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The United States Postal Service

Surprise! They have Annual Reports and file 10-Ks and 10-Qs with the United States SEC
1. Summary
With or without the looming US Presidential election, just about 60 days away, and with a budget hawk (or honk, ok wonk!) as the challenging VP candidate, only a heartbeat away from the US Presidency (if Romney wins the election), it is important that we understand how government services indeed work so that intelligent choices can be made without being swayed by partisan ideologies. So, here we will consider the United States Postal Service (USPS) and analyze its profits-revenues data, treating it finances like we would the finances of a company like Apple, or Microsoft (both discussed in detail in other articles available on this website). The classical breakeven model for profitability of a company is used as the starting point for this analysis. This breakeven model implies that the graph of profits P versus revenues R will be a straight line, P = hR + c = hR a, with the intercept c = - a being equal to the negative of the fixed costs and with a slope h which is determined the unit variable costs and the unit price (the postal rate). This simple analysis provides an estimate of the fixed cost, estimated at $21.7 billion. This is the minimum revenue that must be generated, whether or not mail is delivered profitably. Further analysis of the costs-revenues and profits-revenues data is also presented taking into account the data (readily available) for the period 1998-2011. Perhaps, such an analysis can become the starting point of a serious, nonpartisan, discussion about how to control costs and the budget deficits, going beyond the often repeated conservative ideologies of corporate tax cuts (0% tax rate in the ideal case, lets push that limit first and then slowly scale upwards from there) and deregulation of all business activity. Lets see what the USPS teaches us. Cut COSTS is the clear message here.
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2. Introduction
After all the recent talk about, Medicare cuts, Social Security cuts, entitlement cuts, NO defense (military spending) cuts, overall budget cuts, and yet, we must have tax cuts with soaring budget deficits (no longer billions, now into trillions each year) and the national debt ($16 trillion and rising), I got wondering about how we could ever, if ever, resolve all these problems. Then, it dawned on me that we could take a good look at how the United States Postal Service (USPS) has been handling its finances. It is one of the oldest arms of the US government and predates even the US declaration of independence. The first US Post Office, in Philadelphia (a service conceived by none other than Benjamin Franklin), opened in 1775. It is (or was) the only post office without the US flag. Quite surprisingly, the financial data for the USPS is readily available. The USPS even files annual and quarterly 10-Q and 10-K reports with the United States Securities and Exchange Commission and produces Annual Reports like any other public corporation. So, lets look at the following data taken from the annual reports and the 10-K filings and some other sources (e.g., Kosar) cited in the reference list given at the end of this article.

Table 1: Financial data for the United States Postal Service

Mail volume, Revenues, x Profits, y billions of pieces $, billions $, billions 167.9 65.711 -5.067 2011 170.9 67.052 -8.505 2010 176.7 68.090 -3.794 2009 202.7 74.932 -2.806 2008 212.2 74.778 -5.142 2007 Source: Data for 2011 to 2009 from the 2011 Annual Report, and 2008 and 2007 from the 2008 Annual Report; see links and Year

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Let us treat the USPS as a business. After all, government must be run like any efficient business. This is one of the most basic tenets of fiscal conservatism, almost a mantra, in the highest and glorifying sense of the Sanskrit word mantra which is adopted into English. Just like any good corporation, we would expect the USPS to follow the universal law that governs the operation of any company, or financial entity. This is given below as equation 1. Profits = Revenues Costs (1)

Consider now the simple case of a company making or selling N units of a product. In the case of the USPS this N could represent the N pieces of mail, data for which are available. The total costs of producing and selling the N units equals the sum of the fixed cost a and the variable cost bN where b is the unit variable cost. Thus, C = a + bN. The total revenues generated R = pN where p is the unit price (this could be taken as the postal rate in the case of the USPS). Hence, the profits P = R C is given by P = pN (a + bN) = (p b)N a. Since, N = R/p, we can eliminate N. Thus, P = hR a where h = (p b)/p. Thus, the classical breakeven analysis implies a simple linear relationship between the profits P and the revenues R. This can be rewritten as follows with x denoting revenues and y the profits. P = hR a = y = hx + c = h(x x0) Slope h = (p b)/p = 1 (b/p) depends on b and p Intercept c = - a (2) (3) (4)

