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AlbertDarago
Abstract
This paper will discuss the costs and benefits of privatization of the United States Postal
Service....
AlbertDarago
online products becoming much more popular has also led to a drop in revenue and a growing
deficit. In 2006 c...
AlbertDarago
Revenue by Product in 2009 (Total Revenue of $68 Billion)
First-classmail (correspondence,bills,payments,stat...
AlbertDarago
may be downsized. The reasons for overstaffing can be linked to a lack of a budget constraint
along with prot...
AlbertDarago
the marketplace. Private firms have an advantage over public firms in which they can offer
lower compensation...
AlbertDarago
The total employee breakdown of USPS and private firms are similar in the regard that
they are both major emp...
AlbertDarago
privately owned systems tend to have a more diverse area of services and have moved to a
stronger package mai...
AlbertDarago
and stave off a potential privatization movement and has yet to show signs of vast
improvement.
AlbertDarago
Works Cited
Adie, D. K. (1989). Monopoly mail: Privatizing the United States postal service. Transaction Publ...
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USPS Final Project

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USPS Final Project

  1. 1. AlbertDarago Abstract This paper will discuss the costs and benefits of privatization of the United States Postal Service. I will focus on the potential impacts of privatization including job loss and potential effects on citizens of the United States. The United States Postal Service or USPS for short has provided numerous benefits for the nation including affordable and convenient mail delivery to every US citizen. They also provide jobs to over 500,000 United States citizens (USPS 10-K, 2014). There are many benefits that USPS provides, but recently the costs associated with USPS have been mounting. The new age of online bill pay and email have resulted in less and less revenue for USPS leading to an overall loss over the last couple of years. Introduction The United States Postal Service was created in 1775 by President Benjamin Franklin this service was built to help with the exchange of mail between all US citizens. For much of the 20th century the USPS was the sole provider of mail and parcel delivery and provided US citizens with convenient and cheap methods of delivery. USPS holds a government issued monopoly on all post/letter delivery; however with recent technology that has resulted in a decrease in letters/post traffic USPS has been steadily losing revenues. Other firms in the market have better logistics and rates then the postal service can offer and continue to gain market share in the parcel shipping. The result is a drain on the taxpayer dollars spent funding the losses incurred by USPS. The postal service has been operating at a loss since 2007. The recent recession was said to have an impact on the volume of mail delivered by USPS and was partially responsible for the loss in revenue. The loss of revenue due to new technology such as online bill pay and print to
  2. 2. AlbertDarago online products becoming much more popular has also led to a drop in revenue and a growing deficit. In 2006 congress enacted the Postal Accountability and Enhancement Act that required the postal service to pay upfront for future retiree health benefits (UsGovInfo, 2014) this resulted in an increase of expenditures of $5.4 billion to $5.6 billion from 2006-2016. Motivation The United States Postal Service has been posting a loss since 2009. I was motivated to provide an idea of the pros and cons of privatizing the postal service industry as a major change in how USPS has been receiving revenues in this new age with the decline of their letter mail volumes and revenues. I was motivated to find a new solution that will lessen the tax burden for US citizens that are paying for a failing business. The solution of privatizing the USPS seems to be the most reasonable solution as it has been practiced before in other nations and has had positive effects with the con of job loss. Discussion USPS provides mail delivery for about half of the world’s mail. They operate in 38,000 facilities nationwide and provide jobs to about 656,000 employees (Cato, 2013). They are responsible for the delivery of mail to every post office box in the United States. The United States Postal Service has a complete governmental monopoly on all mail delivered to post office boxes across the country in which the majority of their revenue is achieved. An analysis of the revenue by product for USPS in the year 2009 depicts that 88% of revenue was obtained in the government monopoly products.
