Latest in Deficit Terrorism: Postal Service Default

By Mitch Green

Americans living in rural areas should brace themselves for a new dose of pain.  As the USPS approaches the end of its fiscal year, where it will be unable to make payment of $5.5 billion to its employees health benefits fund, it is considering closing over 3600 facilities nationwide.  Just yesterday they placed on the chopping block another 250 processing centers.  Most of these closures are distributed throughout rural areas, a demographic that has borne a considerable amount of hardship throughout this entire contraction. For an interactive map of the proposed closures go here.

Naturally, this has a lot of people seeing red.  Both Senators Tester and Baucus of Montana, a fine example of rural America, protest:

The decisions being made by postmaster general are really going to cement the post office as a thing of the past. The proposals he’s put forth are absolutely devastating on rural America, and the economies in those communities are going to be very negatively impacted. – Sen. John Tester

Closing a post office in Alzada or Rapelje is not like closing a post office in Washington, D.C., or suburban Virginia and Maryland. Folks simply cannot drive a few blocks to reach another.  Sen. Max Baucus
Great Falls Tribune

I could go on about how this proposal is shortsighted, or it doesn’t even make much of a dent in their budget woes anyway, but I won’t.  I reject the premise the post office faces a budget crisis on its face.  I reject the whole frame that it entails.  The notion that an agency of the federal government can default on its obligation to – gasp, another agency of the same federal government – indicates a wholesale collapse in mental capacity.

Deficit terrorists, small government conservatives and other such ideologues, like to point to the fiscal condition of the postal service as proof that governments activities are inherently inefficient and unsustainable.  Since I find this sort of nonsensical, fallacious reasoning annoying I usually dismiss these claims.  Of course the postal service doesn’t do well as a business – it is charged with the task of providing timely, affordable, and universal mail coverage throughout the entire United States.  Profit maximizing firms corporations would never do such a thing; it would violate their fiduciary responsibilities and create a rift in the space-time continuum.  But, more recently I’ve heard, in growing chorus, that the USPS is facing a default.  Umm…what?

If it is not obvious to you now why I was surprised to learn this, don’t worry I’ll get to that. But first, I need to provide a little background information on how the post office has evolved over the years.  One of America’s earliest acts following its independence was the establishment of a postal service.  The founding fathers recognized its importance in promoting both the civil and economic development of a new democratic nation.   Adam Smith, who is often relied upon by free-market fundamentalists for his “invisible hand” metaphor, stressed the importance of a postal service as an essential government function.  Here’s what Smith had to say about the role of government in the economy:

[A] duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expence [sic] to any individul or small number of individuals, and which it, therefore, cannot be expected that any individual or small number of individuals should erect or maintain. – Book V, Wealth of Nations [bold words selected for emphasis]

The founding fathers, like Adam Smith, were all Enlightenment philosophers and recognized that a free society requires free communication.  So, we established the postal service with the intent of facilitating the exchange of ideas for everybody, not just those who can afford the service of a private courier.

Fast forward to the present (sorry, this isn’t intended to be an exhaustive history).  The most significant change to the postal service in recent history occurred in 1971, with the Postal Reorganization Act.  Previously, the service existed as a cabinet level position within the executive branch.  Following reorganization the postal service was established as an independent agency of the government, where it would no longer be funded through direct appropriations.  The goal was to make the USPS function more as a business, relying upon its own revenues to cover operational and legacy costs.  In the event that revenues proved insufficient to defray costs, it would assume debt through the Federal Financing Bank.  The change also placed a statutory limit on both outstanding and periodic borrowing, which has been modified through subsequent legislation to accommodate inflation.  Currently, the limits are $15 billion in outstanding obligations and a maximum of $3 billion in new obligations per year.

As I write this the post office is running up against its borrowing limit for this year, and is roughly $13 billion in total debt to the FFB.  As a result, it will not be able to meet its pre-payment obligation towards its retiree health benefits fund ($5.5 billion) by September 30 2011, which will force it into a technical default.  Let me explain why this whole “crisis” is insane.

First, the USPS is a federal agency.  Yes, it thinks it’s a business, but that doesn’t change the fact that it is an entity of the federal government.  The FFB is also a federal entity which operates under the supervision of the Treasury Dept.  To the extent that one agency owes the other money is an accounting problem.  Nothing more.  There’s no risk of insolvency at all here.  Now, interest payments to the FFB are not that important as a proportion of USPS overall expenses, instead it is their contractual obligation to make good on their commitment to fund its retirement health benefits account.  This requirement, by the way, has been exacerbated by a legislative change in 2006 that mandates the service to front load a 75 years obligation horizon into the health fund, within ten years.  But, if after fulfilling that obligation they cannot make an interest payment to the FFB what happens?  Nothing.  The FFB can write off its “bad” assets from the USPS.  In fact, there’s no reason why they can’t forgive the entire $13 billion and give the USPS a clean slate.