The breakeven analysis implies that the graph of revenues x versus profits (or losses) y will be a straight line with a slope h = 1 (b/p) which depends on the unit variable cost b and the unit price p. The intercept c made by this straight line on the y-axis equals the fixed cost a. The higher the unit variable cost b, the lower the profits. The higher the unit price p, the higher the profits (since slope h will increase). The analysis also indicates that profits will appear only if revenues exceed the minimum value of x0 = - c/h = ap/(p b) which reflects the complex
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interaction of all the three constants (a, b, p) in the breakeven model. Profits will appears if and only if the revenues x > x0. Also, when x > x0, not all the revenues are converted into profits, because of the variable costs. Only a portion of the revenue pN, the amount (p b)N, will appear as profits because of the variable costs. Thus, the slope h = 1 (b/p) determines the rate at which a company is able to convert its revenues into profits. The lower the unit variable cost and the higher the unit price that its product can command, the higher will be the profits y. Once revenues exceed the cut-off value of x = x0, an increase in revenues will mean an increase in profits, at the fixed rate h = y/x where x is the increase in revenues and y the corresponding increase in profits.

3. Analysis of the USPS profits-revenues data

With this background, if we now consider only the data for 2007 to 2011, the pattern is very clear. The higher the mail volume (the units N), the higher is the revenues and the lower the losses (or negative profits). Lets see now if a drop in the mail volume, due to competing mail services available to the customer, is entirely responsible for the losses reported since 2007. A graph of the revenues versus profits, see Figure 1, shows a nice upward trend with the 2010 data being the exception. The same data is also plotted in Figure 2, as Costs versus Revenues, with costs C = R P being deduced from the x and y values listed in Table 1. Let us consider the profits-revenues graph first. Profits increase, or alternatively losses decrease, with increasing revenues following the simple linear relation y = hx + c = h(x x0) = 0.245x 21.18 = 0.245 (x 86.38). The 2010 data is clearly an exception with losses being higher than for 2011, when the revenues were slightly lower than for 2010. The line segment joining the 2008 and 2011, corresponding to the highest change in revenues, x = -$9.221 billion, with corresponding change in profits y = -$2.262 billion, yields the slope h = y/x = - 2.261/(-9.221) = 0.245.

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The costs-revenues plot, Figure 2, does not reveal this discrepancy in the costs for 2010 vis--vis the rest of the data. Hence, the rest of the scatter here can be taken to be simply a fluctuation around the general trend represented by this straight line. Extrapolating, this implies that revenues must exceed the minimum level of x0 = -c/h = $86.38 billion before the USPS can report a profit. The positive intercept made by the straight line on the x-axis is the breakeven, or cut-off, revenue. For a successful company, like Microsoft, or Apple, the profits and revenues graph is again a straight line (with positive y), with a positive intercept x0 on the revenues axis, click on the hyperlinks provided to see the profits-revenues graphs.

Annual Profits, y [$, billions]


0 -2 -4 -6 -8 -10 20 40 60 80 100 120

y = 0.245x 21.2 = 0.245 (x - 86.4)

Annual Revenues, x [$, billions]

Figure 1: The profits-revenues data for the USPS for the five years, 2007-2011. Losses were reported each year, with losses increasing as revenues decreased. We must now check the data for earlier years to see if this breakeven model can be validated. The data has been compiled in Table 2. The data, which has been separated intentionally from Table 1, reveals that the USPS was able to report a

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profit, even with significantly lower mail volumes. More importantly, the revenues were also much lower. Hence, it is clear that: The losses reported, starting with the fiscal year 2007, cannot be attributed entirely to the decrease in the mail volume and the concomitant reduction in the revenues. Merely increasing postal rates, to compensate for the reduction in revenues, will not make the USPS any more profitable than it was in the years before 2007 when profits were being reported.

Table 2: Financial data for the United States Postal Service

Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 Mail volume, billions of pieces 167.934 170.860 176.744 202.703 (207.463) 202.822 202.185 206.106 211.743 213.1 Revenues, x $, billions 60.072 62.726 64.540 65.834 66.463 68.529 68.996 69.907 72.650 Profits, y $, billions 0.550 0.363 -0.199 -1.608 -0.676 3.868 3.065 1.445 0.900

Source: Various annual reports and also from the SEC filings. Notice that profits were reported with significantly lower revenues. Also revenues were lower with higher mail volumes (due to the lower postal rates). The two values for the mail volumes for 2001 were from different reports.

