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, our 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 p 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 are disturbing assembly lines and mass production with point of use manufacturing that changes everything. chinese manufacturers are leaking over the entire supply chain. they 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 into 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 atomically incorrect. operating as the network matters stream. so know how to optimally map citizens to those data streams and to the internet of things. and to network matter streams. 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 a specific prism, and that is from the perspective of the people that i represent 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's 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? well, first of all, there are two key criteria as far as business nailers are concerned. without a question, since i'm 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 through a measuring system that is transparent and accountable. i should be able to be confronted with data that clearly says when you see these figures, when you see these facts, you clearly can make the 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 ons. 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 who would choose to worry about the other aspects to handle those aspects themselves. here are some of the aspects we need to keep in mind. the entire cost of operateling this nation's postal system is operated by people who use the mail, who send the mail. so that 95% element of the

business that's business transaction-related, that's where it gets the lucre that's necessary in order to be able to make this thing go. we've talked about the division between market dominant and competitive. we've talked about the fact 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 what happens within the mail. not only over the carriage of mail but also the o'deposit of mail in mail receptacles. now, i haven't said anything about prices. the only thing i'm going to say about prices is before the enactment of the postal accountability act the post 58 service was quite proud of itself in saying we have always been able to operate by keeping postal prices within the ranges of inflation. well, no one thought that was going to be different the day the postal accountability act was passed. sxvth, we ended up going through a deep recession that had some structural impacts on just about 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 we 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 mail services still should be offered roughly within the context of inflationary limits. do we mean to say that they have to be as defined by today, limited by cpi constraints applied at the class level? maybe that's not necessarily so and 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 what's wrong with taking a look at that kind of constraint is not whether or not it's tied to inflation but the manner in which it's defined. we continue to define mail services today exactly the way we did even before postal reorganization had taken place. we talk about first class mail, we talk about periodicals, we talk about advertising mail, we talk about packages. why? those elements are not at the heart of what drives the postal service's business. the elements that are at the heart of what the postal service does and what drives this 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 heterogeneous grouping of packages and costs and services we might be able to define them a little more homogeneously so

we can appropriately apply the limits to whatever they have to be. >> thank you very much. this is a lively discussion. i want to take some questions from the audience. i'm going to start off by /z]e talking about four things that i've heard here. 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 develop competitive

products? second, and it's related to this and related to rob's discussion, okay, if the post office get. s into these, how do we deal with the subsidies that the post office enjoys from the federal government? okay? because 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 for you, maybe for the whole group, there's this weird $10 million limit on the market test products, which seems kind of ridiculous given that every other number we're talking about here is billions and the entrepreneurial side of

this is limited to millions. so should that be changed. and finally, how should we think about the monopoly post office, which rob describes, and the competitive post office, which i think you really described, david. should they be separate entities? what should we do with those two pieces of the business? so those are just a couple things that i'm 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 then the postmaster general at the time, given all the patronage at the time. and the postmaster general sat in the president's cabinet.

1970 came along because of all the financial challenges for the postal service and created this business-like entity that we have today. so it really removed a lot of the political involvement. a key part of that was the postal service no longer had its rates set by congress but this little agency called the postal rates commission was started at the time to set rates. so until 2006 that was the law we operated under, and generally speaking, whenever the postal service felt the need to change rates and needed more money, it would come to the commission and the commission would gear up and over a year-long process would set the rates. in essence. the postal service had a sole authority to set its own revenue requirement, so if it needed $5 billion, it would generally get $5 billion. the issue was would first class pay more than second class or third class. jump ahead to 2006 after 12 years of effort, the postal laws were changed.

as jean had mentioned the accountability and postal enhancement act. and one of the key areas that was focused on was trying to modernize the rate setting. instead of this year-long process before they could change any rate, give the postal service more modern flexibility to change its prices. but as we have talked about because there's customers in the market dominant side, this postal rate commission was turned into the postal regulatory commission. more powers and authorities to get the data, ensure that it was all out there and that the postal service wasn't violating an inflation rate. but there's also a recognition in the debate that resulted in the law of 2006, there's this whole competitive category of products. it's relatively speaking much smaller in volume than the market dominant side. they shared that customers on the market dominant side were subsidized in the market. so regulatory regime was set up

to say on the competitive side would be regulated unlike a price cap with ways to ensure that subsidies are occurring. every competitive product has to cover its cost. every product collectively have to kick into the overhead at a percentage that the commission sets. and the commission looks at that not only regularly, but annually. at the end of the this week, we have an annual compliance report. are rates and fees setting law. are service standards being met? we report on that and can order the postal service to take corrective action. as part of that separation, the law said on these competitive products, they are operating in a commercial marketplace 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 the rules up. about 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 cost can be improves, 45 years from the 1970 law of how costing has been refined. the postal service puts a lot of money in it. the commission is 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. so the good news is on this score, we don't necessarily need to have an act of congress. we have a vibrant regulatory system set up from 2006 that can handle it. my last point to go to what you had raised was these areas of new products.

