USPS Finances

¶ … 1980, the demand for postage stamps was price inelastic. Elasticity reflects the affect that a change in price has on demand (Moffatt, 2015). There were few other options at the time -- only a phone call was a reasonable substitute. Not surprisingly, with multiple substitutes having emerged over the subsequent decades, demand for stamps is much more elastic than it once was. Substitutions, in particular email, come in at a much lower cost, so the postal service is simply not economical for people anymore (Hartung, 2011).

That said, I am not sure that this means the elasticity has changed. If people are willing to change their habits over a penny or two either way, I'm not sure they'll do that now either, because a decline in the price of postage still won't make it cheaper than email. So people are either going to send something by post or they won't. If anything, the elasticity question is more when compared to parcel services like UPS or FedEx Ground. The price of postage stamps should not be changed.

When compared with email (free), there is no level at which the post office will be faster or more efficient. Consumers know this. They are either going to use the postal service or they are not. Among those who do, there is probably some elasticity, but not much. So arguably, an increase will have them grumbling, but a decrease will not move the meter on getting people to switch back from email and text.

Elasticity is important to pricing in most cases, because if elasticity is low, the price could be increased in order to increase total revenue. If elasticity is high, then a decrease in price will deliver an increase to total revenue. The first class stamp is actually a unique example, because it is competing against a product that consumers see as free. The incremental cost of an email is nothing. The normal rules of elasticity and substitution do not really apply when the substitute is free.

People still mailing letters are going to do so because they need to. But they could change their mind if the cost of doing so is too high. 3. The USPS posts a report to Congress each year. In 2014, it actually formatted this as a 10-K, more familiar for publicly-traded corporations. Revenue has increased in the past three years, by a small amount.

While the USPS has gotten its retiree health benefits under control -- they have declined by around $5 billion in the past couple of years, and the other total operating expenses are stable, the organization is still losing a lot of money every year, and that money must be made up for by the U.S. taxpayer. There are two interesting line items. First, is that retiree benefits are over 10% of total operating expenses.

That is very high, a legacy of a time when the postal service was bigger, and when middle class benefits were really that good. Still, the USPS is now in a situation where it is not making enough money to pay for those benefits. Where other companies have gone through bankruptcy to deal with such legacy costs, the USPS simply taps the taxpayer. That said, operating costs are still quite high.

For the revenue that USPS generates, it either has too many workers, or it pays them too much, or both. The stability of the operation suggests that the next three years will not look much different -- USPS will lose around $5 billion each year. 4. The current and projected situation are not good, either one. Labor costs are massive -- total labor costs are 84.3% of revenues, a level that is completely unsustainable. The unionized workforce represents a challenge.

The issue is this -- if you go into a collective bargaining session pleading poverty, it won't work because the union knows that Congress is the payer. So it is not like any other company. Only Congress has the power to put the pressure on the union to cut pay, benefits or the workforce. The CEO cannot do anything without Congress. And realistically, it's a non-starter politically. There are still a lot of people who rely on the postal service, and Congress would hear from them if service was cut.

$5 billion is nothing in the federal budget -- even for fiscal conservatives, this is not a battle to fight. So the CEO can ask Congress to cut funding and force the union's hand, but that doesn't mean it will happen. The current situation exists for a reason. 5. Privatizing.