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Annual Costs, C = (x y) [$, billions]

100 90 80 70 60 50 40 30 20 10 0 0 20 40 60 80 100 120

Fixed costs, C = C0 = $21.7 billion Related to a in breakeven model

Annual Revenues, x [$, billions]

Figure 2: The USPS costs-revenues graph for the period 2007-2011 with costs being deduced from the profits and revenues listed in Table 1. Something besides just reduced mail volumes is at work and needs more careful investigation. The costs-revenues graph in Figure 2, suggests that even if revenues go to zero (the mail volume N = 0), i.e., no mail is delivered by the USPS, the costs will be nonzero. Unlike the profits-revenues equation in Figure 1, where only two data points were considered, the equation C = (x y) = 0.762x + 21.72, relating the costs and the revenues, was deduced using linear regression analysis. The regression coefficient r2 = 0.761 is quite high indicating a strong positive correlation between the two variables (as is to be expected). Brief comment on fixed cost estimate: (This italicized section can be skipped!) Notice the huge difference in the estimated values of the fixed costs, $21.72 billion versus $86.4 billion. This is due to the fact that only two points (2008 and 2011) were considered in Figure 1 whereas all the five points were included in the linear
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regression analysis of Figure 2. If we consider the same two data points, the change in costs C = -6.96 billion and the change in revenues x = -9.221, giving a slope hC = C/x = -6.96/(-9.221) = 0.755 = 1 h = 1 0.245. Theoretically, the slope of the costs-revenues graph hC = 1 h. Hence, on the costs-revenues graph, the line segment joining 2008 and 2011 data points has the equation C = 0.755x + 77.74. If costs are extrapolated down to zero revenues (set x = 0 in this equation), the estimated fixed cost equals $77.74 billion, which is more in line with the estimate of $86.4 billion obtained from Figure 1. This calculation shows that the discrepancy in the fixed costs is entirely due to the fact that the linear regression slope hC = 0.761 considers all the five data points instead of just two data points. This explains the small difference in the slopes (0.761 versus 0.755). The difference in the estimated value of the fixed costs is huge. This reflects the difference between the statistical approach, where all give data points are considered, and the simpler approach of choosing just two data points, based on the criterion of the highest revenues separation. Indeed, it can be shown that only the 2008 and 2011 data points can be connected in this manner with a line segment with a positive slope h < 1. Other (x, y) pairs yield either a negative slope or a slope h > 1 and were therefore rejected as being unreasonable. We now continue with our discussion. The nonzero cost when revenues x go to zero is due to the fixed costs associated with the operation. Based on the current cost structure, the intercept C = C0 = $21.7 billion. This fixed cost (related to constant a in the breakeven model) represents the minimum revenues that must be exceeded before the USPS can report a profit. (or we must accept the higher figure of about $80 billion!) A more interesting conclusion is revealed if we all the profits-revenues data in Tables 1 and 2 into converted into costs-revenues data to prepare a combined plot for all of the fourteen years from 1998 to 2011. This is indicated in Figure 3. The linear regression equation C = 1.051 2.18. The slope hC = 1.05 > 1 and this line practically passes through the origin. Although the fixed costs seem to have
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disappeared in this scenario it, nonetheless, shows that costs are increasing faster than revenues since hC > 1.

Annual Costs, C = (x y) [$, billions]







40 40 50 60 70 80 90 100

Annual Revenues, x [$, billions]

Figure 3: The USPS costs-revenues graph for the period 1998-2011. The best-fit line through the data (obtained using linear regression analysis) has the equation C = 1.05x 2.18. This straight line has a slope hC > 1 which means that the increase in costs C > x, the increase in the revenues, on a statistical basis.

