tv Key Capitol Hill Hearings CSPAN March 26, 2015 1:00am-3:01am EDT
with director joseph clancy. now the brookings institution hosted a special on the future of the u.s. postal service. panelists include acting chairman and current specter general of the u.s. postal service. they address the current health of the postal service and what changes are needed in order to modernize and improve the financial condition of this government institution. this is an hour and 25 minutes.
good morning everyone. i am the director of the center for public management here at brookings. >> -- one of the perhaps oldest, along with the united states army, organizations in the u.s. government. and about which there's been much written, and even a movie made. okay? or two or three. and the post office is at a particular crossroads. i will ask you to just think of the following. when is the last time any of you got a letter with a stamp on it? okay. now some of you did. i suspect those of you born after about 1980 don't even really own any stamps. just for the edification of the
young people here, stamps are these things that you stick on envelopes and put in post office box and it would go to your grandmother or someone like that. so, we are at a crossroads here. there's some very big and very serious issues to be addressed. there's also been a reluctance to confront these issues in the congress. not only do they have a lot to do, but they, as you may have noticed, have a hard time doing anything these days, because they disagree about so much. but, we are here to say it's time to stop kicking the can down the road, and to start having an intelligent conversation about some of these big issues. so to start us off today, i'm going to call on four people who know a great deal about this. and i'm going to introduce all of them now, and then they'll
just speak in turn, and we'll open it up for questions from the audience. to my left is robert taub. he was designated acting chairman of the postal regulatory commission by president obama on december 4th, 2014. he's a little bit new to the job but he was also sworn in as a commissioner in 2011 and elected vice chair in 2013. he came to the post office from the army, where he was special assistant to the secretary of the army john mchugh, and before that he served as chief of staff to u.s. congressman john mchugh for a whole decade. to his left is dr. robert shapiro. he is a president and co-chairman and founder of sonicconllc which is a highly rated economic consulting company here in washington. he's also a senior fellow at the
georgetown school of business, an adviser to the international monetary fund, director of the globalization center at ndm, and in the clinton administration, he was undersecretary of commerce for economic affairs where he oversaw the statistical agencies, and the census. not at all a small job. to his left we have david williams. david is inspector general of the united states postal service. he was sworn in as the second inspector general for the post office in august of 2003, so he has a lot of years looking at this institution. he's responsible for a large staff located all over the country, and he investigates the largest civilian agency in the government. in 2011, williams was appointed by the obama administration to serve as vice chair on the government accountability -- board which will develop plans
for enhanced transparency for public spending. last but not least we have gene del polito. he is president of the association for postal commerce. he's been there for the past 31 years. and he is highly regarded within the postal community as an effective advocate on behalf of those who use mail for business communication and commerce. he has received post-com's j. edward day ward, the association's highest honor granted in recognition of distinguished service to the nation's postal community. so, as you can see, we've got a power house up here of people. i don't know that they'll all agree on everything, but that's going to be the fun part. so i'd like to start by having each of them make some introductory remarks, and then we'll open it up. so go ahead, robert. >> thank you, elaine.
good morning, everyone. i thought i'd just for the few minutes for each of us to set the table, shall we say, hit three issues. one to give you a thumbnail of what the postal regulatory commission is vis-a-vis the postal service and then more importantly give you a sense of what's going on with the postal service today. particularly financially. there's bad news and good news, and i'll try to hit on both of that. then lastly hit upon what i think is an important issue for us to consider going forward, which to me is the issue of universal service. indeed, why else do we have a government institution in the postal sphere if it isn't to provide universal service to the american public at home or at work, wherever you live. now the postal service itself today is a nearly $67 billion operation. almost half a million employees.
