Making No Cents

Bloomberg Businessweek (North America) - - Opening Remarks - By Devin Leonard

Sev­eral days af­ter the U.S. Postal Ser­vice dropped the price of send­ing a one-ounce let­ter from 49¢ to 47¢, al­most 40 peo­ple stood in line at the Franklin D. Roo­sevelt Sta­tion, a post of­fice in Man­hat­tan, fid­dling with their smart­phones, making con­ver­sa­tion, or just star­ing into the mid­dle dis­tance. Per­haps they were there for dis­counted stamps? A clerk at the win­dow laughed at the sug­ges­tion. “Two cents?” she said, rolling her eyes. “Are you kid­ding? It’s the same as al­ways.”

She had this much right: The public didn’t clamor for the April 10 stamp price de­crease, the first in 97 years. U.S. postal rates are among the low­est in the in­dus­tri­al­ized world. In 2015, ac­cord­ing to the USPS, it cost 96¢ to mail a 1- ounce let­ter in Bri­tain and $1.51 to send one in Den­mark, which is about 200 miles across at its widest, roughly 3,800 miles less than the dis­tance from An­chor­age to Palm Beach. Un­til re­cently, Spain was the only na­tion in the de­vel­oped world that charged less; now the U.S. and Spain are tied at the bot­tom.

It’s not as if the Postal Ser­vice was making too much money. It lost $5 bil­lion last year, and with the re­duc­tion it will likely lose an ad­di­tional $ 2 bil­lion a year. How­ever, the Postal Reg­u­la­tory Com­mis­sion, which over­sees the USPS, in­sisted on it. To un­der­stand how some­thing so seem­ingly non­sen­si­cal could hap­pen, it helps to know some­thing about the agency’s his­tory.

The post of­fice has been around for 240 years. In ad­di­tion to de­liv­er­ing mail, it’s sparked a lengthy con­ver­sa­tion about the need to run it like a busi­ness. For much of its his­tory, its bud­get was con­trolled by Congress, which also set the price of stamps. De­spite the pleas of post­mas­ters gen­eral, elected of­fi­cials were in­clined to avoid rate hikes to keep their con­stituents happy, even as they handed out salary in­creases to postal work­ers.

The re­sults were pre­dictable. From 1932 to 1958, the price of a first- class stamp stayed fixed at 3¢, and the post of­fice was starved for cap­i­tal. Arthur Sum­mer­field, a for­mer Chevro­let dealer from Flint, Mich., was hor­ri­fied when he took over as Eisen­hower’s post­mas­ter gen­eral in 1953. “Al­most ev­ery­where work was be­ing done with shop­worn equip­ment in run-down, over-crowded, poorly lighted postal build­ings con­structed years be­fore,” Sum­mer­field re­called in his mem­oir, U.S. Mail.

When he de­parted in frus­tra­tion eight years later, the mail sys­tem was be­gin­ning to un­ravel. In 1966, the fed­eral gov­ern­ment was forced to shut down the enor­mous Chicago post of­fice for 10 days be­cause clerks were over­whelmed by a pre-christ­mas junk mail rush. The Satur­day Re­view called it “the most in­cred­i­ble snarl in mail move­ment since the in­au­gu­ra­tion of the U.S. postal sys­tem—and, in the view of some ex­perts, a night­mar­ish pre­view of mail ser­vice hor­rors that lie ahead.”

In re­sponse, Pres­i­dent Lyn­don John­son ap­pointed a com­mis­sion in 1967, led by Fred­er­ick Kap­pel, the re­cently re­tired chair­man of AT&T, to come up with a plan to re­pair the sys­tem. He and his fel­low com­mis­sion­ers, who’d been re­cruited from Gen­eral Elec­tric, Camp­bell Soup, Bank of Amer­ica, and Har­vard Busi­ness School, were dis­mayed when they learned that the post­mas­ter gen­eral had no say over postal rates.

The Kap­pel Com­mis­sion called for the cre­ation of the U.S. Postal Ser­vice, a so­called gov­ern­ment cor­po­ra­tion, which, in the­ory at least, would be free from out­side med­dling. In 1970, Congress adopted the plan. Con­trol over stamp prices was al­most within reach of the post of­fice, but, at the fi­nal hour, Congress cre­ated an out­side body called the Postal Rate Com­mis­sion, which would have the power to ap­prove or re­ject any pro­posed price in­creases. The rate com­mis­sion­ers saw it as their mis­sion to make sure the USPS, which had a mo­nop­oly on letters and junk mail, didn’t gouge the Amer­i­can public.

The rate com­mis­sion de­stroyed the dream of a more busi­nesslike Postal Ser­vice. When the USPS wanted to in­crease its rates by a few cents, the com­mis­sion of­ten took more than a year to reach a ver­dict.