Reason for the difference in the slope hC of the costs-revenues graph in Figures 2 and 3. (This italicized section can also be skipped.) The best-fit line always passes through the point (xm, ym) where xm and ym are the average (or mean, hence subscript m) values of x and y in the data set. This average value depends on the number of data points and in the case of profits (which can be positive or negative) also on the actual numerical values. This is a property of the best-fit line and is used to determine the intercept c made by the
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best-fit line on the y-axis. Thus, intercept c = ym - hCxm where the slope hC is determined using the statistical formula first derived by the mathematician Legendre in 1805 (see discussion of this point here, in the article on the new GM, and also here, in the article on Googles financial data). The slope hC for the best-fit line is determined as follows. As just noted, the best-fit line passes through (xm, ym). It can therefore pivot about this point in any direction. Some points will lie above the best-fit line and some points will lie below it. The vertical deviation (y yb) of any point from the best-fit line is therefore either positive or negative. The sum of all such deviations (y yb), by definition, will be equal to zero, just as the sum of all the deviations from the mean values of any data set (x xm) = 0 and (y ym) = 0. The square of the deviation (y yb)2 is, however, always positive and therefore the sum (y yb)2 is a positive quantity. The slope of the best-fit line is determined by minimizing the sum of the squares (see formula given in the Google article). Hence, the linear regression line, or the best-fit line, is also called the least squares line. This explains why the slope has changed from hC = 0.755 < 1 to hC = 1.05 > 1 when 14 instead of just 5 data points were considered. The intercept c correspondingly changed from a positive value to a low negative value. For 2007-2011, (xm, ym) = (67.15, 65.45) and for 1990-2011 it changes to (xm, ym) = (67.88, 69.13). Notice that the average cost has increased when more data points were included since losses were also reported in earlier years, although not as high as in more recent years. The average revenues increased only slightly.

4. Discussion
There can be no doubt that government spending is out of control. Every reasonable person, even the most diehard liberal, will accept that. How can one keep spending more and more, year after year? More than income, that is! If expenses exceed income, then one is clearly in debt and spending is possible if and only if credit is extended by some bank or some generous individual. Even this plastic money cannot last very long. Soon or later, the day of reckoning will arrive. Likewise, governments expenditures cannot exceed the governments
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revenues. There are consequences, even if it appears that the GOVERNMENT CAN GET AWAY WITH SUCH DEFICIT SPENDING. Profits (or losses) = Revenues Costs Savings (or debt) = Income Expenses Surplus (or deficit) = Govt Revenues Govt Expenditures ..(A) ..(B) ..(C)