it's 100% part of the government, 100% part of the executive branch. it is not hybrid anything. it is not quasi-government. it is 100% part of the united states government. however, it receives no tax dollars to fund its operations. it is solely self-sustaining through the rates it charges for the services it provides. the postal regulatory commission is the entity that polices and has final authority over the postal service's prices, its products, services, adjudicates complaints. as elaine indicated, it's a regulatory commission like many in washington, with five commissioners appointed by the president, confirmed by the senate, and it is independent and totally separate from the postal service. the commission is the regulators, not the operator, of our nation's postal system. and a key point on that, why a regulator? as i said the postal service is 100% part of the government. it has one of the few agencies that every day is operating in a very commercial marketplace. and it has many captive customers who have no
alternatives to use the mail. so when it comes particularly to prices and products, because it's 100% a government entity with a commercial marketplace the idea is the commission is there to protect the public interest in these spheres. so let me move to kind of a snapshot of where things are at with the postal service today. obviously most of the attention we've seen and heard is the bad news about their financials. and it is bad news. they ended last year with a $5.5 billion net loss. it has brought their total net losses over the last eight years to $51.7 billion. just pause and think about that for a minute. $51.7 billion in net losses over eight years. last year's loss was $500 million higher than the year before, and $900 million higher than planned. and so far in 2015, their total net loss is $750 million more. now they paid $21 billion during the first five years of this eight-year period to prefund
overly ambitious prefunding mandate and they've since defaulted on that and have been unable to make any future payments into the prefunding for future retiree health benefits. they've maxed out on their borrowing authority so they have no borrowing authority available. and mail volume is continuing to decline overall. total mail volume in 2014 dropped to levels not seen since 19 7. now in the face of all that the postal service over the past seven years has reduced its workforce by about 200,000 employees. it's cut cost by about $16 billion. and they've increased productivity. today, the postal service delivers roughly the same amount of mail that it delivered in 1987, but with 173,000 fewer employees. but even with these reductions, and many more planned, they don't have the cash to pay down
their debt or make much-needed capital investments into their infrastructure. they need new delivery vehicles, package sortation equipment, probably about $10 billion of capital investments that's deferred. so if a downturn in the economy, or another stressing event should affect the postal service it really is concerning about their liquidity. the postal service currently estimates they have about 21 days of liquidity. but despite all that bad news, there's good news. there's strength in the system. as i mentioned, the postal service is the one entity that touches every american, whether at home or at work. the postal service literally delivers 150 million delivery points every day on a typical day, to american households and businesses. it facilitates trillions of dollars in commerce. $900 billion is the estimate of the mailing industry that the postal and delivery sector and the postal service is a key cog and part of, employing nearly 8 million americans. and there are positive signs of late.
the total first quarter volume and revenue has shown some good signs on our net operating basis. that's without noncash workers comp, and the prefunding mandates that i had mentioned. the postal service has a net operating income of last quarter of about a billion dollars which is about $360 million better than planned. and while its high margin of first class mail continues to decline, they're starting to see some modest increases in revenue. particularly driven by increases in revenue and volume from a shipping and package services. fuelled by the growth in e-commerce. so as elaine mentioned, this 240 year history of the postal service, despite its challenges today, there's immense strength in the system. and i would argue the postal service throughout his 240 year history has dealt with numerous disasters, numerous challenges,
a great depression, and despite expected calls for its imminent decline has not only continued to operate, but has thrived. and i would argue postal service despite these challenges has strength in the system that will get us through. the last point i mention is how do we deal with this larger issue, though, of the challenges, given the very scary financial news. i would argue it's this issue of universal service. why else is the postal service a government institution than to provide universal service? the postal regulatory commission back in 2008 did a study, as mandated by law, to try to define what it is in the united states, what do we define universal service as? and the commission came up with seven criteria. seven attributes that would make up a definition of universal service. geographic.
range of products. access to services. delivery frequency. prices. affordability. quality of service. and the seventh is users rights or enforcement. most other nations around the planet have very specific guidelines for many, if not all of those seven attributes and they're in law, they're either regulation, or licensing. in the united states, for much of our 240 years, instead we have not defined it. we've expected the postal service to meet the needs of the nation, balancing its budgetary constraints, and exempt for the mandate in the annual appropriations bill since 1982, that provides six-day delivery, it's really been left to the postal service. the commission, by law, annually estimates what does this cost in
universal service? our current estimate is it's about $5 billion a year. so the challenge for the postal service it seems to me is given all those other major financial challenges on its plate, how do we ensure that that $5 billion of universal service cost is continuing to get in to the postal service, so it remains self-sustaining? and where do we look for the answers to those questions? well, i would argue we have to look at ourselves. what sit that we as the american public need from a postal service in 2015 to provide universal service? what is it that we as the americans expect for universal service? and what is the cost? and once we know that it seems to me then we can ensure that the postal service is structured in a way to ensure that money gets to the bottom line of the postal service. as elaine mentioned, congress has been trying to deal with modernizing our nation's postal laws. the last congress both committees in the house and senate moved forward bills but they didn't get enacted. the administration has had its proposal. while all of them have been helpful, i would argue none deal with this central bottom line issue of what is it that we expect from our nation's postal system. and it is that from my perspective where we should focus from the public policy debate.
