Wednesday, September 14, 2011

The Post Office, Privatization, and Path Dependence

By Mike Dorf

In my latest Verdict column, I explore the causes of the recent financial woes of the US Post Office and what ought to be done about the problem.  Among the possibilities I consider is privatization, which, as I explain, is more or less what the current Postmaster General seeks.  Here I want to expand the topic a bit and note how our views about what ought to be accomplished privately and what ought to be accomplished publicly rest on a mix of reasonable policy justification and acceptance of the familiar.

To begin, I need to set aside extreme views, not because they're necessarily wrong (although I happen to think they're wrong) but because they do not lead to interesting puzzles.  At one extreme lies a  Marxist view that favors state ownership of the means of production so as to prevent capitalists from exploiting workers.  At the other extreme lies the libertarian watchman state.  Under this view, the answer to the question whether the state or the private sector should have responsibility for some function is presumptively the private sector, accompanied by a very narrow view of what counts as the sort of "public good" that only government can provide--typically just national defense and mechanisms (such as police and courts) for punishing private force or fraud.

Most people in modern democracies reject both the fully collectivized state and the watchman state.  They reject the Marxist idea that the means of production should be state-owned, either because they hold Lockean views about property and dessert or (as in my case), because they accept the historical evidence that radical collectivization has been a disaster.  They reject the watchman state because they worry much more about negative externalities (like pollution) than libertarians do and because they have a broader notion of public goods.

So where do we end up?  It's tempting to think that we can rationalize everything under a schema in which public goods are provided by the government, natural monopolies are subject to rate regulation, and firms competing to provide private goods are subject to regulation aimed at curbing negative externalities and practices deemed abusive.  And to some extent, that's true.   But some of the lines we draw seem driven as much by tradition and intuition as by anything else.

The Post Office is a good example.  As I note in my column, the Post Office competes with private delivery firms like UPS and FedEx.  Meanwhile, other means of communication have migrated among the categories.  AT&T was once a national monopoly, based on the theory that it was a natural monopoly.  The company's breakup led to a competitive market, so that now when (the company that's now called) AT&T attempts to acquire T-Mobile, regulators worry about consolidation.

Or consider the quintessential public good, even for watchman-staters: national defense.  Over the past decade of war, the U.S. armed forces have become increasingly dependent on private contractors to perform not only back-office jobs but actual fighting.  Likewise, a wave of privatization beginning in the 1980s has resulted in the incarceration of thousands of Americans in private prisons.  Many people (including me) worry that fighting wars and detaining criminals are inherently governmental functions.  Partly this is a concern about accountability, but at some level it may simply be a matter of expectation.  Private bounty hunters may be considered no less shady than mercenaries, but the former are well established, so we simply accept them.

Likewise, with respect to property, there is a mixture of rationality and custom.  We are very much accustomed to private land.  Bodies of water can be private but are usually public.  Nobody owns the air.  These divisions make prima facie sense because land is fixed, water moves, albeit in relatively fixed channels, and air moves without constraint.  But now think about intellectual property.  Millions of people who would never shoplift think nothing of pirating software, and not just because they think it unlikely that they will get caught.  Why?  Because a downloadable computer program or mp3 file doesn't "feel" like property to them in the way that a CD does.

Were I interested in cashing out this line of thought as a policy recommendation, I would conclude by inquiring whether the law, in making decisions about what should be relegated to the domain of private ownership, should take account of people's path-dependent attachments to particular forms, even when, viewed in strictly economic terms, those attachments don't make sense.  Because I'm not making any policy recommendations, though, I'll just end by raising that as a possibility.


Joe said...

I think the U.S. post office still has value (e.g., one person noted in this discussion that private vendors often find it not profitable to deliver items door to door, using the post office for that final step) though it very well might make sense to reduce their reach and alter their business plan to some degree.

I don't think we are quite to the -- to cite the interesting article which you can listen to if desired -- letters of marque and reprisal territory just yet.

Doug said...

Subsidies can be in the form of reduced returns on capital, not outright losses. Also, the postal services in most countries have monopolies on cheap deliveries (natural monopolies and legal generally - with laws prohibiting mail services charging less than 2-3x postage for letters) along with legal notices.

The other option is to relax the flat-pricing model. If you live in Wasallia Alaska you pay more, NYC doesn't subsidize you anymore.

Joe said...

As to flat pricing, putting aside first class mail generally, the distance the package travel seems to matter in some cases. I'm not sure exactly how, but it was noted to me by the clerk that it does.

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