Even Cutting 28,000 Jobs will not help the USPS Compete against the Internet

Posted by PITHOCRATES - May 27th, 2012

Week in Review

The United States Postal Service (USPS) hates the Internet.  Before the Internet they had a monopoly in the letter industry.  If you wanted to send Granny a letter you had to go through them.  There’s only one problem with a monopoly.  Because they have a captive audience they don’t have to innovate.  They don’t have to improve anything.  Just make a lot of money.  And give your employees generous wage and benefit packages.  Just like the railroads did.  Before trucks came around, that is.  The trucking industry nearly destroyed the railroad industry.  But the railroads learned how to compete.  They helped redefine the transportation industry that now includes trains, ships and trucks.  The railroads are back.  Stronger than ever.  And making money.  But is it too late for the USPS?

The Internet is the USPS’ trucking industry.  It has all but destroyed the snail mail industry.  To survive the USPS has to do what the railroads did.  Reinvent itself.  Reinvent the industry they participate in.  If they can.  And they better hurry.  Because their monopoly is gone.  Not from other people entering the snail mail business.  But by new technology that created a better alternative to the snail mail business.  The Internet.  And it’s tap-dancing all over the USPS (see U.S. Postal Service offers buyouts to 45,000 workers by Emily Stephenson posted 5/25/2012 on Reuters).

The mail agency, which lost $3.2 billion in the first three months of 2012, plans to begin this summer moving mail-processing activities away from smaller sites to reduce annual costs.

As part of that plan, the Postal Service will offer $15,000 in two installments to full-time mail handlers who take early retirement or leave the agency, USPS spokesman Mark Saunders said on Friday…

The Postal Service has been hit hard by tumbling mail volumes as more Americans communicate online and by massive payments for future retiree health benefits…

The agency needs to reduce its workforce by 150,000 people by 2015, Saunders said. Consolidating and closing processing facilities, which will continue through 2014, could eliminate up to 28,000 jobs and save $2.1 billion a year, the Postal Service has said.

Saunders said he could not speculate how many mail handlers would take buyouts this year, but added that the change “will not affect mail service.”

It’s not enough.  If you annualize that $3.2 billion quarterly loss that comes to a $12.8 billion loss for the year (4 X $3.2 billion).  Cutting only $2.1 billion per year will not solve their problems.  They’ll still have an operating deficit of approximately $9.6 billion.  And if the Internet doesn’t go out of business in the foreseeable future these numbers are only going to get worse.

It’s pretty interesting that a company can cut 28,000 jobs without affecting its business operations.  Why, it’s almost as if they never shrunk their labor force all these years that their business has shrunk.  It’s as if 28,000 people have just been sitting around waiting for the work to pick up again.  While collecting a paycheck.  And while the USPS pours billions into a pension plan for their future retirement.  Hmm.  I wonder if this could have anything to do with that $3.2 billion quarterly loss. 

The clock is ticking.  While the USPS is still struggling to compete with email texting is giving email a run for its money.  And it just may be that the USPS is not as nimble as the railroad industry in pulling up its tracks and laying them on the road to profitability.

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The Chinese Scale Back their Ambitious High-Speed Rail Plans because their Keynesian Polices Unleashed Inflation

Posted by PITHOCRATES - October 30th, 2011

Week in Review

Railroads are expensive to build.  And to operate.  Especially high-speed railroads.  Why?  Because unlike airplanes that fly in the air between cities trains have to travel on track between cities.  And that’s a whole lot of railroad infrastructure.  That’s why railroads don’t suffer as much during times of escalating fuel costs as trucking and aviation.  Because fuel isn’t their greatest cost.  As it is for trucks and planes.  It’s that massive infrastructure that they have to build.  And maintain.

To build a railroad you need lots of money.  And lots of labor.  Preferably cheap labor.  And that usually means government money.  And immigrant labor.  That’s how they built the first transcontinental railroad in America.  Along with a lot of inefficiencies.  And corruption.  Typical when you put government and big piles of money together.

