Advances in Regulatory Economics series
Edited by Michael A. Crew and Paul R. Kleindorfer
Chapter 22: The United States Postal Service Business Model: Lessons from the American Railroad Industry?
* David M. Levy† and Matthew D. Field‡ 1 INTRODUCTION The financial distress of the United States Postal Service (USPS) is well known, but its woes are not unprecedented. They bear a striking resemblance to the circumstances of the American railroad industry in the 1970s. The regulatory reforms adopted in the 1970s and 1980s, and the dramatic comeback of the railroads since then, may offer useful lessons for postal policy today. In the early 1970s, several major American railroads, including the Penn Central, were in bankruptcy, and many others teetered on the brink. Decades of underinvestment and deferred maintenance had hobbled the industry’s ability to compete with trucks and other modes of transportation. By 1978, railroads carried only 35 percent of intercity freight traffic, less than half the share 50 years earlier. Passenger service obligations generated losses equal to nearly half the industry’s net earnings. Overall, the average return on railroad investment was barely 1 percent. One-third of the largest carriers had negative returns. Almost no carrier, large or small, was earning enough to cover its cost of capital. The railroad industry seemed helpless to pull out of this downward spiral. Legal obstacles and political opposition blocked efforts to abandon unprofitable branch lines, especially in lower-density rural areas, and discontinue money-losing passenger services. A unionized workforce had the political clout to block layoffs and major changes in work rules. Heavy-handed regulation sharply limited the railroads’ ability to price flexibly or offer innovative services. The situation today is quite different. Legislation passed...
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