The sys­tem’s flaws be­came clear when a busi­ness­man be­came post­mas­ter gen­eral. In 1988 the USPS Board of Gover­nors gave the job to An­thony Frank, the shrewd, charis­matic for­mer chief ex­ec­u­tive of­fi­cer of First Na­tion­wide Bank, which he’d turned into the sixth­largest sav­ings and loan in the U.S. “The Postal Ser­vice is the big­gest man­age­ment

The U. S. Postal Ser­vice’s bad busi­ness model is em­bod­ied in a re­cent rate de­crease

chal­lenge in the U.S., maybe the world,” Fr Frank told For­tune early on. He wasn’t exa ex­ag­ger­at­ing. In many post of­fices, clerks were still sort­ing mail by hand as they had do done un­der Ben­jamin Franklin, Amer­ica’s first post­mas­ter gen­eral.

Frank em­barked on a long-over­due plan to have 95 per­cent of the mail sorted au­to­mat­i­cally by 1995. How­ever, mod­ern­iza­tion came with a $5 bil­lion price tag, and the USPS slipped into the red af­ter sev­eral years of sur­pluses. It was one thing to au­to­mate the mail, but Frank was harder-pressed when it came to cut­ting costs. One rea­son: The Postal Ser­vice’s union con­tracts had no- lay­off pro­vi­sions. Frank tried to erase the deficit by in­creas­ing the price of send­ing a first-class let­ter by 5¢, to 30¢, but the Postal Rate Com­mis­sion would ap­prove only a 29¢ stamp. Frank ar­gued this wasn’t enough to re­store the agency to prof­itabil­ity and that a 29¢ stamp would force the USPS and its cus­tomers to use a lot more pen­nies; the only ben­e­fi­cia­ries of that would be Chilean cop­per min­ers. He re­turned to the pri­vate sec­tor in 1992.

His suc­ces­sor, Marvin Run­yon, a for­mer Ford ex­ec­u­tive, pleaded with Congress for more free­dom, too. “Fedex and UPS can of­fer vol­ume dis­counts and do it quickly,” he lamented. “We can’t. You can bring a child into the world faster than we can price a new prod­uct and bring it to mar­ket.” Run­yon didn’t get his wish and de­parted in 1998. Since then, the USPS board has re­lied on life­long em­ploy­ees who know a lot about de­liv­er­ing mail but have some­times lacked the vi­sion of out­siders like Frank and Run­yon. What pri­vate-sec­tor lu­mi­nary would want to run an op­er­a­tion that can’t price its own prod­ucts?

Af­ter a cer­tain point, po­lit­i­cal lead­ers in Wash­ing­ton re­al­ized this was ab­surd. In 2006, Congress passed a law al­low­ing the Postal Ser­vice to raise prices on letters and junk mail with a min­i­mum of fuss as long as they didn’t sur­pass the in­fla­tion rate. But there was a catch: Congress wanted to make sure the USPS would have enough money to pay for the health care of its em­ploy­ees when they re­tired. So it made the USPS start set­ting aside $5 bil­lion a year to fund these fu­ture ex­penses. Then, in 2008, the econ­omy col­lapsed, which prompted many more Amer­i­cans to pay their bills on­line. The amount of mail han­dled by the USPS has dropped by 28 per­cent in the past decade, and it has suf­fered ex­tra­or­di­nary losses, ex­ac­er­bated by the oner­ous le­gal re­quire­ment to pre­fund its re­tiree ben­e­fits.

And be­cause in­fla­tion has been low, the USPS has been re­stricted in how much it can raise its prices. In 2013 it ap­pealed to its reg­u­la­tor, now known as the Postal Reg­u­la­tory Com­mis­sion, for an emer­gency first-class stamp price in­crease of 2¢, which would ex­ceed the in­fla­tion rate. The PRC ap­proved it, but only un­til the USPS col­lected $3.2 bil­lion, the amount of rev­enue the com­mis­sion cal­cu­lated had been lost when moun­tains of mail evap­o­rated dur­ing the re­ces­sion. Never mind that the lost vol­ume from the eco­nomic cri­sis is un­likely to come back.

The price in­crease sta­bi­lized the USPS’S fi­nances; it would have been prof­itable last year if not for the re­tiree pre­fund­ing al­ba­tross. Then the Postal Ser­vice had to give up the 2¢. The USPS wants to re­store the emer­gency hike and make it per­ma­nent, and has ap­pealed to Congress to get around the PRC. But be­hind the scenes, the cat­a­log com­pa­nies and non­prof­its that flood our mail­boxes are cam­paign­ing against it, say­ing the USPS needs to cut costs. Mean­while, postal work­ers are driv­ing 25-year-old trucks, and letters and greet­ing cards are ar­riv­ing later and later. A 6¢ in­crease might help erase the USPS’S deficit and pay for new trucks. Even at 55¢, the price of send­ing a 1-ounce let­ter any­where in the U.S. would be one of the great bar­gains on earth. Un­for­tu­nately, its cus­tomers would still have to stand in long lines. At the Franklin D. Roo­sevelt Sta­tion, a clerk went on a break, leav­ing her win­dow un­tended. Be­fore she did, she sang the re­frain from Donna Sum­mer’s She Works Hard for the Money. Her cowork­ers laughed. No­body in line did. <BW>

Leonard is the au­thor of Nei­ther Snow nor Rain: A His­tory of the United States Postal Ser­vice, pub­lished this month.

Every time the USPS tries to op­er­ate like a real com­pany, gov­ern­ment hap­pens

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