That first transcontinental railroad needed a lot of ‘fixing up’ before it was safe for use.  They had to move some track from ice to terra firma.  Rebuild some bridges that weren’t disposable after a few uses.  That kind of thing.  Because that’s the kind of craftsmanship you get when government is in charge of the money.  What we call crony capitalism.  Government rewarding their friends.  Picking winners and losers.  And helping those who will help them.  That is, return the favor of government contracts with campaign contributions.

Governments all around the world are in favor of building more high-speed rail.  Because it will ‘put people to work’.  And ‘save the planet’.  By moving people out of gasoline-powered cars into electricity-powered trains.  Electricity that is generated from even more polluting coal-fired power plants.

The Americans have been trying.  Obama’s stimulus included billions for high-speed rail.  That did nothing.  Meanwhile the Chinese have been doing it.  By making money for the banks to lend.  And using cheap ‘second-class’ migrant labor from China’s countryside to build their high-speed rail.  And how has that been working?  Not so good (see Can’t pay, won’t pay posted 10/29/2011 on The Economist).

EFFORTS to curb inflation in China are having some painful side-effects. A squeeze on bank lending has prompted some businesses short of cash to stop paying wages to blue-collar workers. Even the much-vaunted state sector is feeling the pinch. Work has all but ground to a halt on thousands of kilometres of railway track, and many of the network’s 6m construction workers have been complaining about not being paid for weeks or sometimes months…

The government touted building railways as a great way to keep the economy buoyant during global financial trouble, and boost employment. But the $600 billion stimulus launched in 2008 is all but spent. Indeed, the central government has urged state banks to cut back on lending in order to curb inflation, which in the year to July reached a three-year high of 6.5%, before dropping to 6.1% in September.

Yet another example of why Keynesian economic stimulus stimulates only economic bubbles and inflation.  Which are always corrected by recessions.  And the greater the stimulus/bubble the greater the recession.  Of course Keynesian government economists everywhere will all come to the same conclusion.  That China isn’t spending enough.  And that governments everywhere should follow the Chinese example.  But without the one flaw of turning off the easy credit spigot.  Because Keynesians always say that any inflation created by government stimulus is minor and negligible in comparison to all the good that it does.

Similar problems have also been reported in road building and property construction, prompting a growing number of demonstrations and violent incidents, including clashes with employers and suicides. Such difficulties are likely to get worse towards the end of the year, when companies traditionally try to settle accounts with employees. Wage inflation is adding to employers’ woes. Minimum wages have risen by an average of nearly 22% in the two-thirds of China’s provinces which have adjusted them this year. Nice if you can get it, but not much use if you are not being paid at all.

But the Keynesians couldn’t be more wrong.  Once inflation starts it ripples through the economy.  Costs go up.  Wages go up.  Increasing consumer prices everywhere.  There’ll be some economic prosperity for a little while.  But soon inflation will eat away at the standard of living.  People will be making more money everywhere.  But that money will buy less and less.  It will buy less of a house.  Fewer toys.  And even less food.  This is the endgame of Keynesian stimulus.  And we’re seeing it played out on a grand scale in China.  Like we saw in Japan during their Lost Decade.  Where the Japanese suffered a deflationary spiral that just never ended.  To correct all that damage caused by their Keynesian bubble.

This could prove to have a devastating effect on the American economy.  For the Americans will have no one left to finance their debt.  And yet President Obama, the Democrats and all those mainstream Keynesian economists are all clamoring for one thing.  Can you guess what that is?  That’s right.  More Keynesian stimulus.

Some people just never learn.