>> great, thank you. the second robert. >> thank you, elaine. it's always a pleasure to be back at brookings. i'm not here to either praise or demean the postal service. i'm here to try to describe how economists thinks about these questions, and the conclusions economic thinking brings to this problem. you know, almost all governments have compelling reasons to communicate with their subjects or their citizens, so some form of postal service has been a public good that most governments provide for a very long time. now, businesses and individuals also want to communicate with each other, and private companies prepare to compete with postal services for at least a piece of their business, when allowed to, by the law, for example delivery of packages in the united states. they've also been around for a long time. the spread of advanced technology, information,
communications technologies, as elaine noted, is only intensified that competition since internet communications have increasingly displaced the central monopoly of most postal systems, which is the monopoly over the near universal delivery of letter mail. we all used to get our bills in the mail. and not so often anymore. now, this subject always draws a lot of attention. i.e. all of you who showed up today, because most people and most businesses still need dependable postal service. mail service. and providing that service on a universal basis costs a lot of money. and when a public, or semipublic
entity receives subsidies for providing a public service, there's a danger of those subsidies being leveraged into a competitive market. one of the -- one of the singular characteristics of the postal service is that it exists simultaneously in a monopoly market where no one can compete, is allowed to compete, and in a competitive market, with pretty intense competition. before addressing those issues, i recently studied the subsidies themselves, which the postal service receives, and in the context of the cost that congress imposes on the postal service, as robert suggested. for example, congress requires the postal service to maintain residential delivery six days a week. and the prc under robert is estimated that reducing
deliveries to five days a week, which most of the public would support, would save the postal service about $2.2 billion per year. congress mandates discounted rates for religious, educational, charitable, political, other nonprofit organizations, which the prc figures costs the postal service more than $1.1 billion every year. every time i say prc i think of china, i'm sorry. congress also directs the postal service to provide a special mailing rate for periodicals, restricts the ability to close inefficient post offices, they estimate that costs about $300 million a year. and all tolled, as robert suggested, prc estimates that legal and regulatory requirements cost the postal service around $4.5 billion a year. now this happens to correspond roughly to the postal service average reported deficit over the last decade, $5.5 this year but $4.2 billion average over the last decade. and to the commission's estimate of the total value of the postal
service special privileges. including its monopoly on delivering letters, its exclusive access to residential and business mailboxes, and the exemption from a lot of state and local taxes and fees. so by this accounting the postal service is effectively self-sufficient financially. an economist approaches it differently and comes to a different accounting. which suggests that the subsidies are substantially greater. i estimate worth about $18 billion per year. rather than $4.5 billion. for example. the commission estimates that the postal service monopoly on access to residential and business mailboxes worth about $810 million in the 2013 fiscal year. now this is a very interesting
provision, and one that i was not aware of until i became immersed in the research for this. it says that the postal service and only the postal service, can leave a letter or package in a residential or business mailbox. whether it's a curbside mailbox, or one in a central mail room. everybody else that makes deliveries, u.p.s., fedex, dhl, whomever, individuals, has to leave them at the front door. of the residence or business. that's a substantial burden in a large apartment house, or business. or office building. the postal service itself estimated that in 2008, that ending the current bar on private delivery companies accessing mailboxes would cost the postal service $1.5 billion to $2.6 billion per year. and that was after all, 2008.
so that's seven years ago. and is two to three times the estimate of the value of the subsidy. it's going at it a different way. i'm not saying that there was any problem in the accounting. it's the way you approach it. how you conceptualize the subsidy. this is how an economist would conceptualize it, and that is that you would look at the volume of mail delivered to curbside mailboxes and centralized mail rooms, and the cost of doing so compared to delivery to each customer's door. because that's the privilege they get as compared to the requirement for private companies.
by that accounting, the mailbox monopoly saved the postal service $14.9 billion in fiscal 2013. which is another way of looking at the additional burden on private delivery companies. the commission also valued the postal service's legal exemption from state and local property and real estate taxes. at about $315 billion in 2006, last time it was done, adjusted for inflation, that would be about $370 million today. but this estimate is based on the financial statements issued by the postal service, which value its real estate holdings at $27.5 billion. but, as the inspector general reported recently, this valuation represents the historical cost of the property. not their fair market value. which is how property taxes are applied. using the fair market value, those properties were worth in 2012 $85 billion, not $27.5
billion. and if we use an average property tax rate, that's what economists do, of 1.8% that exemption from taxes actually provides a subsidy of about $1.5 billion. in 2012, it would be a little bigger today. again, a different way of approaching the problem of the value of this. and of course this is only one of a number of exemptions the postal service enjoys from state and local requirements including vehicle registration fees, road tolls, state sales taxes on fuels, parking tickets. imagine, no parking tickets. there are also some other subsidies which have not been reported and calculated for. but which from an economic point of view are pertinent to this discussion. for example, the postal service borrows from the treasury through the federal financing bank up to $15 billion, they've