the law set up the commission is the one that calls the balls and strikes on can the postal service get into new products. the law made a decision in 2006, for better or for worse, that the postal service could only offer postal products. nonpostal were barred by law. that would take an act of congress to change. within that framework of what's postal, there's a lot of flexibility and the postal service, as they have, have come to the commission and can continue to do so. i would add if the laws change, we now have what we didn't have in '06, a regulator that has been in place looking at these things. if congress were to say let's broaden what they can get into, you can now put that into a process where a regulator can look under whatever criteria that the law would look at, fair competition issues, things of that nature. but i would argue that gets us off from we should first look at

what is it that we need from this institution to provide us a government agency. that should inform what then are the other things that should be done to do that. >> anybody else? >> i fortunately only have to operate under the laws of economic and not under the laws of congress. from an economic point of view, a single organization that's providing monopoly public service is always problematic. it's inherent, it is built into the structure and it is pervasive and significant. we're doing a new study of that where we're 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 had these enormous economies of scale and scope based on the monopoly product, we would be very uncomfortable if we said that the military could have a private business for. private security forces. i don't see any difference, frankly. second, you know, the congress at least as robert just noted, has limited the activities of this government agency in the private market to postal products. we heard from our friends proposals for a whole line of new products. it this would only compound the problem.

the notion that the postal service has the expertise to handle banking services and financial services, to me, in the 1970s the oil companies had a lot of money because oil prices are skyrocketing and said we are all going to become conglomerates and they started buying businesses that had nothing to do with the oil business. ten years later they had sold off virtually all of them at a loss because all of the managers from harvard business school and engineers and scientists who ran exxonmobil and shell and chevron had absolutely no experience in the refrigerator business. they had, you know, no business in financial services, which they also got into. we have a very vibrant and effective and efficient market in all of those services. i was once advising a very wealthy family who were thinking of getting into the private equity business because they

thought they had all this money, how should they spend it, this would be fun. the first question you have to answer is on what basis can you -- do you believe that you can do this better than all the people who are already doing it? because that's the only justification. otherwise you should invest in them. this is the same issue with respect to after all the investment ultimately comes from all the people who use the mail who would have to provide the resources to get into banking, et cetera. we need to think of it in exactly the opposite way. we need to think of it in terms of a public service function, which is separate, entirely separate from and unable to subsidize the private sector business. otherwise, we undermine the

innovation and effectiveness of what is a very effective private sector in delivery. >> david? jean? >> you can tell robert and i have a slight different view of the road ahead. i'm pleased that when you said friend you didn't put that in air quotes. a very valuable useful study of world posts and they looked as a subset of the world post that first began to emerge from the devastating blow of 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 have 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 and they are diversified, which the u.s. postal service is not. they are 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. we certainly have many ways to do that. as far as who would do this, i agree and understand that we have a traditional workforce that has been narrowly focused on mail and parcels in the past, but the postal service has the longest tradition of all the

federal departments and probably within the world of creating effective partnerships with the private sector. first of all we're the long pole in the tent. of the postal industry, a trillion-dollar industry. we have had a long tradition of discounts to achieve the lowest combined cost for delivery of services. competition with the other carriers 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 with the private sector to expand into areas where the expertise lies. but there's value, as i said, in a common infrastructure, particularly in industries that are being severely disrupted. the supply chain and the banking industry are two examples. we need to be there. we can't leave with everybody else.

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 if for commerce. >> i'm old enough to remember the days of watergate. if you remember the key saying was follow the money. if you want to know how a postal system that is owned and operated by the a government under a monopoly is going to function, you have to ask yourself to what are the incentives? 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 in a bureaucracy. to translate those into human terms, we might say the

incentives are to maximize pleasure and minimize pain. if you just look at the way the postal system today functions, it is not trying to maximize pleasure, but it's doing everything it can to minimize its pain. so consequently, how it will function is going to determine result is and it is what you would expect to see of an enterprise that truly can exist within a competitive environment. >> i think it's time. thank you. this is a complicated issue. i think it's time to open it up to the audience. >> the thing i learned about running an organization, even though it's a not for profit i was the ceo over, we need a revenue. and the limits on revenue seems to be the heart of the problem. we talk about businesses -- i don't know any business that restricts its price increases to

how they -- to some other criteria other than what the market would bear. if the market needs lower prices, they lower the prices. if they need higher prices, theyp could bear higher prices, they raise the price. i think the biggest problem, one of the big problems with the new regulatory regime in the post office is congress has limited them to external inflation as the limit on how much you can raise total revenue. at the same time, it has mandated above inflation costs to the system. until you fix that, there's absolutely no way you can get 50 new banks or products, you're still not going to be allowed to raise the revenue and the system is going to fail. can you comment on that?