All the three simple equations are different ways of stating the same fundamental reality that applies to corporations (equation A), to individuals (equation B) and to the government (equation C). We must pay attention to this reality. The permanent loss in the value of the dollar, in international markets, is one of the most important consequences of this continued deficit spending and soaring national debt. The increase in the cost of all imports (that we must buy from abroad since they are NOT MANUFACTRED IN THE USA) is another consequence. On the other hand, if the dollar is weakened, the cost of goods that are exported (that other countries will buy, IF THEY ARE MANUFACTURED IN THE USA) will become more favorable. The loss in the value of the dollar will also be felt in the rise in the prices of goods that are sold in the domestic market, everything from food, to clothing, to the price of gasoline and the price of cars and homes. Every election, politicians like to think, is a turning point in the history of the country. They say that and make promises that are not kept, or cannot be kept, to get into office and then do whatever they wish to do. The 2008 election is a case in point. It was indeed a turning point, given the election of a new President amidst a total financial meltdown, the scale of which was unprecedented. It was also a turning point in electing the first black President, or more correctly, the first not fully white President (Obamas mother is white, as is well known). It was expected to herald a new post-racial era. Instead, the country seems to be divided bitterly, with a lot of racial undertones. Thus, much was expected and much was promised as the country entered a real crisis mode immediately following the election with the unemployment figures jumping to a new high months following the election and then more slowly during 2009 (see further discussion of this point here.)
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In the next 60 days or so, the US will have a new President-elect. Jobs, lots of jobs that is what Mitt Romney, the Republican nominee, has promised. That is a great message given the total lack of focus on something so fundamentally simple and important under President Obama and the huge spike in the unemployment rates in the first full year of his term. The total number of unemployed is the highest it has ever been (although the rate matches the two previously recorded highs in the number of unemployed in 1941 and 1981-82, see discussion of this point here). If everyone who wants a job can get a job, a well-paying job, all the problems that we face will disappear overnight. This obsession, yes that is how it feels, with the national debt and the budget deficits, will disappear too! Why? The financial mechanism of budget deficits permits the government, and only the government, to live beyond its means. Elaborate schemes are developed, such as selling US government bonds, to make it appear as if the US Treasury is living within its means. Interest payments are due on these bonds. This is where the real deficit appears, or where the rubber meets the road, as they say. If all the interest payments are made and there is no defaulting on the interest payments, one can continue forever. It would be like making the minimum payments on your credit card accounts and finding ten other offers from banks to pile up even more debt. At some point, just these monthly minimum payments will exceed the monthly income. Then the game is over. The US is almost there! Nonetheless, only the government and only the government is allowed to exercise this right of deficit spending endlessly. The power that we have granted the government in this matter is unprecedented. It is one that no one has. It is like a mans word, his word of honor. A honorable man is only as good as his word. And, so it is that a honorable man will be able to get credit (from his friends, or family), in his time of need. The power that we have bestowed upon our government, via this budget deficit
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mechanism is essentially the same. It is OUR WORD of HONOR that all of us, together, as citizen have bestowed upon our government. We keep hearing that taxes are too high and that somehow magically cutting corporate taxes will solve all our problems that corporations will magically turn into job creating machines once we cut taxes. If you are a liberal and do not believe this, just listen to the latest from the Australian heiress, Gina Reinhart (yes, she inherited her riches!) admonishing the poor to work harder and decrying everything from high taxes to governments overregulation of businesses (such as mining in Reinharts case). A few large corporations, like General Motors for example, and even some small companies with good credit, can continue to operate with decreasing profits, or increasing losses, for a few years. The situation with General Motors, and the conditions that led to its bankruptcy in 2009 have been discussed in two recent articles, available at this website (click here and here), see also links given below. 1., Published August, 25, 2012. 2., Published August 22, 2012. The Republican nominees running mate, Paul Ryan, is known to be a budget hawk who is hell bent on seeing an end to every form of social spending. Will the majority in the government succumb to (t)his obsession with balancing the budget? Or, will everyone take a hard look at the consequences of piling on increasing amounts of national debt? (As explained here very briefly, I am NOT an economist, and neither are Romney and Ryan, or Obama, so I guess it is all fair and square to offer this opinion, at least.) I remember even newly minted 2011 economics Nobel laureates, who dedicated their lives to sorting out cause and effect from the economy and policy (click here), did not want to get into a discussion of what is the best course of action for the country in order to reduce the national debt. The choices are essentially political, they said. We know what should be done. What will be
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done? That is all politics and nothing to do with economic theory (see also here). The pendulum today seems to have swung too far to favor businesses at the expense of the greater good for society as a whole. Alas, who will champion this? Let us also remember what Einstein, whom we all admire, had to say about the most efficient means of production, which results in reduced levels of employment, since a more efficient company must necessarily also employ fewer workers. Courtesy: If two factories produce the same sort of goods, other things being equal, that factory will be able to produce them more cheaply which employs fewer workmeni.e., makes the individual worker work as long and as hard as human nature permits. From this it follows inevitably that, with methods of production as they are today, only a portion of the available labor can be used. While unreasonable demands are made on this portion, the remainder is automatically excluded from the process of production. This leads to a fall in sales and profits. Businesses go smash, which further increases unemployment and diminishes confidence in industrial concerns, and therewith public participation in the mediating banks; finally the banks become insolvent through the sudden withdrawal of accounts and the wheels of industry therewith come to a complete standstill. (Albert Einstein, 1934, click here) What Einstein is saying here, is that the very nature of technology is to minimize the need for labor (only a portion of available labor can be used), and where labor is employed, to exploit it to the fullest (make worker work long and hard as long as human nature permits). Does this make Einstein a socialist? NO.
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Great thinkers like Einstein (and Gandhi) wanted to maximize the use of, and the benefits to be derived from, human capital. Alas, this lesson now seems to be lost. And so it is that I have made here a humble attempt to discuss the finances of one of the most visible agencies of the US government. Why did the USPS start reporting losses beginning 2007? Indeed, there is a lot of discussion about this as well. I have provided a few references in the appendix here. What is obvious from the analysis here is that losses are NOT entirely due to reduced mail volumes. The USPS did report a profit, when revenues were lower (due to lower postal rates but the mail volumes were higher). It is the cost of operation that needs to be controlled. Indeed, every single branch of the US government, including the US military, must enter into a program of reducing its costs, year after year, for the next ten years, with no increase in its budget. COST cuts, not BUDGET cuts! It is simply a matter of political will to impose this on our government. There is too much waste in government but eliminating government itself cannot be the focus, at least until the US regains its outlook for long term prosperity with greatly reduced unemployment levels. Finally, the prescription of the 1980s, will not work in 2012. Both parties, regardless of who is elected in November 2012, must recognize this. We do not have a revenue problem, we have a spending problem, President Reagan said, to justify tax cuts (which, as the simple minded thinking goes, implies reduced government revenues). To paraphrase Reagan today,