hit that limit, but it does so at very highly subsidized interest rates. currently it has $15 billion in debt. its legal limit it pays on average a very below market interest rate of 1.2%. that cost is $184 billion in interest last year. if they had to borrow at commercial rates, and as a aaa credit risk, as its competitors do, its interest payments would have been $600 million to $675 million. so that creates another subsidy from an economic point of view of between $415 million and $500 million. there's also the special arrangements for the federal income tax on the profits that
the postal service generates from selling competitive goods and services. and its competitive side it has to pay taxes on the profits that it earns from delivering packages where it's competing with fedex and u.p.s. but there's a very interesting arrangement. i wish i could pull it off. the treasury credits those tax payments to the postal service fund. the postal service fund is a special revolving fund that at the treasury which the postal service draws on to cover any expense. so the federal tax payments circulate back to the postal service. that's a subsidy worth $850 million last year. finally, and this is really where we get into the economics of it, the postal service -- the monopoly over letter mail has created what economists call major economies of scale and scope. protected from competition and its monopoly area, it maintains this huge network of post offices and postal workers that
reaches, as congress requires, and as robert noted, 153 million delivery points six days a week. however, the postal service can leverage these economies of scale and scope to cut its cost in its competitive markets for package delivery and express mail. in the most consequential example, the postal service's core function of delivering letter mail to most homes and businesses on a daily basis means it can pick up and deliver packages to or from any home or business at little additional cost. this produces what economists call a network advantage since a private competitor's cost to pick up and deliver a package exceeds the postal service's incremental cost to pick up and deliver the same package along with its normal service. at the same time the monopoly is the main reason the postal
service needs subsidies. think of it this way. in the absence of any legal monopoly the postal service would face full competition from private companies and be forced to undertake the strategies and investments necessary to match the productivity of the private sector in this area. it happens we can quantify that. because, the bureau of labor statistics found that from 1987 to 2012 the postal service productivity, labor productivity, grew at an average annual rate of 0.7%. per year. private companies in the business of shipping, warehousing, storage and delivery, the basic functions of the post office, recorded average annual productivity
gains at 2.5% for a year over the same years. so, if the postal service had not enjoyed its monopoly position over this 25-year period, it would have been forced to be as productive as its private sector counterparts, and by 2012, that higher productivity would have reduced its 2012 costs by $20 billion. that's a lot of money. that's even greater than the subsidy, the value of all the subsidies if you approach it as an economist would. it's much greater than the deficits that the post office endures. now this is technically not a subsidy. but it represents an economic burden on everyone who uses the mail, and taxpayers, that arises directly from the monopoly position, and in addition, to the -- in addition, the subsidies, the effective economic subsidies associated with that position which reinforce the need to not compete. now, the higher salaries and benefits that postal employees
enjoy and the larger number of employees relative to some but not all private delivery firms account for less than half of those additional costs. the other half reflects the weak competitive pressures on the postal service to become more efficient and innovative, which ultimately lead to less effective management practices, investments, and operating procedures. this is not a criticism of the postal service. this is the way any subsidized monopoly responds. it is inherent in the position, and the problem is the position. and those costs are certainly grounds, i think, for a serious discussion about reforming the arrangements of the postal service. thanks. >> thank you, robert. david? >> thanks, elaine. the postal service is the largest link in a worldwide communications and logistics
infrastructure value chain. like all infrastructures, our role is to provide common solutions to problems that cannot be reasonably solved individually. we're complemented by adjacent infrastructures that are both traditional and digital. and the suddenly faster and global environment. so what are the new respective roles of the infrastructures? and should the postal infrastructure adapt to this new speed of light ecosphere and what are the rules of the road for the road ahead? the first rule i would say is keep up, no matter who you are. if you're a key player it's critical that you keep up. the world is turning at the speed of blur. and when key players can't keep up, it creates distortions in the landscape. it's like trying to drive a car wearing magnifying glasses, for the rest of us. when one of us can't keep up.
you individually, of course, need to keep up, as well. because no matter how young you are in this room, your world is disappearing. it's passing around the bend in the river of time. this is true whether you're a mailer, great customers, the postal service and its unions, customs that are constantly in the way these days, congress, purposefully slow, and deliberative to avoid sort of being ruling the country by the roar of the mob. and the universal postal union whose stodgy rules are designed to assist developing nations long after they cease to be developing nations. so keep up for god's sake, don't find yourself in the way or clumsily picking winners or losers by your inaction. the second rule, i would say, is velocity doesn't really matter without focus. focus on the new end game. would everybody reach in their pocket and pull out a $1 coin
and hold it up? they're very efficiently made, very cheaply produced. that's great. but nobody wants them. now you have a silver dollar, that's very impressive. the road ahead is not about encouraging consumption of efficiently managed but unwanted manufacture, but unwanted goods. it's about customer value creation. third, enjoying the systems of the world and enable their value to your users. we shouldn't define the postal service literally as envelopes and parcels and traditional post offices. we need to define the postal service conceptually as an enabler of communications and logistics services.
