About This Blog

Ludwig von Mises (1881-1973) was the greatest economist of my time. His greatest works can be accessed here at no charge.

Mises believed that property, freedom and peace are and should be the hallmarks of a satisfying and prosperous society. I agree. Mises proved beyond a shadow of a doubt that the prospect for general and individual prosperity is maximized, indeed, is only possible, if the principle of private property reigns supreme. What's yours is yours. What's mine is mine. When the line between yours and mine is smudged, the door to conflict opens. Without freedom (individual liberty of action) the principle of private property is neutered and the free market, which is the child of property and freedom and the mother of prosperity and satisfaction, cannot exist. Peace is the goal of a prosperous and satisfying society of free individuals, not peace which is purchased by submission to the enemies of property and freedom, but peace which results from the unyielding defense of these principles against all who challenge them.

In this blog I measure American society against the metrics of property, freedom and peace.

Tuesday, December 6, 2011

Mission Impossible: Cutting "Excess Capacity" From the US Postal Service

Yesterday, according to CBS news, the U.S. Postal Service "announced major budget and service cuts. As a result of the $3 billion in cuts, first-class mail that used to take just one day to deliver will now take two to three days," CBS reported. "Stamps will also rise in cost by 1 cent to 45 cents, starting next month."

Earlier, Postmaster General Patrick Donahoe attempted to explain the higher postage price and severe service cutbacks by saying that the Postal Service was reducing "excess capacity."

This comment got me thinking. How is it possible for Gen. Donahoe to even recognize what he says is "excess capacity" in the Postal Service, much less reduce it? After all, the Postal Service is a government monopoly. No company operating in the free market is allowed by the federal government, under penalty of the law, to do what the Postal Service does. Without competition, i.e., the discipline of the marketplace, how can Gen. Donahoe possibly determine that his organization does too much of what it does?

The short answer is: He can't. For all Gen. Donahoe knows, the whole of what the Postal Service does is "excess capacity."

This answer, of course, assumes that Gen. Donahoe is talking about "excess capacity" considered from the point of view of consumers in the marketplace.

Because of its legal status, the US Postal Service exists in a sort of bubble insulated from and independent of consumers in the marketplace.

Depending on who you believe and how much time you spend looking for it, the budget of the Postal Service was about $69-billion in 2006. This information is from someone with the nickname of "Crystal" who provided it on the omnicient website WikiAnswers. Those untrusting souls who demand a more authoritative number can read through this lengthy article published by Bloomberg Businessweek: "The U.S. Postal Service Nears Collapse." Referring to the Postal Service and its budget, the article states: "Last year its revenues were $67 billion, and its expenses were even greater." Furthermore, the USPS is $15-billion in debt.

Terrific! Given the article's title, the fact that it says the Postal Service has "stayed afloat by borrowing $12 billion from the U.S. Treasury," that it will "reach its statutory debt limit" this year, and that it "would default on $5.5 billion of health-care costs set aside for its future retirees scheduled for payment on Sept. 30 unless the government comes to the rescue, I think we can safely assume this federal Brontosaurus is in deep doo-doo. This assessment does not even consider the amount of money the agency is in hock to the federal government for employee pensions ($75-billion or so) and the drastic, continuing decline in the volume of First Class Mail, which is the agency's bread and butter.

The point is that the US Postal Service is an expensive and outdated dinosaur that hangs like a millstone about the neck of the American public. For example (more quotes from the story), since "2007 the USPS has been unable to cover its annual budget, 80 percent of which goes to salaries and benefits." Moreover, the USPS operates "the world's largest network of post offices" and "80 percent of them lose money."

In short, while the rest of the world (read the free market) was computerizing, streamlining and modernizing their organizations, the USPS was maintaining and adding to their brick and mortar effigies to the past. While Fed Ex, UPS and all the other free market package and priority letter delivery companies were mobilizing their services by going to the customer for parcel pickup and delivery, the Postal Service was still demanding that its captive audience journey to its local post office or mail box, where a large army ("571,566 full-time workers") delivers daily "an average of 563 million pieces of mail—40 percent of the entire world's volume."

The worst part is that this large army of employees is represented by an aggressive and militant union, the American Postal Workers Union, AFL-CIO, which has negotiated lavish wages, benefits and no-layoff contracts over the years with our pandering public representatives in Congress. The bottomline is that change of any kind in the USPS is nearly impossible. Hence, the USPS is more firmly entrenched in the taxpayers pocket than the US Marine Corps.

