Seung-Hyun Hong, a University of Illinois professor of economics, discusses what steps the U.S. Postal Service can take to remain financially solvent in an era of instant communication and declining revenues.
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Is Saturday mail delivery from the U.S. Postal Service soon to be a memory? Seung-Hyun Hong, a University of Illinois professor of economics, has studied the agency's tenuous financial situation. In an interview with News Bureau Business and Law editor Phil Ciciora, he discusses what steps the service can take to remain financially solvent in an era of instant communication and declining revenues.
The U.S. Postal Service is looking to close about 3,700 post offices as early as January. Is this a good move?
The Postal Service has experienced considerable reduction in its revenue, largely because more consumers use email and online payment systems, instead of regular mail. Despite its efforts, it appears that the downward trend in revenues will not be reversed in the near future. As a result, the Postal Service needs to focus on cutting costs, and it has been reorganizing its business and streamlining its services to do just that. Closing post offices is one potential solution, but this does not mean that the Postal Service stops providing any service to a particular area, since their universal service obligation prohibits them from doing so. Rather, it means consolidating post offices in some neighborhoods or outsourcing its services to local businesses.
In fact, the number of post offices has decreased from 38,123 in 2001 to 35,754 in 2010, while various third-party retailers are already providing some types of postal services. The recent move to close about 3,700 post offices would speed up this change, but this is not necessarily good or bad. It could potentially lead to cost saving; one estimate suggests $200 million saving by closing about 3,700 post offices. But that's not sufficient to cover an expected deficit of $8 to $9 billion in fiscal year 2011. For this reason, the Postal Service needs to look for other solutions as well.
In addition to closing branches, would switching to five-day delivery help? Or would that just create less demand and, by extension, less revenue?
Five-day delivery would reduce costs significantly - from $1.7 billion to $3 billion per year, according to the Postal Service and regulatory commission estimates. But a more important issue is how it would affect the demand for postal services. Many consumers might not care if their mail wasn't delivered on Saturday. With email, fax or other delivery services, consumers are already using alternatives for more urgent mail. However, business customers might care about the change, because five-day delivery means less frequent exposure to consumers via coupons, fliers and other advertisements, which could potentially reduce business customers' willingness to pay for postal services and could also lead some businesses to switch to the Internet for advertisements.
However, it takes time for businesses to reassess how much to spend on standard mail for their advertisements. They could eventually reduce their spending, but in the short-run, the change in demand might not be significant. In contrast, cost saving from five-day delivery would appear immediately. But this does not mean that the potential change in demand can be ignored.
To the best of my knowledge, no study has attempted to measure the precise magnitude of the potential change in demand due to five-day delivery. Nevertheless, the current debate on five-day delivery should still take into account the possibility of potential reduction in future revenue.
Instead of ending Saturday delivery, why not just increase rates?
Increasing the rates also decreases the demand, and this decrease could outweigh any revenue gain from an increase in the rates, thus reducing the revenue. This was the case when the Postal Service raised the rates in January 2006, as shown in my work with Frank Wolak, of Stanford University.
Is there any other solution the U.S. Postal Service can pursue?
One additional solution is related to its retirement funds. The Postal Service has argued that it has been overpaying into its pension fund, which the regulatory commission also agrees with. Although I do not have enough information on exactly how much the Postal Service has overpaid (some estimates range between $50 billion to $80 billion), one thing is clear: If the Postal Service has indeed overpaid, this potential surplus came from their revenue, not from taxpayers, and so some flexibility with respect to this surplus is likely to help the service. For example, Congress could allow the service to temporarily stop its payment as long as the pension fund is fully funded.