Second, the whole notion that we ought to place a debt-ceiling on the postal service is almost as ludicrous as the idea that it should float bonds at all.  The post office ought to be a direct appropriations entity anyway, and if we can’t accomplish that simple task then we should at least raise its statutory debt ceiling to reflect collapse in revenues during this recession.  I know, what you are going to say:  “But, the post office is going broke because they can’t adapt to things like the Internet.”  I’ve heard that more than a few times.  Perhaps, they’ve lost revenue to increased electronic correspondence. (Although the effect of the Internet on USPS revenues is probably ambiguous given the increase in shipping due to online orders) .  But, like most other budget problems that exist today, the Great Recession is primarily to blame.  When you have a contraction on the scale we’ve been living through for the last several years, the demand for shipping through the USPS falls through the floor.  Normal levels of shipping just haven’t recovered, hence the light revenues.

The idea that the post office needs to shutdown in rural areas is a lie.  The post office wants to shutdown in rural areas (or at least the guys running the show in Washington prefer it).  The only constraint on postal activities is the insatiable drive to enact further job-killing budget cuts, in an attempt to break one of the last bastions of organized labor.  The USPS is one of the nations largest employers and its labor force is represented by the National Association of Letter Carriers.  Shutting down these offices will not only add to the already swollen ranks of the unemployed, but impose a cost upon the elderly and poor who rely upon home delivery.  It is unnecessary, wrong and criminal.  It is just the latest in an enduring process to unravel the American Dream.

So, don’t be fooled.  The post office ain’t broke…yet.

UPDATE:  A thoughtful reader has pointed out an error in my original post.  Originally I suggested that the Postal Service Regulatory Commission was issuing the order to close the offices.  The agency is actually the Postal Regulatory Commission which only issues an advisory statement regarding the closures; the USPS retains responsibility in the closures.

12 Responses to Latest in Deficit Terrorism: Postal Service Default

  1. In delicious irony, Meg Whitman refused to bring ebay to Russia. Why? Because their postal service was so bad.

  2. My answer to the idea that the Post Office can't adapt to the Internet is that the Post Office should OWN the Internet. Clearly the intent of the postal service from its inception was to facilitate free and low cost communication capability to the citizenry since that is a value for both commerce and democracy. In today's world that means the Internet, so if the USPS assumed control of the internet backbone and the wireless spectrum, we could lower the cost of internet and cell phone service to the entire country and solve the accounting problem between the USPS and the FFB.

  3. Running government enterprises as businesses is insane. If all government enterprises were "run as businesses" – making a profit, they would soon extract all the money from the economy, and we would no longer have a monetary economy. Government enterprises should be run as anti-businesses, setting their prices at marginal costs perhaps. The problem with the Post Office is that it provides universal benefits – very efficiently and at a very low cost. Once I had to send a package to Canada, and very unexpectedly needed to travel there. I took it along, thinking to send it there. Even with a strong US dollar, it was much more expensive to send it a few hundred miles in Canada than to bring it back to the US and send it a couple thousand.The end result of the plans of the sociopaths running our government is that everything that benefits ordinary people will be "run as a business" – inefficiently, ineffectively and at outrageous cost, like our world's worst health care system. The enormous welfare-for-the-rich parts of government will of course not be run as a business, but as a pipeline of dollars to the pockets of our modern upper caste of predators. And we are quite close to this friendly-fascist wet dream already.

  4. The real problem with the post office isn't that there's less mail sent, it's that their fixed costs are still set up for the volume of a few years ago. While I agree most of your points, I also know there's less mail being delivered then there used to be (not necessarily due to the Internet, more likely due to the collapse of the debt markets). Bulk mail was a low margin cash cow (if there can be such a thing) for the post office. It helped subsidize the most expensive part of mail delivery, the last mile (BTW, also the biggest expense for you ISP). Rural Post Office patrons already know this, since most have to have a PO box in town.While I agree that running the PO like a business isn't the right model, I do think they need to take a page from business management 101 and make sure their employees are being productive and not sitting around with nothing do to. They should also move their retirement away from a fixed pension plan and to a 401(k) or equivalent. Hell, let 'em stack the deck and have the Congress run it. That way they can take part in insider deals and other shenanigans that would put the rest of us in jail. That would get rid of the requirements to fund out some ridiculous time frame that can't possibly be anticipated.And finally, peg the price of a stamp to inflation, or at least reflect the real cost of delivering a letter. While I think it's great to get a package delivered for $5 or less, if that means a deficit somewhere else it really doesn't make sense. This idea that mail delivery for cost isn't fair is what gets us into deficit spending in the first place. There's no reason a peacetime government cannot keep spending in order, recession or not.