in an age of great upheaval and advancement, an age that left us with amazing gifts, but unanticipated restraints. the last great disruptive wave for the postal service was the near simultaneous development of railroads and the telegraph. the postal service at that moment didn't continue plodding along the postal roads that they built, because that's who they were literally five seconds ago. it was the first one to the railroads and the first ones to the air carriers, greatly helping both of those fragile, infant industries. and as the value of mail increased it was also the first ones to the new highway system in america. history shows that the postal service rapidly adapts, as they're allowed and as it identifies better ways to serve americans so how should it adapt now to serve the emergent human and commercial needs of this new century. act as an intermediary enabling seamless navigation between people's digital and physical lives. gain an essential american
neighborhood role in providing inputs to smart mega cities of the future. be sure to equip our trucks and our carriers and our post offices to become a mobile sensor net collecting and uploading data to customers, and to the smart city infrastructures. should be testing wi-fi and cable strength in the neighborhoods, air quality, gas leaks, conduct meter readings, we should become neighborhood cohort centers for electricity reserves for the power grid, 3-d print centers, we should build wi-fi towers on post office roofs. did you ever think of that? gene suggested that. microwarehousing for people and small businesses. i guess rule five is we should act to protect the continuity of commerce during the coming
supply chain wars. as the world becomes more digital and global, the supply chain is being disrupted. from the design and manufacture of goods all the way to the last mile delivery of the products, supply links are going digital, and middlemen are becoming embrittled and disappearing leaving behind residual services that cannot become digital, and they cannot finance the middlemen any longer. here are a couple of examples. 3-d printing, and customers as creators of disturbing assembly lines and mass production with point of use manufacturing. that changes everything. chinese manufacturers are leaking over the entire supply chain. take goods straight off the assembly line and send them straight to your residence, nothing in between. amazon seeking to provide a one-stop shop for the entire supply chain.
we're also seeing the rise of peer-to-peer commerce for products and services. that also leaps all the way over the supply chain. foreign shoppers in an increasingly global marketplace are often unable to buy u.s. goods without a u.s. delivery address. sixth, mediate disruption of the banking industry that blocks transactions for citizens, and adds friction to commerce. mobile banking has put a bank branch in everybody's palm. even before this began one out of twelve americans did not have a bank account. bank branches may shrink from where they are today, 100,000 down to 10,000 bank branches remain. high cost payday loans and currency exchanges have stepped in to that vacuum that is rapidly growing. many americans can't engage in e-commerce. just at the time that brick and mortar commerce is disappearing. the postal service could provide financial services platform, and front office services where there are no banks. today, 59% of our post offices,
17,000 locations, are located in zip codes where there are no banks or a single bank in the entire zip code. post offices could provide financial instrument exchange at a time when their instruments are proliferating. prepaid and debit cards which could cash checks, money orders and we could become a loan mart platform. seventh, become a network matter stream. we're seeing the end of a very peculiar world war that went on for ten years. between the very cool bits and the stodgy atoms. i think kids in the future are going to be laughing at what we're doing today. we're doing virtual work in a brick and mortar office. the worst of both worlds. we've been seeing digital as an end instead of a means. we've been insisting the digital
communications are a passing fad in some instances, including at the postal service early on. anyway, that's all sorted out now. we are after all atomic structures and packages don't beam themselves off the assembly line to your home. so digital matter streams are finally anatomically incorrect. operating as the network matters stream. so know how to optimally map citizens to those data streams into the internet of things. and to network matter streams. and the postal service needs to continue to integrate its network matter stream with its users data streams to enable e-commerce, e-health, mobile banking, e-government and soon e-learning. we also have the huge burden of the universal service obligation that you've heard about today. it would be great if we could turn that liability into a wonderful asset for americans,
and for the postal service. we need to understand the impact of digital communications on the uso. we shouldn't be fearing and viewing them as competitors, but, in fact, digital communications can lighten the load with the immense burden of universal service. we could provide seamless visibility to senders and recipients of items traveling through the fulfillment value chain from smart postage and packaging, to intelligent mailboxes and to virtual p.o. boxes. in short we need to ask ourselves who are we now? and not become distracted by the literal artifacts of yesterday. this evolution will also add to our viability, and will be profitable and maybe very profitable. but while we're updating our role of vital infrastructure, being fuelled by this, we can't forget we have an additional responsibility, one additional
to the universal service obligation. we must take friction out of commerce and we have to minimize transaction costs as we finance this immense infrastructure without taxpayer dollars. we're the largest of the world postal networks, 40%. we're the engine of the global network effect. the postal service doesn't perform this mission because it chooses to, or because it's a business. it's our duty to you. we're sentinels for a system that incentivizes innovation, meritocracy. we're conflict free in keeping the playing field level in supporting efficient market forces in the united states. thanks. >> thank you. gene? >> well, i've been in this industry for 31 years, and here we are once again at the brookings institution going about probing the nation's postal soul. and rather than sit up here and