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LESSONS LEARNED #63: “There is no such thing as a monopoly in free market capitalism.” -Old Pithy

Posted by PITHOCRATES - April 28th, 2011

Even the mighty Coke-Pepsi Duopoly can’t stop People from Drinking Tap Water

Coke and Pepsi have a near monopoly in the cola market.  Or a duopoly.  They dominate.  And they’re bitter enemies.  Few brands are locked in such a bitter struggle that we call it war.  The Cola Wars.  They are archenemies.  Even though they may cooperate by alternating their discounting to limit their losses.  One month Coke may be on sale.  The following month, Pepsi.  They’re big and their powerful and when you ask for a Coke at a restaurant you’ll either get a Coke.  Or they’ll ask you if Pepsi is okay.  Or vice versa.  Because they own the market.

But do they?  There’s always another choice.  At a restaurant, we can order ice tea.  Hot tea.  Coffee.  Orange drink.  Beer.  Wine.  A cocktail.  Or even water.  Ditto at the grocery store.  Walk down an aisle and there’s more to choose than Coke or Pepsi.  RC Cola, for one.  And then there’s the un-cola (7-Up).  VernorsA&W Root BeerSquirtDr. PepperCrushSnapple.  And other name brands that aren’t owned by the Dr. Pepper Snapple Group.  Not to mention all the store brands.  And, of course, tap water.  Which I personally drink with most of my meals.  Even though there’s nothing finer than a Coke or Pepsi to wash down a greasy pizza.

Try as they might Coke and Pepsi can’t limit entry into the beverage market.  The barriers they can erect are minimal.  They can offer a special price to a store or restaurant in exchange for keeping out their hated rival, but they can’t prevent people from asking for tap water.  Or from people simply going elsewhere to get the Coke or Pepsi product they want.  Or the million other options out there.  And if they raise their prices in their ‘duopoly’, people will just seek out those other options.  Yes, they may be able to tell the difference between Coke and Pepsi in blind taste tests.  But if the price isn’t right, they’ll enjoy RC Cola just fine.  Or even the store brand cola.

Go ahead and Tax our Tea.  We’ll just drink Coffee Instead.

You see, to keep out the competition, you need the power of government.  Just ask the sugar importers.  Who would love to sell to the cola companies.  But don’t.  Because government has erected a barrier to that market.  Now, we don’t know what their highly guarded secret recipes are, but we do know that they each use the same sweetener.  High fructose corn syrup (HFCS).  They don’t use sugar.  Why?  Because Big Ag lobbied Congress to slap high tariffs on imported sugar.  Which they have.  Now the price of sugar is so high the cola companies use HFCS instead.  Though that may be changing as of late with a new round of health concerns about HFSC.  But that’s a whole other story.

To limit consumer choice, you need government to step in.  Because only government can write laws to erect market barriers.  For example, the last straw of British oppression before America’s Declaration of Independence was about a British law that erected a market barrier.  British Americans, being of British stock, liked their tea.  But they didn’t like paying the high price of East Indian Company tea.  In the Mercantile economics of the day, everything bought and sold in the British Empire shipped on British ships through British ports.  Indian opium shipped on British ships to China (via Calcutta).  The British than used the proceeds from those sales to purchase tea.  Which they shipped on British ships back to London.  Where they paid a duty on it.  And then on to America.  Where the colonists paid a tax on it.  All these markups made their tea pretty expensive.

Famine and recession caused financial problems for the East India Company.  To help alleviate their problems, British Parliament stepped in.  Said they could ship their tea directly to British North America (without going through London).  And sell it tax-free in the colonies.  Which made all other tea more expensive.  Which did not go over well with the American tea merchants.  Or the colonists in general.  This led to the Boston Tea Party.  American Independence.  And the switch from drinking tea to drinking coffee in America.  Because even when there is only one tea that is legal to drink, there is always another choice.

Rockefeller benefited Consumers.  The ICC did not.