>> you hit on a key point, referencing a system that by law mandates that it's market dominant products, which is where you have the captive customers needs to be regulated under a cpi system. the law did say after ten years, the commission needs to look at the full ten years of experience and assess improvements, changes, how that might operate. the idea was on the competitive side, the competitive marketplace would be that limit. if you go back to 2006 when this law was being finalized after 12 years of effort and a lot of if was focused on the prices, the products, the flexibility for the postal service, there was an issue that got bubbled up toward the back end, which was this idea of pre-funding future health benefits. a huge liability. that future rate payers were going to get hit with. at the time the decision was made, look, this makes sense for the postal service to start

pre-funding that. what came out of the legislation and that was signed into law actually locked into place for ten years specified payments of upwards of $5 billion or more per year for ten years. after the ten years, it was re-amortized. back in 2006 if we all go back to then and certainly from the postal service perspective, they were at their peaks of revenue, volume and the postal service, at that time, their general focus was, look, this is going to be tough for ten years, but we can make the payments. none of us would have predicted that the next year our nation went into a great recession that rivalled the depths of the great depression and mail volume and revenue, and i think you hit upon the key point, while good intention because it was locked into statute to undo it, create scoring issues and it became a recipe for insolvency. >> and there's equally significant issues in revenues not just in the inflation cap, but from the deeply discounted

rates that nonletter mail receives. that's periodicals. it's mainly advertising. it's all the mailers you get. and that is an increasing share of the volume. and the congress has mandated deeply discounted rates and they have done this in a way the congress operates. that doesn't have to be described. but if you need it, we have one of america's premier political scientists here to explain it. and that's not a subsidy, that's a cost.

and it's under universal service obligation. if we are going to have a hybrid form of a system, which is that provides delivery that competes with private companies, then we also have to introduce more competition into the other side of the market. and the first way to do that is to get rid of those two things. get rid of all of them and let other people -- let other companies compete for that business at a market rate. >> i think gene may want to say something about this. and david. >> not just specifically about that. but let's talk about the limit that you pose. the limit you posed was how do you make things work when you limit the amount of income you can make based on an external factor like inflation versus what congress does in order to tell it what it has to do. you've got at play here, you'll

never be able to satisfy or successfully resolve the postal service's dilemma until you can come up with the answer for this. you've got at play here a different ideological perspective that congress. if you were to ask rand paul what he would expect the postal service to be like and contrast it with what bernie sanders thinks the postal service would be like, it would be like night and day. the thing is the congress has never said if this is what we want to have, there needs to be a way by which it gets funded. now we can all talk about raising everybody's rates, but here's the important thing to keep in mind. you may compel people, but today with electronic communication, you don't have to mail. so if you end up doing things that makes it apparent to a business that the prices you're charging no longer facilitate the ability to use, they will take their business elsewhere.

but you still have the mandates. how do you fund the mandates in the absence of sufficient revenue if the revenue now has an opportunity to leave? >> i guess what i would like to point out is that what robert said is very important. the moment of passage of in legislation was important to remember. an enormous, robust, expanding business that was approaching a cliff where i think legislators felt that mail was expanding but there would be a time in which it would totally evaporate. there would be no postal service in the future. all of which turned out to be quite wrong. but the cpi cap was intended as a surrogate for market forces because absent those federal bureaucracies, any bureaucracy,

absent efficient market forces tends toward bloat. so it was market. they don't work very well where the market is stable and a disaster where the market is declining which is exactly what occurred. the other great pressure was prefunding. paid 5.5$5.5 billion a year. the postal service in its history had never made $5 billion. we make or lose $1 billion. we never made a single payment. we borrowed to make every single payment. we borrowed against a bill that we didn't have that would someday arrive. that was an odd one. and it was in the hands of opm. opm had a couple of things going on there. they were desperate for money to manage what had been a fairly poorly managed pension fund for

all of the government. secondly, there were competence problems. they just tried to collect our pension amount to prefund earlier than that. they missed a $171 billion debt by $71 billion. that's pretty bad. they missed the math problem by more than a third. through congressional determination and a lot can be said for it we have put aside $335 billion. most attractive take over target in the corporate world today but we have paid dearly for that. we suffered an enormous blood loss. >> thank you. i think there is a question back there, sir? >> good morning. thanks for the panel. my name is john bird with business coalition for fair