try to act as a social engineer, i'd rather sit around and talk to you from my view of things for those specific prism, and that is from the perspective of the people that i help whose businesses are tied in one way or another to the use of mail as a vehicle for the transaction of business communication and commerce. now we're in the process of talking about postal reform and you've heard others talk about the definition of universal service obligations and so on. and i hope that my comments today might crystallize for you what mailers genuinely believe should be part of a postal reform package and what also should be part of their aspect of the definition of universal service. i'm not going to be talking about universal service from the perspective of the individual customer who is out there. i'm going to be talking about it specifically in terms of the way businesses would do it. i don't choose to talk about the world the way that i would like it to be or the way that i would believe it to be. i have to talk about the world the way that it is. and when you take a look at the
mail today, and you look at business communication, business-to-consumer communication, consumer-to-business communication, and tally it all up, what you come to is the reality that 95% of all mail carried by the postal service today is business transaction, really. only 5% of the mail that the postal service carries is actually what you would characterize as personal communications. for the past several years we should quickly have realized that facebook has all but supplanted mail as that vehicle by which grandma and the grand kids get together, talk to each other, exchange birthday greetings, and also share pictures with one another. from the business' perspective, considering that 95% of all mail is business transaction related, i find it compelling to conclude that when you look at mail, you have got to say, it is an important part of the nation's
economic infrastructure. now when we talk about infrastructure, it's all too easy to lapse into the social engineer's perspective, talking about whether it's good or it's bad, it's fair or it's unfair. none of which matters. when you talk about infrastructure, the only thing that matters is does it work? if you talk about electrical infrastructure, i don't care how you get the electricity here, all i want to know is that when i hit the light switch the lights will come on. when i turn the faucet, the water will come out. the same thing is also true with the mail. when i put the mail inside of the postal system i expect the mail to be delivered in a specific way. for us, the way that we judge the quality of this infrastructure is does it or does it not facilitate the transaction of commerce? if you're using it for commercial purposes, then obviously it should set itself
up in a way that it facilitates using it for those particular kinds of purposes. now if you had to take a look at the postal system and say well, okay, how are you going to know that it's doing that? first of all there are two key criteria as far as business nailers are concerned. without a question, someone in the business of using the mail as a communication vehicle, mail service has got to be reliable, it's got to be consistent, and it's got to be predictable. because i am building other elements of my business around the belief that certain things are going to happen at a certain time. how will i be able to prove that? well, clearly, in order to be able to do that, i must have how mail is provided in a system that is transparent, and
accountable. i should be able to confront data that clearly says when you see these figures, when you see these facts, you clearly can make a determination that mail is being consistent and reliable and predictable. the second thing is, is, i must be assured the costs upon which all mail services are based are accurate, complete, and transparent. and when i say the costs of all mail services, i'm not just talking about market dominant services. i'm talking about competitive services, as well. you know, in the days when paf was past we recast gaul into two parts, market dominant and competitive. we subjected the market dominance with specific regulatory regime for a reason and that is because you could not have competition within the market dominant area, you must take steps to be absolutely sure that there was not going to be this illegal, unwise subsidy going to competitive services for market dominance.
the only way you can do that is to be assured that the costs upon which the postal service bases its prices and all of its other activities are accurate, complete, and transparent. the whole day of being able to go to the postal regulatory commission and finally got there when you asked for the costs of competitive services you find everything redacted should be long gone. i, as a user of market dominant services have an absolute right to be assured that when i pay a price for that particular service, that price is covering the cost of my service, not the cost of somebody else's. so we're looking for a way in which we can actually say that we've got an ability to measure the costs in a way so that we're sure that they're accurate, complete and transparent. now the postal service to its own benefit is beginning to move very quickly for the implementation of its intelligent mail system which
gives us the tools that are necessary to actually make those kinds of measurements, and make them apparent. but i should not have to be able to go over to the postal regulatory commission and when i look for the data, i'm required to burrow down from 15 different spreadsheets to hopefully find what i want to see. it should be there. it should be transparent, it should be discernible. so that everybody who is using this system, and has to pay the costs associated with the system, knows exactly what is being done. now let me make this really, really clear. from the mailer's perspective, we don't care how the postal service goes about structuring its work rules. we don't care how it goes about compensating its workers. we don't care how it ends up dealing with its employee relations. and we couldn't care less whether congress likes it or not. all of these matters are of no concern to mail users. the only thing that matters is does the post system satisfy the mission that it was given as
part of the nation's infrastructural system? if it does, and if we get from it those reliable services, based on costs that are accurately transparent we have received everything that we need to get to make postal system today, and we can leave it to those so we're looking for a way in costs that are accurate and transparent they have received everything that we need to get from a postal system today and we can leave to choose to worry about the other aspects to handle those aspects itself. here are some of the realities people need to keep in mind. the entire cost of operating this nation's postal system is paid for by the people who use the mail, who send the mail, so that 95% element of the business transaction related, that's necessary in order to be able to make this thing go.