People love Teddy Roosevelt for his trust busting.  Attacking the big robber barons.  To help the little guy.  And one of the big guys the little guys loved to hate was John D. Rockefeller.  Of Standard Oil fame.  Rockefeller was richer than most nations.  And some people just hated that.  He made his wealth by making refined oil products affordable to the consumer.  And he was a great environmentalist.  He saved the whales by replacing whale oil with kerosene.  And his relentless research and development made every bit of refined oil into a useful product.  While his competitors dumped most of their waste back into the environment.  Not Rockefeller.  He hated waste.  He even experimented in finding the least number of welds it would take to hold an oil barrel together.  He invented vertical integration (controlling industries up and down the product pipeline from the collection of raw resources to the sale of a finished product).  He not only made refined oil products cheap.  He made them plentiful.  Which made America the world’s leading economic power.  Successful corporations follow his example today.

Sure, he put a lot of his competitors out of business.  But it wasn’t because he was a monopoly.  It was because he was just that much better.  He produced refined products better and cheaper than his competition.  By the time the trust busters busted up Standard Oil, competition was coming into being on the Standard Oil model.  Which ultimately produced more refined products at lower costs.  He forced the competition to step up to his level which benefited consumers.  While the trust busters tried to bring Rockefeller down to his competitor’s level which benefited his competitors.  Not the consumers.  No, consumers did very well by John D. Rockefeller.  He created and produced at a relentless rate.  He didn’t ask for government help.  Unlike his competitors.  Who complained to the government.  (It is never a consumer that complains about predatory pricing).  Because when you can’t compete legitimately, you petition government for special favors.  Much like some of the railroads did.

Building a railroad is costly.  And takes a lot of friends in government.  At all levels.  Because you have to lay track through federal land, state land, county land as well as through cities.  Of course, everyone wanted that track to go through their land because the railroad was the way to ship goods.  And people.  So the system was ripe for corruption.  And it often was.  Once built some shippers complained about unfair shipping rates compare to what others got.  Rockefeller, for example, was highly criticized for getting better rates by far than any of his competitors.  Of course, he shipped by far more product than any of his competitors.  Which probably had a lot to do with his rates.  But the government saw that things were unfair in the railroad business.  So they stepped in.  And created the Interstate Commerce Commission (ICC).  Which was to right all the wrongs.  Which, of course, it didn’t.  It just made it easier for the big companies to fix things in their favor.  For they now had a single governing body to buy.  Which made it easier to buy political influence.

But none of this made a difference to save the railroads.  They started to die in the Fifties.  Of arrogance.  When people asked the big railroad executives what business they were in, they replied, “The railroad business.”  But they weren’t.  They were in the transportation business.  What’s the difference?  The ‘railroad’ business had only other railroads for competition.  The transportation business had cars, trucks and, eventually, planes, as competition.  So even though those who used the power of government to restrict other railroads from entering their markets, there was still competition.  The interstate highways and the automobile killed passenger rail.  And the trucking industry almost killed the freight railroads.  What saved them was realigning their operations into the transportation business.  Intermodal transportation combined container ships, railroads and trucks into a seamless and cost efficient transportation system.  Roadrailers took that concept to a higher level.  These are truck trailers that can be pulled by a locomotive without the need of a rail flatcar.  Trucks deliver these trailers to a rail yard.  They add a train bogey to the trailer.  Put it on the track.  Couple them together.  And attach them to a single locomotive.  Very little non-revenue weight.  Making it very efficient.  John D. Rockefeller would be impressed.

In a Free Market there is always a Choice

Wherever there is a market there is competition.  For any market where a profit can be made will attract others to that market.  Companies can try to restrict competitors.  But that’s all they can do.  Try.  Because if it’s a free market, it’s open to competition.  There are no barriers that a competitor can’t overcome.  Except one legislated by government.  And competitors can even crack that barrier.