  3. 3. AlbertDarago Revenue by Product in 2009 (Total Revenue of $68 Billion) First-classmail (correspondence,bills,payments,statementsandadvertising) 52% Standardmail (bulkadvertisinganddirect-mail solicitation) 25% Other(periodicals,parcel post,librarymail,andboundprintedmatter) 11% Competitive products(ExpressMail,PriorityMail,bulkparcel post,andbulk international mail) 12% Total 100% Carbaugh,R., & Tenerelli,T.(2011). RESTRUCTURING THE U.S. POSTALSERVICE. CATOJournal,31(1), 129 In recent years with the new addition of private firms, UPS, FedEx and DHL, into the competitive market the Postal Service has lost market power against competitors that can provide competitive pricing with the use of top notch logistics and more efficient processes. The current decline of mail that is shipped into PO boxes has made the importance of expansion into the field of competitive products that much more important; however USPS has failed to do so with the lack of ability to compete. The United States government has key powers over the postal service such as price regulation. The price of a postal service stamp has increased only with the rate of inflation since 1971. (Fields, 2013) The stamp prices that USPS is currently offering solicit a demand that is above equilibrium; therefore the supply that would typically be offered at this rate would be too low. If the postal service were to privatize they could adjust the stamp rates to market price. The higher price for stamps would detract some mail volume but would allow for a conservation of resources and capital. One of the key areas of concern with privatization is job loss as publicly run firms tend to overemploy; whereas private firms employ the minimum needed in order to maximize profits. If the USPS were to privatize there would be a major loss in the number of people employed. Post offices that are not showing profits would be closed and those that are running at a profit
  4. 4. AlbertDarago may be downsized. The reasons for overstaffing can be linked to a lack of a budget constraint along with protection with competition in which USPS has been linked to over the years (Kikeri, 1998). In the table below several examples of rampant overstaffing are shown with job totals before and after privatization in Argentina. The data shows an overall loss of jobs after privatization has taken effect. Enterprise Employment before privatization Employment after privatization % Change ENTel (telecoms) 44,339 42,908 -3 GdE 10,273 10,273 0 OSN 7,500 7,500 0 SEGBA 20,271 15,806 -22 YPF (oil) 37,400 10,600 -72 FAA (railways) 92,500 18,000 -81 SOMISA (steel) 12,000 6,000 -50 Total 224,283 111,087 -50 (Kikeri, 1998) Total job loss of 50% in Argentina when public firms went private may be an indicator as to the potential overemployment that may be represented in USPS. In an attempt to address overemploying the postal service has begun to offer early retirement packages to their employees. In 2012 USPS offered and granted early-out retirement plans to 25,500 employees. Many of these packages are worth $20,000 and the postal service plans to cut a total of 75,000 employees in order to eliminate costs. (Josh, 2013) This method of curbing overemployment helps to lessen the negative effect of job loss and provide employees with ample time and money to find new jobs. The fact that private firms have more incentive to turn a profit then a firm that is publicly run is a key part of this study. Firms such as UPS and FedEx have been forced to innovate and provide products at a lower price in order to remain competitive and survive in
  5. 5. AlbertDarago the marketplace. Private firms have an advantage over public firms in which they can offer lower compensation to employees as they are not required to provide as many benefits that a public firm has to provide as the breakdown of USPS total employee compensation is below. USPS Compensation and Benefits Expenses in 2009 (Millions of Dollars) Salary $39,208 Retirement $5,917 HealthBenefits $5,294 WorkersCompensation $2,223 Other $512 Total $53,154 Carbaugh,R., & Tenerelli,T.(2011). RESTRUCTURING THE U.S. POSTALSERVICE. CATOJournal,31(1), 129 In addition to normal salary compensation as a public firm USPS has to provide their employees with retirement, health and workers compensation benefits unlike private firms who are much less accountable for their employees. In terms of overall compensation in the private vs. public sector the average compensation for the public sector is almost $20,000 more than the private. (USPS 10-K, 2014) 0 20,000 40,000 60,000 80,000 100,000 Public Private Compensation ($) Compensation ($)
