How the COVID-19 Pandemic Accelerated the Transformation of the U.S. Postal Service into a State-Owned Package-Delivery Enterprise—and Why Policymakers Must Respond
Years before the widespread use of email and the World Wide Web, Congress directed in the Postal Reorganization Act of 1970 that the U.S. Postal Service “shall have as its basic function the obligation to provide postal services to bind the Nation together through the personal, educational, literary, and business correspondence of the people.” Congress further directed that, to discharge that paramount statutory duty, the Postal Service “shall provide prompt, reliable, and efficient services to patrons in all areas and shall render postal services to all communities.”
Half a century after that congressional declaration of the “basic function” of the Postal Service, the COVID-19 pandemic gripped the American economy and dramatically stimulated demand for and reliance on e-commerce package deliveries from businesses to homes. Substantial evidence indicates that in 2020 the business of the Postal Service fundamentally and permanently changed. And as a result of that change, the congressionally declared “obligation” of the Postal Service to provide “as its basic function” the provision of services that would “bind the Nation together through the . . . correspondence of the people” is now threatened by two separate factors.
The first is the collapse of demand for mailed correspondence because of technological innovation and changing consumer tastes: the “correspondence of the people” continues its steady migration from letters to electronic means, a trend which of course began long before the COVID-19 pandemic. The second factor is the demand (by both businesses and households) for the Postal Service’s expanding (but inessential) role as a public enterprise providing e-commerce package delivery.
In the aftermath of the COVID-19 pandemic, policymakers must confront existential questions concerning the Postal Service. Not all the answers to those questions are yet known. Not all the pertinent questions are even known. The key contribution of this article to posing and answering those essential questions can be summarized in the following 13 points:
1. In 2020, the Postal Service no longer faithfully adheres to the statutory mandate—that its “basic function” be the delivery of the “correspondence of the people.” From 2010 to 2020, first-class mail volume steadily decreased and package volume steadily increased. Following the onset of the COVID-19 pandemic in the United States in 2020, the Postal Service’s transformation into a public enterprise primarily providing e-commerce package delivery abruptly accelerated. During the three-month period from April 2020 through June 2020, for the first time in its history the Postal Service earned approximately as much revenue from competitive products (a category composed of packages, among other items) as it earned from market-dominant products (a category composed of first-class mail, marketing mail, and periodicals, among other items).
2. In 2020, after the onset of COVID-19, the level of demand for e-commerce package delivery that formerly was considered “peak load” became the new—and perhaps permanent—“base load.” The new base load resembles the Christmas peak load consistently observed in the last two months of every calendar year.
3. During the sustained peak load after the onset of COVID 19—that is, the new base load level of demand for package delivery—substantial evidence indicates that package delivery might remain incrementally unprofitable to the Postal Service. In particular, during the Christmas peak, one would expect to observe incremental revenues derived from—and incremental costs attributable to—the incrementally increased volume of package deliveries. One would hope to observe incremental revenues that exceed incremental costs. Yet, substantial evidence indicates that the observed incremental increase in package revenues during the Christmas peak is insufficient to cover the incremental increase in Postal Service costs during the Christmas peak, despite a decrease in market-dominant mail volume over that same period. Similarly, during the COVID-19 peak period for packages, despite a decreasing volume of market-dominant mail (which one would expect to reduce postal costs), incremental economic costs appear to have exceeded incremental package revenues.
4. The Postal Service’s outmoded accounting principles date to the 1970s and obscure precisely how incrementally profitable or unprofitable package delivery really is as an economic matter. Although Congress enacted the Postal Accountability and Enhancement Act (PAEA) of 2006, the Postal Regulatory Commission’s (PRC’s) implementation of the PAEA has failed to correct the Postal Service’s inadequate accounting. Section 3633(a) of the PAEA requires the Postal Service to price its competitive products so that they recover not only (1) the costs “attributable” to those products (which, subject to certain nuances, are what economists would call the incremental costs that are proximately caused by the supply of those products), but also (2) an “appropriate share,” set by regulation, of the Postal Service’s common costs, which postal cognoscenti call “institutional costs.” The minimum “appropriate share” of institutional costs that the PRC required the Postal Service to cover through revenue from package delivery—5.5 percent in 2007 and 8.8 percent in 2018—has been disturbingly low. In 2020, it is laughable to suggest that only 8.8 percent of the Postal Service’s institutional costs are properly assignable by its overhead-allocation methodology to package deliveries. The D.C. Circuit said that the reasoning animating the PRC’s 2018 implementation of the PAEA’s appropriate share requirement was incomprehensible. The Postal Service’s probable underreporting of the amount of costs attributable to package delivery in turn artificially inflates the supposed incremental “profitability” of package delivery. That package deliveries satisfy the appropriate share requirement as it is currently interpreted by the Postal Service is almost meaningless from an economic perspective. If the Postal Service cannot reliably confirm to Congress that its package-delivery enterprise is in fact incrementally profitable, Congress faces the difficult task of overhauling a failed enterprise with incomplete and unreliable information.
