gone forever.
Congress Mostly Leaves It to Louis
Despite the warning from postmasters general and many others, Congress has proven unable to muster the courage to address the agency’s broken business model. Can the USPS remain a self-funding enterprise? Can it afford an almost wholly unionized workforce? How often do we really want or need paper mail? Should the USPS compete with the private sector to deliver parcels? These and other existential, rudimentary questions should be raised on Capitol Hill. Elected officials, however, are loath to do so. Thinking big about what the Postal Service should be in the 21st century raises the prospect of changing the status quo, which would upset large interest groups who have a stake in the USPS of the 20th century.
Legislators have few incentives to roll up their sleeves and work through these challenges. Doing so would reopen the divisive left-right postal politics of old—politics that has perennially stymied transformative postal reform legislation. Democrats, ever protective of postal unions, love to look at the revenue side of the ledger and conjure new lines of non-postal business (like banking services) that could flood the agency with additional cash. (Never mind that none of these proposals show any promise of bringing profits of $1 billion or more, which would be needed to appreciably improve the USPS’s bottom line.)
Republicans, for their part, historically have focused on the expense side of the ledger, suggesting reforms like curbing collective bargaining by employees and reducing days of service. (These days, though, it is not clear which postal policies GOP legislators prefer, seeing as they voted for the 2022 postal reform bill, which locks in six-day delivery and does not demand any cost-cutting.)
Hence, Congress did nothing from 2007 to 2020. The USPS was left to find a way out of its financial mess. The agency triaged the bleeding mostly by trying to cut costs. It shrank its workforce by offering early retirement incentives and not replacing employees who quit. The agency slowed first class mail delivery and shuttered some of its facilities. It tried to garner more revenue by raising prices, and it got a windfall of a few billion dollars through a temporary emergency postage price hike from 2014 to 2017. Some of these maneuvers helped, but none of them gave the USPS a means of bringing in sufficient revenue to cover the costs of fulfilling its statutory mandates.
Congress finally acted during the latter half of the Trump administration and the first two years of the Biden presidency. As part of a gigantic pandemic relief bill, Congress delivered what effectively was a grant of $10 billion to the agency. It also added a provision to the Inflation Reduction Act, passed last August, that supplied the Postal Service with $3 billion to help it replace its aging vehicle fleet with new electric-powered trucks. And the Postal Service Reform Act of 2022 shifted $100 billion of retiree health benefit costs from the USPS onto Medicare, a proposal Democrats had favored for years.
These measures have had the happy effect of shoring up the USPS’s finances. But they’ve also had the negative effect of reducing the pressure on policymakers to address the agency’s existential plight. Collectively the measures amount to a major departure from a core assumption in U.S. postal policy: that the agency should be self-supporting and paid for by purchasers of postage instead of taxpayers.
So if Congress is unwilling to save the USPS by reimagining it for the 21st century, who will? Apparently, Congress’ plan is to hope that Louis DeJoy, the postmaster general, can fix things.
Leave it to Louis? Congress seems to be hoping that U.S. Postmaster General Louis DeJoy can fix the USPS's problems. Image Credit: Kevin Dietsch/Getty Images
DeJoy, a highly successful, former logistics industry executive, was appointed by the Board of Governors during the Trump administration. Arriving in May of 2020, he had a rocky start. On-time mail performance plunged shortly after his arrival. DeJoy was partly to blame, but other factors outside his control also were at play. For example, droves of USPS workers had to stay home because they had been sickened by or exposed to COVID. But postal unions, eager to show DeJoy they were a force to be reckoned with, spun to credulous media that the postmaster was incompetent and wholly to blame.
Matters got worse leading up to the 2020 election. States across the nation were expanding access to voting by mail, and President Trump railed that this was a plot to steal the election. Normally sleepy postal politics became histrionic national theater. Democrats, aided by liberal and often clueless media, assailed DeJoy as a Trump stooge who was going to steal the election for the president by thwarting voting by mail, and who intended to wreck the USPS so that it could be privatized and sold off to the private sector. (Who exactly would want to purchase a legacy enterprise saddled with colossal debt was never quite clear.) The hashtag #FireDeJoy trended on Twitter for much of the year and into early 2021, as liberal activists fundraised off stoking hate toward the postmaster general.
Little noticed by legislators, media or anyone was that the “evil postmaster general,” as DeJoy jestingly referred to himself, had an idea of how to reinvent the USPS’s business model. Central to it was capitalizing on an insight voiced by Patrick Donahoe, who served as postmaster general from 2010 to 2015: “[T]he internet has giveth, and the internet has taketh away. We lost the bill payment world, which was very profitable for us. But the nice thing is, with e-commerce and the internet, we’ve had the opportunity to deliver packages for companies like Amazon.” The agency, DeJoy ventured, needed to understand that paper mail was dying and pivot to ride the wave of burgeoning e-commerce.
This new business model would cover the cost of a nationwide mail service operating under the 1970 Postal Reorganization Act’s myriad mandates by shifting much of the USPS’s operations to delivering parcels, which the agency could price as it saw fit. The Postal Service would survive and maybe even flourish by outcompeting private sector delivery companies.