competition. and we are very interested in knowing what kind of remedies would be offered whether congressional or regularatory that would take a look at the evolving market conditions, current financial challenges and then the second part to the question would be the management, where is that most pronounced? to the extent you can kind of weave each of the remarks about that appreciate it thank you. >> want to start down here? anybody want to pick this up? >> in terms of mismanagement i will leave that to somebody else. i think to your earlier point, rob, i think may have put his finger on it. that is the time of having a hybrid system that is supposed to act like a business and one that is not supposed to act like a business may be past us. it may be time to start saying if there are certain core services which we know the nation needs and we want to

restrict who can provide them they ought to be organized separately and distinctly from those services we would like the other element of the business enterprise to undertake to operate more competitively within the market place. that would mean you would have to restructure competitive services that would require it to have the same source of sets of books same sorts of constraints that we apply to anybody else in the private sector where the issue of cross subsidy is immediately ruled out. >> anybody else have a comment on that? >> i just want to say the defense of the postal service here that i don't think it's really an issue of mismanagement. i think it's an issue of responding to incentives that the problem with any entity which enjoys effective

insulation from competition. and this applies to market dominant private companies as well as this unusual hybrid is that the need to figure out how to be more efficient and in particular how to innovate what kind of investment should you be making? and what kind of investment should you be pulling back on? those incentives are absent. and consequently they have become less efficient and less innovative and cost relative to the product decline. and we see the bls has quantified that. that's what productivity captures. and that's not because they have bad managers. i don't think they have any quality of managers there is any

worse than the average for the private sector. i think that the way they are forced to operate is different. and it has predictable economic consequences. >> i think if you think about what the postal infrastructure is about it's instructive to your question. they provide universal service to all of america even places that are not profitable. they do so at the lowest possible cost so that we energize commerce. we don't destroy commerce. we are conflict free with regard to picking winners and losers. and now hold that thought. in europe they attempted all of this. something very curious happened. there were no serious takers. they said would anybody else

like to do these three things? no serious takers. so is there some value in having someone just focused on energizing commerce with no conflict of interest? and who's charging as little as they possibly can to survive? i think so. i think that is the very definition of a national infrastructure. >> it did work in sweden. sweden is the case. sweden has the most competitive open system. and it's worked quite well in sweden. i would not claim that sweden -- that the problems facing a small homogenous society and one facing ours are the same. it would be different and more complicated complicated. they went to full privatization. >> i think we will do the last

question, lady up here. yes? >> my name is elaine middleman. i am an attorney. i got involved in postal issues when the post office by my house was closed even though it was profitable by tyson's corner. i am in favor of post offices. i appreciate your point of view. i don't understand because it is like you want to start from scratch and pretend none of this exists which maybe in the perfect world that would be great but that is not where we are at. one thing that troubled me was the reporters always talk about the postal service bleeding billions of dollars and they don't seem to understand the concept of operating revenue and operating income. this 5 billion requirement makes it look like that it's a dysfunctional business when, in fact, as you pointed out the last mile delivery is vital to the economy.

i think many people rely on the post office. i always when i go and look at everybody they have a reason to be there and have a piece of paper and want somebody to help them with something. it's a very important part of our infrastructure. >> robert, do you want to take that? >> i think a key point to what everyone thinks of the prefunding requirement we have to deal with the fact that it is the law of the land. hence because of that they are not meeting certain obligations that are required by law to meet. more importantly has real world application. i went through what i saw was bad news and good news. with those requirements and the law as it is the liquidity is just not available there. that would require legislation. and that then we get into scoring issues of whether -- so

and that's a challenge for congress to sort through. at the end of the day it's like everything. it will need 218 votes in the house, 51 or 60 in the senate and a presidential signature. until any of that happens it is what it is. and it has the effect of the postal service where they are at and they as a result of a variety of these factors we know they cut $16 billion in costs since the law took effect. >> i think we are going to have to close this now because we have come to the end of our time. thank you very much for opening up this issue to us and we hope that congress is listening. [ applause ]

with congress out this week for spring recess we are featuring americanfx#b history tv in primetime. up next historian kenneth bowling recounts the story of how washington, d.c. became the capital of the united states. his lecture examines how the location was chosen and the figures that shaped creation including story of the plan presented to president george washington in 1791. this session from the smithsonian associates and historical society of washington, d.c. is about an hour. i don't have any visuals and i can claim that that is because i don't know how to do it but the truth is i never know what i'm going to say and