And this is what it takes to make a monopoly.  Government.  Railroads had monopolies for awhile.  But creative business people found a way to crack their government-imposed monopoly.  Truckers came in and shipped at rates lower than the ICC said was fair.  Of course, fair is a relative term.  What’s fair to the railroad is not fair to the shipper.  Or the consumer.  But a trucker shipping at rate that he can cover his expenses and support his family is fair to everyone.  Except the railroad who depended on government instead of innovation for their business profits.

Coke and Pepsi can fight their cola wars but they can’t keep out competition.  There’s always root beer, ginger ale, orange drink, beer, wine, liquor, water, coffee or tea.  And even when government uses their full weight and power to create and maintain a tea monopoly, tea drinkers can simply become coffee drinkers.  For in a free market there is always a choice.  Always.

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The Obama Administration Proposes an Ambitious and Costly High-Speed Rail Plan

Posted by PITHOCRATES - February 9th, 2011

Nowadays Passenger Trains Yield the Right-of-Way to Freight Trains

I remember traveling by train with my family some 20-30 years ago.  My mom loved train travel.  She lived in the golden age of rail.  Has lots of fond memories.  But these are different times.  Even 20-30 years ago.  I remember on that trip we came to a stop on a siding.  Sat there for about a half hour.  Maybe 45 minutes.  I was starting to think there was a problem with the train.  Then a freight rumbled by on the main line.  After it passed, we started moving again.

Now if you understand railroading, you know how significant this is.  Back in the golden age, before planes and the interstate highway system, it would have been the other way around.  Passenger trains got the priority because they made more money.  Back then, freight trains pulled onto sidings.  But today, though heavily subsidized, passenger trains don’t make money.  Freight trains do.  They can pay for themselves.  And make a profit.  Therefore, passenger trains take to the sidings to get out of the way of profitable freight trains.

Freight trains make money because they can move a lot of freight cheaper and faster than other means of transportation.  Passenger trains, on the other hand, are neither the fastest nor the cheapest.  Planes are faster.  Cars are cheaper.  And this is why most passenger rail, including high-speed rail, don’t make money.  Even with huge government subsidies.  Not the same for planes or cars.  One way or another, we pay our own way with these faster and cheaper alternatives.

A Public Works Project that doesn’t End

Despite this, the Obama administration is proposing to spend billions on high-speed rail.  And it’s an ambitious plan (see GOP critic calls Joe Biden’s $53 billion high-speed rail plan ‘insanity’ by Daniel B. Wood posted 2/8/2011 on Yahoo! News).

According to the plan laid out Tuesday by Biden, the first step of the six-year plan would be to invest $8 billion to develop or improve three types of interconnected corridors:

Core express corridors would form the backbone of the national high-speed rail system, with electrified trains traveling on dedicated tracks at speeds of 125 to 250 m.p.h or higher.

Regional corridors would lay the foundation for future high-speed service, with trains traveling between 90 to 125 m.p.h.

Emerging corridors would provide travelers with access to the larger national high-speed network and travel at as much as 90 m.p.h.

During times when oil prices soar, air and truck transportation costs soar.  But not rail transportation.  Why?  Because the massive rail infrastructure costs are greater than their fuel costs.  Unlike with planes and trucks.  Trains have to buy land (or right-of-ways).  Grade the land.  Build tunnels.  Bridges.  Lay track.  Switches.  Install communication systems to control those switches.  And more.  And they have to do this everywhere a train will travel. 

Planes fly between airports.  And trucks drive on roads paid for by fuel taxes.  They don’t have the infrastructure costs railroads do.  So volatile fuel costs impact them far greater than they do the railroads.  So the plan Biden laid out won’t be cheap.  It will be very, very expensive.  And take a long time to build.  It will be a public works project that doesn’t end.

But building high-speed rail is no easy process, says Leslie McCarthy, a high-speed rail expert at Villanova University’s College of Engineering. “Whether or not a bill would or should pass is the easiest part of all this,” she says. “The bigger part of the question is purchasing the land, getting right of ways, zoning issues, environmental impact assessments, laying dedicated tracks in a reasonable amount of time.”