By the time DeJoy was installed in USPS headquarters in Washington, D.C.’s L’Enfant Plaza, parcels and Priority Mail boxes and oversized envelopes were flooding in (Figure 2), and the USPS’s total revenue was increasingly coming from services provided in competition with the private sector (Figure 3). This trend peaked in 2019, with parcels and Priority Mail supplying more than 47% of the agency’s revenues.
Whether DeJoy will succeed or not is anyone’s guess. He reckons it will take him 10 years to rework the agency’s logistics network. Shifting from moving mostly paper to mostly boxes necessitates revamping every aspect of the USPS network, from mail carriers’ mailbags to the sorting machines and the trucks—all of which were designed to carry paper mailpieces (letters, magazines, catalogs etc.).
To date, DeJoy has forged a partnership with the postal worker unions that has allowed him to shutter old facilities and open new ones, and to move workers from one plant to another. But that could change at any moment: Many previous USPS reorganization plans have crashed on the shoals of union objections.
In the meantime, the postmaster general is doing what he can to weed out inefficiencies and trying to bring in more revenue from mail by aggressively raising postage rates, particularly on paper mail.
Saving the USPS by making it more a parcel company will not be easy. Just how much more revenue the USPS can earn by delivering parcels is anything but clear: Figure 3 shows that parcel revenues have slid from their pandemic high.
The USPS is venturing deeper and deeper into competitive markets populated with firms with far greater operational freedoms and far more modern logistics networks. They do not have to deal with the anachronisms, like 30-year-old trucks, that confront DeJoy. Nor do they have anyone in Congress regularly looking over their shoulder and second-guessing their decisions.
Moreover, a significant chunk of the USPS’s parcel revenue comes from its competitors. Private delivery companies like UPS and FedEx often hand off small packages to mail carriers for “last mile” delivery to individuals’ homes. Those companies could, in theory, pull back on those partnerships.
The biggest peril, however, is that Amazon and its largest customers continue to build out their own delivery networks. For years, the USPS has warned of this risk its annual financial statement, and last autumn warned:
“Historic growth in our competitive service volumes has largely been attributable to certain of our largest customers, a trend that was further accelerated by the pandemic as the nation has increasingly relied on the safety and convenience of e-commerce. However, during 2022, our competitive service volumes decreased compared to the prior year, as the impacts of the pandemic began to abate and certain of our largest customers returned to building their delivery capability, which enables them to divert volume away from the Postal Service over time. As these major customers divert significant volume away from the Postal Service, our competitive service volumes may continue to decline.”
Amazon already has delivery lockers, delivery trucks, and a corps of Uber-like drivers who hustle packages to homes and businesses. Walmart is doing these same things.
The continued viability of the USPS, then, depends on many things going right and very few things going badly. But Congress could do one thing to make the agency’s future less fraught.
One Thing Congress Can Do Now
The digital age has been upon us for more than two decades, but the USPS’s difficulty in adapting to it doesn’t mean we should let the agency wither and die.
The pandemic was a big reminder of the value of having a logistics system that could reach every home. Postal workers delivered billions of parcels, tens of millions of COVID-19 test kits and 135 million ballots in 2020. Less appreciated is that during the lockdowns the USPS also continued to do the things that no private sector company will do, like deliver license plate renewal tags, jury summons and, yes, advertisements from local roof replacement companies and grocery stores.
Half a century ago, Congress saw a Post Office Department struggling to survive, and it dared to reimagine the agency. Legislators are more than overdue to again rethink the agency, which means addressing two fundamental questions about the USPS: What do we need this entity to do in the 21st century, and how should its costs be covered?
But if that is all too much for Congress to tackle, there is something it can do that would greatly help the agency’s bottom line. Legislators should allow the agency to invest the $96 billion in the Postal Service Retiree Health Benefits Fund (PSRHBF) in index funds. Presently, the agency is forced to keep these funds in low-yield Treasury bonds. This policy is the worst possible investment strategy, according to an analysis by the USPS Office of Inspector General. State and municipal pension funds do not limit themselves to Treasury bonds. Nor do federal employees, whose retirement funds are invested in index funds by the nonpartisan Thrift Savings Plan Investment Board and earn solid returns higher than bonds.
Congress should draft a short law that would empower the USPS to diversify its portfolio, an idea has been around for years and has drawn bipartisan support. A mere 1% improvement in the PSRHBF’s performance would generate an additional $1 billion in its first year alone. That is real money, and over time a higher performing investment strategy would greatly help the agency afford the capital investments needed to execute its10-year turnaround plan.
And if Congress wanted to go really big, it could also allow the USPS to do the same with the $261 billion it has in its pension funds. That would more than triple the USPS’s annual take to $3.5 billion.
Perhaps best of all from Congress’ perspective is this: It is the easiest thing to do. Letting the USPS invest its retiree assets more sensibly likely would spare them from having to take up the agency’s existential questions entirely. They could dodge the deep thinking and nettlesome politics, and just leave the responsibility to Louis. Certainly, that is not really how things are supposed to work in our representative democracy, where Congress creates policy through the lawmaking process and agencies are supposed to execute policy. But maybe that is where we are right now.