  5. Please define, "American Dream." This term has been used by MoveOn lately. Am I wrong to react to it as sloganeering on the part of MoveOn with the intent to obscure the lack of organized political representation of non-owning class USers and fig leaf the Democratic Party? By the way, how would you describe and what would you call the various social classes within the context of Modern Monetary Theory? Are there any USers who own the means of production? or just the means to make bets on something?

  6. Two questions for the author:Is it theoretically possible to have a government entity that is inefficient and wasteful?How would you characterize the depth of your expertise on the operations of USPS?

  7. Whoops — The second question should read:How would you characterize the depth of your expertise on the operations and finances of the USPS?

  8. I have an idea.As an economic stimulus, could we, instead, actually "double down" on the USPS–fully fund them, but not only that–subsidize them and actually let them run far into the red in exchange for really inexpensive postal service for, say, a period of one year. (?) Perhaps, offering 50% off of last years' rates?The program would be made available only to non-corporations, and the items shipped would necessarily be restricted to U.S. origination and destination.Think of the Americans, who, for example, use Ebay and other on-line auction sites–both as buyers and sellers. What if, through a federal subsidy, the USPS were to cut their rates by 50% for those consumers? Americans might be able to buy and sell items that they previously could not, due to a significant difference in shipping costs. Perhaps this could trigger a flow of money that could goose the economy for average Americans.Speaking as an American who has accumulated too much "stuff" over the past decade or two–I would be much more likely to sell my "stuff" and to buy other "stuff" directly from other Americans if the shipping costs were not such a huge factor. And a "limited-time sale" on the shipping charges would encourage me to start doing it soon.This would also have a bit of a novelty factor to it; it would be sort of exciting. It would be tangible, it would be immediate, and it would be something that absolutely every American could partake in.Perhaps such a measure would help free-up our everyday economy from the liquidity trap that seems to be getting its grip on us.And we could save the jobs of U.S. Postal Workers at the same time. That would feel good.I'm just a housewife; so my idea might not be a very good one. But I just thought I would throw it out to you smart folks to mull over….

  9. Dear Anonymous, as a house husband with a background in fine art painting I won't have any of that "just a housewife" talk, if you please! The existence of yet another interested un-trained economist makes my call for an MMT themed FORUM (not just blog comments) all the more persuasive. I dig your mail fee holiday to stimulate commerce and think it exhibits and understanding that the point of the blog post is that the funding source of the post office is the US government not necessarily the fees for postage. By the way, are fees, like the cost of stamps, taxes?

  10. Personally, I use the USPO twice a year (to mail my federal & state income tax returns) – everything else in web-based. The reality is that the PO is approaching obsolescence – technology is rather rapidly eroding its utility and "customers" are abandoning it in droves. I could care less if the PO raises its rates or adjusts its pension contributions or reduces delivery days, but I'm no more interested in subsidizing snail mail than I am in funding horse-drawn carriages. If we need a jobs program, how about something that will be useful in the future???

  11. Well, when you lose your job and can't pay for internet, you may find that you can scrape up that 44 cents to mail in your bill payment – that is if the USPS is still open. The rural elderly and low-income customers on my mail route depend on deliveries every day to their personal mailbox, since they can't afford the gasoline at $4/gal to drive more than a few miles.

  12. @anonymous (Sept 17th)Thank you for you patience. I'll answer your questions in order:#1 Is it theoretically possible to have a government entity that is inefficient and wasteful?Certainly. The degree to which you attribute wastefulness to depends entirely on definitions. What is considered waste or inefficient? Are we measuring efficiency in terms of the price system, physical systems, or what? So, the short answer is yet, but that doesn't give us any new information.How would you characterize the depth of your expertise on the operations of USPS?I am not an expert on USPS operations. For that sort of expertise, you should consult an employee of the USPS.@anonymous (Sept. 18)I'll echo andrewlylehartman. I think your proposal has merit. In the end we might disagree slightly on some minor detail of the proposal, but in essence such a proposal serves to lower the cost of interacting in the economy. Whether the interaction be an exchange of goods, or simply ideas, the purpose of the post office should be to drive that cost as near to zero as possible.I'm fundamentally opposed to the idea that the USPS should mimic the nature of a business enterprise. They each have divergent interests. The post office is there to make sure that anyone who wants to participate in a free society may gain access to the public forum. While private enterprise is there to restrict such activity to those who can purchase the right to participate. There are certainly aspects of social life that should be limited to paying customers (I leave it to the reader to populate such a list). At the same time, there are areas that should never be restricted in the price rationing sense from social life, such as the right to send a birthday card to a granddaughter.IMHO, the post office should ALWAYS operate "in the red."