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188 IRET Congressional Advisory 1 (2005)

handle is hein.taxfoundation/iretcgadv0185 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. June 20, 2005 Advisory No. 188 RATE-CAP REGULATION WILL NOT DELIVER REAL POSTAL SERVICE REFORM Executive Summary At present, the Postal Service must seek prior approval from an independent federal regulator, the Postal Rate Commission (PRC), before changing the prices of its products. Two bills before Congress, H.R. 22 and S. 662, would loosen rate regulation. In markets the Postal Service dominates, the bills would give the agency much more rate-setting discretion, provided it does not raise prices faster than inflation. In competitive markets, the Service could set virtually any prices it wants, provided rates at least cover products' costs, as measured by the Service. The bills' fundamental assumption is that rate-cap regulation would motivate the agency to operate more efficiently. Rate-cap regulation, however, is poorly designed for a government-owned enterprise like the Postal Service. Government enterprises lack the market discipline provided by private owner/investors (residual claimants), who are eager to improve efficiency in order to increase profits. The Service's main financial problem is high and rising costs. The bills would do little to help the Service better manage its costs - except for shifting billions of dollars of pension costs from the Postal Service to the Treasury, which would not lower the government's overall costs whatsoever. The Service indirectly acknowledges that costs are its biggest problem when it warns that rising costs may not permit it to stay within a rate cap and demands a legislative escape clause. Looser rate regulation would increase the danger that the Postal Service will impose excessive rate hikes on products within its monopoly power. On numerous occasions, the PRC has had to scale back excessive rate-hike requests, especially on first-class mail. Relaxed rate regulation is also a threat to transparency and accountability. If price flexibility were the secret to financial health, most airlines would be booming, as would Amtrak. In reality, price flexibility does little good when costs are high. H.R. 22 and S. 662 approach Postal Service reform from the wrong direction. Careful rate regulation is desirable at a giant government-owned enterprise that possesses a huge core market sheltered by a statutory monopoly.

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