The continuing Republican sabotage of the United States Postal Service has probably attracted your attention since it has been much in the news lately. Briefly, the Trump appointed Postmaster General has ordered procedural changes which will make mail service more unreliable. This, in itself, is concerning because many individuals depend on mail for paychecks, bill payment, and prescription drug delivery. In addition, because of the pandemic, absentee voting appears to be the safest method of participating in this year’s Presidential and Congressional elections. Mr. Trump has been complaining vehemently about this sort of voting, claiming it will disadvantage Republican candidates. Like most of Trump’s fulminations, this is not remotely reality based. If anything, absentee voting has historically benefited Republicans.
The recent assault on the Postal Service is part of a long-standing pattern of behavior. The ultimate goal is apparently privatization of the Postal Service. In 2006, the Republican Congress passed a “reform” bill which mandated prefunding 75 years of retiree medical benefits. In honesty, public pensions are a deeply problematic area. Public officials are willing to offer public employees generous pension benefits because they do not inflict the pain of having to raise taxes, as larger salaries might. Besides, the officials will likely be out of office before the bills come due. However, funding an obligation for 75 years out is ridiculous on its face. This represents funding retirements of future employees who haven’t even entered the workforce yet.
In what follows, I’m going to assume that the drive to privatize the Postal Service succeeds and game out what the likely consequences of privatization will be. First of all, how would privatization be implemented? Presumably, the Secretary of Treasury would retain an investment banking firm to advise him. In the case of Secretary Mnuchin, perhaps that would be Goldman Sacks, his former employer. In any case, the banking firm would rake in tens, if not hundreds, of millions of dollars in “advisory fees.”
The Treasury would then organize an auction of the Postal Service. The identity of the ultimate purchaser is largely irrelevant. The buyer would be a “private equity” firm. These firms all follow the same playbook, so the results which I am predicting won’t depend on which private equity firm wins the auction.
The winner will create a new firm (for now let’s call it Postal Enterprises, Inc (PEI)). The winning firm will contribute a small amount of its capital to PEI. Most of the price will be financed with a large issue of bonds, most likely junk (below investment grade) bonds.
The new owner’s first move will be to revalue the reserves that the Postal Service has been required to accumulate on “sound actuarial principles.” The finding will undoubtably be that this account is massively overfunded. Now, the reserves that we are talking about are not kept in a safe in the basement of Postal Service headquarters. Instead, they are invested in US Government bonds, very safe, if low yielding, investment grade bonds. The owners of PEI will sell off those bonds generating large cash flows. This is the first sleight of hand, they bought with junk and are able to acquire much more valuable assets.
The next move will be for PEI to make a large dividend payment to the private investor owners of the new firm. This dividend will dwarf the amount of capital actually committed by these owners. They have also privatized the former Postal Service’ most valuable asset. But the looting is not done. The private equity firm will also extract substantial “management fees” from PEI. These exactions will set up the next stage.
Remember, most of the purchase price was financed by bonds which must receive regular interest payments. With the resources available this will be extremely difficult. The ownership will complain about costs being too high.
This sets up the next move, which is to break the American Postal Workers Union. There are over 220,000 workers and retirees represented by this union. In fact, the Postal Service probably has more unionized workers than any enterprise in America. As is well known, unions are highly offensive to the billionaire class who believe that they are entitled to unlimited power over their employees. Expect working conditions in a non-union PEI to resemble the conditions in Amazon warehouses.
Even breaking the union will not be sufficient for PEI to become profitable. This will lead to the final act in drama. One of the reasons that the Postal Service struggles financially (beyond the sabotage outlined above) is the universal service obligation. Once the infrastructure is in place, delivering mail in cities need not be terribly expensive. On the other hand, providing mail service to Schurz, Nevada, a town on a Native reservation in the middle of the state and literally a hundred miles from anywhere, is extremely expensive.
The owners of PEI will insist on eliminating the universal service requirement. If the government is not willing to make this modification, expect the owners to put the firm into bankruptcy. (They have nothing to lose, the dividend already paid them back their capital and more.) The delivery firm that comes to “rescue” PEI will certainly make ending universal service a condition of sale. (They might also insist on a government provided “sweetener” payment. Remember these people are completely shameless and will loudly proclaim their allegiance to “free enterprise.”)
So that’s my prediction about the Postal Service’ future. I personally hope that I’m wrong.
Caveat: One of my cousins has been a fairly high ranking official in the Postal Service as it currently exists. Although I’m quite fond of my cousin, this analysis is based on my professional observations as an economist, not her status.