  6. 6. AlbertDarago The total employee breakdown of USPS and private firms are similar in the regard that they are both major employers across the globe. USPS employs 656,000 and their largest competitor UPS employs 395,000 (UPS 10-K, 2014) using the chart above the assumed additional cost that USPS has to provide for employees is around $5.22 billion. The rise of e-mail and online bill pay coupled with the great recession have resulted in revenue loss for USPS. In the past they have relied on letters as a main source of income using the monopoly given to them by the US government to create a sustainable revenue stream. In recent data it is shown that the use of physical mail is on the decline and in best case scenarios the use of mail will remain stagnant in the future. In 2009 USPS was placed on the US governments high risk list, with fear that revenue streams will continue to remain stagnant or in decline. In recent years USPS has posted losses. USPS Net Deficiency (In Millions of US$) 2010 $13,873 2011 $18,940 2012 $34,846 2013 $39,823 (USPS 10-K, 2014) Although USPS has attempted to reach out and increase market share in the package shipping industry they have remained unsuccessful and have increased the deficit for the last 4 years. They have been receiving contributions via the federal government for each of the previous 4 years of $3,132 (in millions) and are still increasing their net deficiency at an alarming rate. Other postal systems around the globe operate with partial privatization, full privatization and governmental regulation. They have varying amounts of success; however
  7. 7. AlbertDarago privately owned systems tend to have a more diverse area of services and have moved to a stronger package mailing area of operation. (Hickey, 2008) Foreign Postal Services Privitization Diversification Country Private Ownershipof Shares NonMail Revenue asa % of Net Revenue Australia 0 44 Germany 69 87 Netherlands 100 62 NewZealand 0 44 Sweden 0 47 UnitedStates - 13 Carbaugh,R., & Tenerelli,T.(2011). RESTRUCTURING THE U.S. POSTALSERVICE. CATOJournal,31(1), 129 All international firms listed have had a greater success entering into competitive markets that give them a more diverse source of revenue; therefore leading them to relatively less risk. The USPS is less diverse then all of the foreign post offices that have been privatized to some extent as they have more motivation to succeed and turn a profit as opposed to USPS. Conclusion The United States Postal Service has been on hard times lately. They have lost a large amount of revenue due to new technology and have been largely outperformed in the competitive market that is not covered under their monopoly power. They have held losses over the last 6 years and have a continued deficit growth. USPS employs more than they should and continues to offer postal rates that are below market price which is leading to a loss on a consistent basis. A potential solution to this issue is privatization as it will allow for USPS to make many strategic moves to attempt a recovery from their current situation. The postal service has recently made many strategic moves by themselves in order to balance their budget
  8. 8. AlbertDarago and stave off a potential privatization movement and has yet to show signs of vast improvement.
  9. 9. AlbertDarago Works Cited Adie, D. K. (1989). Monopoly mail: Privatizing the United States postal service. Transaction Publishers. Boettke,P.,Privatization,PublicOwnershipandRegulationof aNatural Monopoly.Journal of Economic Literature,32(4),1916-1918 Carbaugh,R., & Tenerelli,T.(2011). Restructuringthe U.S.Postal Service. Cato Journal, 31(1), 129-150 Caves, R. E. (1990). Lessons from privatization in Britain: State enterprise behavior, public choice, and corporate governance. Journal of economic behavior & organization, 13(2), 145-169. Crew,M., & Geddes,R..(2014). The Role of the Postal andDeliverySectorinaDigital Age.EdwardElgar Publishing.16-27 Fields,K.(2013). U.S.Postal Service AnnouncesNew Pricesfor2014. UnitedStatesPostal Service. Jaag, C., Postal-sector policy: From monopoly to regulated competition and beyond, Utilities Policy (2014), http://dx.doi.org/10.1016/j.jup.2014.03.002 Henig, J. R. (1989). Privatization in the United States: Theory and practice.Political Science Quarterly, 649-670. Hickey,R.(2008). Postal Privatization andthe transformationof the global logisticsindustry. ManagementInternational,12,39-49 Josh,H., & Lisa,R. (2009, June).U.S.Postal Service givescost-cuttinganothertry. WashingtonPost,The Kikeri,S.(1997). PrivatizationandLabor:What happenstoworkerswhenGovernmentsDivest.World Bank Technical Paper,396. Vickers, J., & Yarrow, G. (1991). Economic perspectives on privatization. The Journal of Economic Perspectives, 111-132.

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