5. Nevertheless, even if one assumes counterfactually that the Postal Service has been satisfying the statutory criteria that Congress established in the PAEA—that is, even if the Postal Service has been allocating an appropriate share of its institutional costs to package delivery, to be recovered through the rates for such delivery services—the Postal Service has still failed to prove that its package-delivery business is profitable in the generally accepted economic sense. That is, the Postal Service has not reliably shown with substantial evidence that the incremental revenues derived from package delivery cover the incremental costs that the Postal Service has attributed to its delivery of packages.
6. Policymakers should seriously confront the prospect that the Postal Service does not even seek to turn an economic profit from its package-delivery enterprise. The Postal Service has not produced persuasive evidence that it even seeks to determine what its economic profit—or loss—is on its package-delivery business.
7. To summarize, the Postal Service has not produced substantial evidence that its package-delivery enterprise is profitable as an economic matter. To the contrary, substantial evidence indicates that as an economic matter the Postal Service’s package-delivery enterprise is incrementally unprofitable.
8. Yet, the Postal Service plans to invest billions of dollars in infrastructure to deliver e-commerce packages. Who will pay for that investment? If the Postal Service is not maximizing its profit from package delivery, and if it is instead asking the Treasury to cover its losses or lend it more money, then the Postal Service is asking taxpayers to subsidize e-commerce delivery when it sacrifices profits in the short run.
9. Even if the answer to the question of who will pay is “the Postal Service,” taxpayers are still footing the bill through long-run investment in infrastructure for the delivery of e-commerce packages. Are taxpayers the proper source of funds with which to expand the e-commerce package-delivery infrastructure of the Postal Service, particularly if that package-delivery enterprise is incrementally unprofitable? No. More likely, the optimal level of investment by the Postal Service is negative, or some modest amount sufficient to support a leaner delivery network for falling market-dominant mail volumes, particularly if the Postal Service already has sufficient capacity to deliver the traditional categories of mail that support the “correspondence of the people”—which, to repeat, is what Congress has called the Postal Service’s “basic function.”
10. In other words, policymakers should seriously consider whether the Postal Service should disinvest from its existing package-delivery enterprise. Increasing package volume will require more truck rolls per piece of market-dominant mail and will make delivery of the mail more expensive than it would otherwise be. Letters, magazines, and packages differ in shape, size, and weight. The Postal Service should be designing its network to serve its basic function—the delivery of a decreasing volume of letters and other market-dominant mail. The Postal Service should not be expanding its package-delivery network capacity. With few exceptions (such as election mail), the Postal Service arguably should not even be expanding its network capacity for delivering correspondence mail, considering that the demand for such mail is steadily shrinking rather than expanding, as we shall see.
11. Finally, if package delivery is instead incrementally profitable to the Postal Service as an economic matter, then surely policymakers cannot credibly justify gratuitously giving the Postal Service billions of taxpayer dollars. Some members of Congress in 2020 had proposed appropriating $75 billion in unrestricted funds to the Postal Service—which, for context, is approximately the enterprise value of FedEx. Put differently, for that amount of money, the Postal Service could simply buy an existing, profitable package-delivery company. Either the Postal Service’s transition to a package-delivery firm is profitable, in which case the Postal Service should not turn to Congress for a gratuity, or it is unprofitable, in which case the Postal Service should not continue to invest in package-delivery infrastructure.
12. The COVID-19 pandemic has cast a spotlight on the challenges facing the Postal Service and on the value to the United States of a functional Postal Service. Although the Postal Service can financially survive in the near term, policymakers are at a crossroads. Substantial evidence indicates that, as package deliveries approach levels seen only during the Christmas peak, those deliveries might not be incrementally profitable. Similarly, peak package-delivery levels might increase the costs and decrease the quality of market-dominant products. Should Congress authorize the Postal Service to continue down this path? Simply put, what is the end game for the Postal Service’s investment in e-commerce infrastructure? Decreasing mail delivery quality? Increasing prices? A thriving package-delivery firm for which the mail is just along for the ride?
13. Members of Congress must decide what kind of business the Postal Service should operate before they appropriate billions of dollars for a business model that is unsustainable in the long run. Would it be negligent for the management of a private company to invest in a business in which it had no expectation of making a profit? Why should the management of the Postal Service be allowed to act according to a lesser standard of care? The corporate assets that the Postal Service and Congress would be wasting would belong to taxpayers. The alternative, and the solution, is to design a Postal Service optimized to serve its essential statutory mandate.
The economic performance of the Postal Service in 2020 confirms that its true principal business and managerial focuses have become the delivery of packages, notwithstanding the obligation that Congress created in 1970 for the Postal Service to regard as its “basic function” the delivery of the “correspondence of the people.” We must therefore ask, How do those institutional priorities advance the statutory mandate that Congress gave the Postal Service in 1970? Are immediate changes in policy necessary to ensure that the Postal Service will discharge its statutory mandate in a sustainable manner, year after year?Download as PDF