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279 IRET Congressional Advisory 1 (2011)

handle is hein.taxfoundation/iretcgadv0276 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. September 22, 2011 Advisory No. 279 THE POSTAL SERVICE'S FINANCIAL PLIGHT AND THE U.S. CREDIT DOWNGRADE Executive Summary On August 5, Standard & Poor's downgraded the U.S. government's credit rating. On the same day, the U.S. Postal Service added to the financial gloom by reporting another dismal quarter and warning that it will default on a $5.5 billion payment to the federal government on September 30. Since then the Service has continued to talk of default, escalated its projected loss for fiscal year 2011, and predicted that within a year it will have insufficient cash to fully pay workers and contractors. In addition to both situations being alarming, the federal government's overall finances and the condition of the government-owned mail service bear many similarities. They both involve federal government operations, are characterized by unsustainably large deficits, have been worsened by the recession and anemic recovery, and would have been almost unimaginable just a few years ago. Another similarity is that they are worse than otherwise because of Congress's behavior, specifically, its reluctance in the past to rein in federal spending or allow the Postal Service more flexibility in reducing operating costs. Important differences also exist. The Postal Service's finances are terrible, but those of the overall federal government are much worse. The federal government's funding sources are taxes and virtually unlimited borrowing, while the Postal Service primarily relies on receipts from product sales and up to $15 billion of borrowed money. Because the Service cannot continuously accumulate red ink, it has responded more promptly and intelligently to financial problems than the overall federal government, although neither has done enough. The shorter leash also explains why the Postal Service's financial problems, although not as horrendous as those of the overall federal government, are more immediate. Another difference is that while the Postal Service's troubles are economically worrisome, the consequences would be seismic if serious doubts arise about whether the United States can meet its debt obligations. The comparison shows the value of a moderately short financial leash. It brings near-term pain but provides important budget discipline. There is controversy about whether the bill to raise the federal debt ceiling was the proper tool for shortening the government's financial leash, but the greater fiscal restraint resulting from the accord reduces the odds that the United States will suffer further credit downgrades in the future. The federal government's gaping deficit hole, which is the core reason for the S&P downgrade, reduces its ability to provide monetary assistance to the Postal Service. A better approach would be for Congress to allow the Service greater operational flexibility to lower costs in ways that would bring large savings relative to the inconvenience for mail users.

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