But enough boring and depressing statistics. Let's get back to the economics of the matter and Gen. Donahoe's futile attempt to recognize the Postal Service's "excess capacity."

Gen. Donahoe may not admit it but he knows full well that the Postal Service does not serve the American consumer. The Postal Service serves Congress, as authorized in the Constitution. Congress sets the parameters of postal service. It determines that a first class letter must be delivered to every nook and cranny in the United States for the price of a single, first class stamp. When the Postal Service has the nation's mailmen trudging from house to house on foot, or driving from street to street in jeeps, or sailing across lakes in boats, or across Alaska in snowmobiles and pontoon planes attempting to deliver a single letter for 44 cents, it is merely carrying out the mission assigned to it by Congress in the best and most politically correct way it knows how. The result is the bleak army of employees and the sea of red ink described above.

So the question remains: In light of this mandated Congressional mission, and in light of the status of the USPS as a protected, federal monopoly, how does Gen. Donahoe determine his organization's "excess capacity?"

The answer is that Gen. Donahoe considers the capacity of the USPS, not from the point of view of the consumer, but from the point of view of his Congressional mandate and his Congressional budget. "Excess capacity" to Gen. Donahoe means plain and simply the difference between what USPS spends per year and what USPS takes in each year in revenue. That's it! No philosophizing. No gut checks. No innovating. No out-of-the-box theorizing. No changing.

The only means Gen. Donahoe must consider when he is faced with reducing "excess capacity" are: first, raising the price of postage; second, abandoning buildings and equipment, thereby consolidating his workforce (which results in more roundabout service); and third, petitioning Congress for taxpayer subsidies. In Gen. Donahoe's mind, no other options exist. His labor costs are fixed. He can't converst labor costs into capital equipment. His pension costs are fixed. But most of all, his and his organization's very existence is fixed and certain!

An entrepreneur in the free market who is faced with the problem of "excess capacity" must think on a far broader and the most fundamental scale. The entrepreneur in the free market serves the consumer and no one else. "Excess capacity" in a free market company is one of many possible symptoms of a plague which exists only in the free market: loss.

Consumers in a free market express their sovereignty by means of voluntarily buying goods and services from sellers who best satisfy their demands. The dollars spent by these consumers accumulate in the coffers of sellers. If a seller finds that he has produced too much and sold too little, he may say he is experiencing "excess capacity" and must reduce it, but what he really means is that he is not making a profit. He is suffering a loss. He knows, in fact, that continued losses, will result inexorably and inevitably in the end of his business and his career as an entrepreneur.

Why does the entrepreneur feel the life and death pressure of profit and loss, but Gen. Donahoe does not?

Because the entrepreneur does not operate in a bubble like the Postal Service does. The entrepreneur is not isolated from the effects of the production of other vendors and suppliers who supply the same product and service and who freely compete in the free market. These competing business offer buyers an endless choice of quanity, quality, service and price. If the entrepreneur can't measure up to his competition, or surpass his competition, he suffers a loss. He fails.

If the USPS was a private company operating in the free market, and Gen. Donahoe was its entrepreneur, he would be faced with making do-or-die decisions on a grand scale. He would be forced to reduce the size of his work force, or reduce wages and benefits, or drastically cut costs to increase efficiency by making fundamental changes in job descriptions and capital equipment, and improvements in operational systems. He would be forced to re-evaluate the very mission of his business and the very assumptions which guide the way he has been doing business and accomplishing his mission.

In short, if the USPS operated in the free market, Gen. Donahoe would have to weather the competitive storm of Fed Ex, Western Union, Google and countless local companies delivering first class mail. He would have to make a profit in the face of this competition or he and his USPS would be forced by the market to go away. There would be no Congress of last resort to bail him out.

Critics will object that making such drastic adjustments would cause untold hardship among USPS management and staff. This is true. Free market USPS employees who lose their jobs would have to find new, productive ones at a free market company. Some enterprising ex-USPS employees might even start their own mail delivery companies and make millions. Who knows? USPS employees who retain their jobs would have to work harder and more efficiently. But without such changes the American consumer and taxpayer are doomed to live with the millstone of the USPS draped around their neck from now until forever.

The best part of the free market is that, when losing businesses fold and profit-making business thrive, the consumer in us is satisfied. And satisfaction of our consumer wants and needs is the best we can hope to expect from an exchange society.

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