we have talked about the division between market. dominant and competitive. we have talked about the fact that it's subjected to a regulatory regime. again, it's subjected to a regulatory regime because it has not one monopoly, but two monopolies that control within what happens over the mail. also the deposit of mail in mail receptacles. now, i haven't said anything about prices. the only thing i'm going to say is before the enactment the postal service was proud in itself in saying we have always been able to operate by keeping postal prices within the ranges of inflation. no one thought that was going to be different the day the act was passed. one thought that was going to be different the day the post accountability act was passed. okay, we ended up going through a deep recession that had some structural impasse just like every business there was in america. but what's the problem when you see that the cost of operating the system are exceeding the revenues that you're now able to gain because of the transformation that has
occurred in terms of the way that we communicate and do business. it's not because you're being overly regulated. it's because your costs have not been reduced to the level of the changes that have been going on within your own business. we believe, generally, that male service mail services should be offered within the context of inflationary limits. do we need to say that they have to be defined today as they are defined at the class level? well, maybe that's not necessarily so. maybe that's what the commission needs to take a look at as it goes forward. but we also need to be mindful that maybe it was wrong taking a look at that kind of constraint. it's not whether or not it's tied to inflation, but the manner in which it's defined. we continue to define mail services today contactually the way we did even before postal
reorganization had taken place. we talked about first class mail, we talked about periodicals, we talked about advertising mail we talked about packages. why? those elements are not at the heart at what drives the postal services business. the elements that are at the heart of what the postal service does and what drives its business are determined by the shape of the mail pieces. so perhaps if we redefine classes, in accordance with the way the postal service actually processes mail within the system, we might find that instead of having a hetero heterogeneous group of services, we're able to define a little bit more homogeneously to apply them to whatever they have to be. >> i want to take some questions from the audience.
i'm going to start off by talking about four things that i've heard here, okay? one is, david, you really laid out a vision of all sorts of things the post office could be doing in the future. and, so, i want -- and many of those are very intriguing. some of you know the post office is already doing a lot of experimentation getting into the business of grocery delivery their partnership with amazon for sunday delivery, so there's a lot of thought and entrepreneurship going on. my first question is does the postal service as currently organized, have the capacity to actually -- the managerial capacity to actually develop competitive products. second, and it's related to this and related to rob's discussion is, well, okay. if the post office gets into these, right, how do we deal with the subsidies that the post
office enjoys from the federal government? okay. because you're -- if -- as the post office moves into new territory, it is obviously going to compete with existing businesses and entities. so how should we think about that? what should congress think about that. third, maybe -- maybe for you, maybe for the whole group, there's this weird $10 million limit on the test market test products which seems kind of ridiculous given that everything -- every other number we're talking about here is billions. and the entrepreneurial side of this is limited to millions chl. and, so, should that be changed? and, finally how should we think about the monopoly post afs office, which rob describes, and the competitive post office, right, which i think you really described, david. i mean, should they be separate
entities? how should we -- what should we do with those two pieces of the business? so those are just a couple things that i was thinking about. i made four questions into one. and let's open it up. >> sure. thanks elaine. i think it's helpful as we look at those questions to just quickly give a little context as to where we are today. until 1970, the post office department was a cabinet-level agency, the postmaster general usually had been the campaign manager for the president and was appointed the postmaster general, given all the patronage at the time. >> good job. >> the postmaster general sat in the president's cabinet. 1970 came along, because of all of the financial challenges because of the postal service and its managerial and created this business-like entity that we have today. so it really removed a lot of the political involvement. and the key part of that was the
postal service no longer had its rate set by congress but this agency called the postal rate commission came. in 2006, that was the law we operated. generally speaking, whenever the post office felt the need to change rates and needed more money, it would come to the commissioner and the commissioner would gear up and over a year-long process, would set the rates and assets. the postal had to set its own revenue requirement, generally speaking. if it needed 5 million$5 million it would generally get $5 million. the issue was would first class pay more, second class and so forth. jump ahead 12 years, the postal laws were changed. the postal accountability enhancement act. one of the key areas it was focused on was trying to modernize this rate setting. so instead of this long year-long process before the postal service could change any rate, the idea was give the
postal service more modern flexibility to change its prices. but, as we've talked about it's capped customers in the market down side the postal rate commission, more powers and authorities to get at it and ensure that it was all out there and ensure that the postal service wasn't violating an inflation rate. but there's also recognition in the debate that resulted in the law in 2006 was well, there's this whole competitive category of products. it is relatively speaking, much smaller in volume in revenue than the market dominance side. and gene eluded to ensuring that customers on the market dollar side were now subsidized. so a regulatory regime was set up to say the competitive side would be regulated like a price cap, with ways to ensure that cross subsidies aren't occurring. every single competitive product collectively has to kick into the overhead at a percentage
that the commission sets and the commission looks at that not only preg ly only regularly, but annually. are rates and fees in compliance with the law? are service standards being met. and we report on that and we can order the postal service to take corrective action. as part of that separation the law says look, on these competitive products, they are operating in commercial market place. and the commission needs to provide protection for information of a competitive nature as the commission gets it, set up rules much like a federal court would do. the commission set those rules up, 2008, they took effect. the commission has been operating under that. can it be improved, sure thing. and the commission has a role now to deal with a lot of these issues whether costing can be improved we've got 45 years from the 1970 law of how costing can be defined.
