• by Erik Sass  @eriksass1, September 9, 2011

As lawmakers in Washington, D.C. battle over fiscal policy, one of the nation's largest and oldest public corporations, the United States Postal Service, is rapidly approaching financial collapse, according to Postmaster General Patrick R. Donahoe. He warned Congress the USPS could default on its pension obligations as early as Sept. 30, followed by a total shutdown (resulting in interruption of mail delivery) as early as July 2012.  

While many external trends have been blamed for the postal service's financial woes, including the rise of email and various forms of digital communication, the single most important factor is probably its reliance on growing volumes of "junk mail" to subsidize regular mail delivery.

That reliance makes it unlikely that the USPS will be able to stabilize its finances (and therefore operations) at anything close to its recent levels.

There is no question that the USPS faces disruptive competition from email and various social network messaging systems. From virtually nothing some 20 years ago, the volume of emails sent per day, globally, surged to 294 billion in 2010, according to the Radicati Group, reaching an incredible 107.3 trillion for the year. Americans are responsible for a disproportionate share of this activity.

In March 2010, the CTIA Wireless Association estimated that Americans were sending about 5 billion text messages per day via mobile devices.

There has been a steep decline in the number of pieces of mail delivered by the U.S. Postal Service, from a peak of 213 billion in 2006 to just 166 billion in 2010 -- a 20% drop in four years, which is still accelerating, resulting in a projected $10 billion shortfall this year.

But the rise of email is not necessarily the only -- or even main -- culprit behind the decline of USPS volumes. After all, USPS mail volumes continued to rise into the second half of the last decade, when email was already firmly established -- and the declines began when email volumes were actually stabilizing, not when they were still going up. This may be partly explained by the simple time lag between the two trends, but clearly something else is at work behind the USPS woes.

The real problem goes back much further, to the 1970s and 1980s, when the postal service embarked on what appeared to be a thoughtful strategy to contain postal costs passed along to the consumer by delivering more and more "third class" (later, "standard") mail -- more commonly known as "junk" mail.

The idea was to use these profits to subsidize the less lucrative core business of first class mail -- i.e., mail actually sent by ordinary consumers. Although Americans complain about seemingly endless rate hikes for first class mail, the USPS has actually been able to contain costs fairly effectively with this approach, in inflation-adjusted terms: the cost of a first class postage stamp has remained stable at between $0.40 and $0.45, in 2008 dollars, since 1980.

There were some drawbacks to the "junk mail subsidy" strategy, of course -- the most obvious being the massive increase in the amount of "junk" mail delivered to American households, often against their wishes. Thus, the total volume of "junk" mail delivered every year surged from 20.4 billion pieces in 1970 to 35 billion in 1980, 63.7 billion in 1990, 90.1 billion in 2000, and an incredible 103.5 billion in 2007.

In proportional terms, "junk" mail has soared from 24% of all mail delivered in 1970 to 49% in 2007. Looking at annual figures over time, the trend is unmistakable. Almost every time that first-class mail volumes have dipped, third-class mail volumes have increased -- until recently, that is.

Indeed, the "junk mail subsidy" has turned out to be something of a deal with the devil. On one hand, it allowed Americans to become accustomed to relatively low postal rates for their first-class mail (when adjusted for inflation) without ever really understanding the economic factors that allowed the USPS to keep prices down.

On the other hand, it filled their mailboxes with marketing materials that are often unwanted, annoying consumers and making them less sympathetic to the postal service, which many Americans now view as bloated and irrelevant -- except, of course, when they need its services.

This view has chipped away at political support for the USPS, which is further eroded by concern about the perceived ecological impact of "junk" mail -- despite the fact that a large proportion is now made from recycled paper -- making it almost impossible for the USPS to push through rate increases on first class mail and periodicals.

The coup de grace came with the decision of many marketers to cut their direct mailings sharply during the recession, in response to tighter marketing budgets and plunging consumer confidence. From 2007-2010, the volume of standard or "junk" mail delivered by the USPS plunged from 103.5 billion to 78.9 billion, knocking out one of the main financial pillars supporting the whole system.

With first-class mail under siege by digital channels, and junk mail volume collapsing due to the recession, there is now almost no way for the USPS to maintain existing levels of service, even with rate hikes and steep cost reductions through layoffs and benefit cuts -- presuming Congress approves such measures.