We do NOT have a spending problem. We HAVE a revenue problem. People need jobs, so that they can a) Support their families, and
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b) Pay their taxes to support essential services, like the USPS.

This is the stark reality as we head to the polling booths in about 60 days to elect a new President. At the very least, this is one mans opinion and I have taken the time to explain myself and express it here and share it by posting this document in a public forum. The choices are essentially political. What we need is a vision like the one projected by President Kennedy - that put a man on the moon! Bold programs in the areas of energy, education, public transportation, infrastructure, the environment and public health that will do it, in the first 100 days after the inauguration of the new President. We have already waited for almost 4 years!

Some References on Analysis of the USPS financial data

1. The US Postal Services Financial Condition, Overview and Issues for Congress, January 19, 2010, by Kevin Kosar 2. The US Postal Services Financial Condition, Overview and Issues for Congress, January 26, 2012, by Kevin Kosar. 3. The Manufactured Financial Crisis of the US Postal Service, by Ralph Nader, September 21, 2011. 4. Cost structure of the US Postal Service, July 20, 2011.

Some related articles by the author available at this website.

5. by V. Laxmanan, first published on June 17, 2011, and republished Sep 1, 2012.

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6. by V. Laxmanan, first published on June 23, 2011, before the debt default crisis which led to lowering of the US rating, republished Sep 1, 2012. 7. by V. Laxmanan, first published on October 13, 2011, republished Sep 1, 2012. 8. by V. Laxmanan, first published on July 3, 2011, republished Sep 1, 2012.

About the author V. Laxmanan, Sc. D.

Email: The author obtained his Bachelors degree (B. E.) in Mechanical Engineering from the University of Poona and his Masters degree (M. E.), also in Mechanical Engineering, from the Indian Institute of Science, Bangalore, followed by a Masters (S. M.) and Doctoral (Sc. D.) degrees in Materials Engineering from the Massachusetts Institute of Technology, Cambridge, MA, USA. He then spent his entire professional career at leading US research institutions (MIT, Allied Chemical Corporate R & D, now part of Honeywell, NASA, Case Western Reserve University (CWRU), and General Motors Research and Development Center in Warren, MI). He holds four patents in materials processing, has co-authored two books and published several scientific papers in leading peer-reviewed international journals. His expertise includes developing simple mathematical models to explain the behavior of complex systems. While at NASA and CWRU, he was responsible for developing material processing experiments to be performed aboard the space shuttle and developed a simple mathematical model to explain the growth Christmas-tree, or snowflake, like structures (called dendrites) widely observed in many types of liquid-to-solid phase transformations (e.g., freezing of all commercial metals and alloys, freezing of water, and, yes, production of snowflakes!). This led to a simple model to explain the growth of dendritic structures in both the ground-based experiments and in the space shuttle experiments.
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More recently, he has been interested in the analysis of the large volumes of data from financial and economic systems and has developed what may be called the Quantum Business Model (QBM). This extends (to financial and economic systems) the mathematical arguments used by Max Planck to develop quantum physics using the analogy Energy = Money, i.e., energy in physics is like money in economics. Einstein applied Plancks ideas to describe the photoelectric effect (by treating light as being composed of particles called photons, each with the fixed quantum of energy conceived by Planck). The mathematical law deduced by Planck, referred to here as the generalized power-exponential law, might actually have many applications far beyond blackbody radiation studies where it was first conceived. Einsteins photoelectric law is a simple linear law, as we see here, and was deduced from Plancks non-linear law for describing blackbody radiation. It appears that financial and economic systems can be modeled using a similar approach. Finance, business, economics and management sciences now essentially seem to operate like astronomy and physics before the advent of Kepler and Newton.

Cover page of AirTran 2000 Annual

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