postal service puts a lot of money into it. the commission is constantly ordering and looking at improvements and any party at any time can come to the commission and start a rule making to improve this process. and my last point to go to the areas that you had raised was these areas of new products. the postal service, as they
have, have come to the commission and can continue to do so. i would add what we did in '06, what's broad in the aperture of what they can get into. the fair competition issues. to provide in the government agency and that should inform what then should be done with that. >> anybody else. >> i fortunately don't know the laws of economics and only congress.
from an economic point of view, a single organization that's providing a monopoly service for a public good is always problematic. it is inhernt, it is built into the structure. it is pervasive and significant. we've doing a civility of that where we'll try to lay that out. but just think about the example of delivering a package at the same time you're delivering the mail. the incremental cost of delivering that package given that you already have these enormous economies of scale and scope based on the monopoly product. we would be very uncomfortable if we said that the military could provide -- could have a private business for private security forces. i don't see any difference. frankly. second you know, the kirby.
the activities of this government agency in the private market to postal product. we heard from our friends proposals for a whole line of new products. this would only compound the problem. the notion that the postal service, as the expertise to handle backnking services and financial services. to me, this is, you know, in the 1970s, the oil companies had a lot of money because oil prices had skyrocketed. they said we are all going to become conglomerates. and they started buying businesses, they had nothing to do with the oil business. and ten years later they had sold off virtually all of them at a loss. because all of the managers from harvard business school and
where the world post first began to emerge from social networking and the economic downturn and so forth that had so devastated postal services. they said all of the winners had three aspects. they were lean. i would certainly give the u.s. postal service pretty good grades for that. they've undertaken an enormous effort to become smaller and more lean. smart efficient the postal service is embarking down that road. the third is they are entrepreneurial. they are diversified which the u.s. postal service is not. they're saying those are the three key essential ingredients to survive in today's world, as
a postal service. i think one of the keys to staying out of trouble if we do begin to enter the area of diversification is to enable not to compete with commerce. and we certainly have many ways to do that. as far as who would -- who would do this i agree and understand that we have a traditional work force that's been narrowly focused on mailing parcels in the past. it involves the federal developments and probably within the world of creating effective parter in ships within the private sector. first of all, we're the long pole and attempt of the postal industry, a trillion dollar industry. federal loan tradition of workshir discounts to achieve
the lowest combined cost for delivery of services. competition has been very effective where we use their air transport and they use our last mile delivery. it's been a long, rich history of combining the private sector to expand into areas where the expertise lies. but there's value as i said, in a common infrastructure infrastructure, particularly in industries that have been severely disresultive. the supply chain and the banking industry are two examples. we need to be there. we can't lead with everybody educational. there won't be those essential services. that are left behind and abandoned and cannot go digital. there needs to be some infrastructure left for the american people. and for commerce. >> around dave's point i'm old
enough to remember the days of watergate. if you remember the key saying in watergate, follow the money. you wonder how a statutory monopoly is going to function, you have to ask yourself what are the insentives. if you follow the incentives, you'll understand how it will behave. if you look at the private sector, the incentives are to maximize your gains and minimize your costs. those incentives do not exist within a governmental pure ok ra sill. translate those insentives into more human terms we might say the incentives are to maximize pleasure and minimize pain. just look at the way the postal system functions. vis-a-vis congress. it is not out there trying to maximize its pleasure. but it's doing everything it can to minimize its pain. so consequently how it will function is going to