She says the typical US highway project can be held up anywhere from three to five years at the low end to 12 to 20 years at the high end. “Legislators and the public aren’t aware of the number of federal, state, and local laws that agencies have to comply with that can’t be gotten around,” she adds.

The plan will employ a lot of people to build these railroads.  And they will have jobs for a long time.  But it will cost us a fortune in taxes.  Will the investment pay off?  When completed, will these railroads make money? 

In fact, the very thing that makes the Northeast so attractive for high-speed rail – its population density – could also make it the most difficult place to build. “There is so much population in the Northeast corridor that I don’t know if there is even enough room for the dedicated tracks needed for high-speed rail,” says Professor McCarthy. “And if the distances you are going are not sufficient to make efficient use of the high speeds, what’s the point..?”

Critics agree. Only two rail corridors in the world – France’s Paris to Lyon line and Japan’s Tokyo to Osaka line – cover their costs, says Ken Button, director of the Center for Transportation Policy at George Mason University in Fairfax, Va.

“Both of these are the perfect distance for high-speed rail, connect cities over flat terrain with huge populations that have great public transportation to get riders to the railway,” he says, dismissing French claims that other lines make money. He says they calculate costs in ways which ignore capital costs.

Well, with only two high-speed rail lines actually paying for themselves, I guess the answer is ‘no’.  The proposed high-speed rail project will just be a sinkhole for tax money. 

High-Speed Rail:  Huge Expense with Little Benefit

All right.  So the proposed high-speed rail will never pay for itself.  And it will become a permanent sinkhole for our tax dollars.  But it will at least get cars off the road, right?  Reduce our carbon footprint?  Make the earth a greener place?  Or at least take us to our destinations faster?  Probably not (see Obama’s High-Speed Sale by Ernest Istook posted 2/8/2011 on Heritage’s The Foundry).

The “high speed” adjective invokes thoughts of bullet trains speeding at 150 mph, 200 mph or more.  The reality of Obama’s plan is—at best—the 85 mph that is the average speed of America’s fastest train, the Amtrak-run Acela.

When Obama claims his trains would reach 100 mph and more, he’s talking about peak speed reached only for short stretches, not the average.

I’ve actually traveled on Amtrak.  Not the Acela.  But we did reach speeds in excess of 60 miles an hour.  For a short period of time.  In the middle of farm country.  In a metropolitan city, for about 20 minutes or so, we crawled.  The track was so bad that speed limits were reduced.  To prevent further trains from derailing. 

City to city high-speed travel in excess of 150 mph will require new, dedicated track between point A and point B.  Until you have that you’ll never ‘average’ anything close to those high speeds.  And that will require a grand, bold and expensive plan of railroad building.  The question is, knowing that such a railroad will never pay for itself and may never move people faster (unless you build terminals outside of cities where you’ll be able to build these dedicated lines and bus people to and from these terminals), will we at least save the planet?

An exhaustive Department of Energy analysis by Oak Ridge National Laboratory concludes, “intercity auto trips tend to be relatively efficient highway trips with higher-than-average vehicle occupancy rates — on average, they are as energy-efficient as rail intercity trips. Additionally, if passenger rail competes for modal share by moving to high speed service, its energy efficiency should be reduced somewhat12 — making overall energy savings even more problematic.”

The lack of energy or pollution savings leaves us with the key problem:  Huge expense with little benefit.

So we spend a fortune for what?  Surely there must be a better way.

Rail travelers don’t pay their own way as drivers must do.  Obama’s plan would increase the rail subsidies, which already are heavily subsidized with tax money–often by hundreds of dollars a trip for each passenger–whereas the U.S. Department of Transportation reports that drivers receive no subsidy:  Drivers buy the roads through fuel taxes, and also must pay for their own car, gas, insurance and repairs.

Well, there appears to be a better way.  Cars.  And we already have them.  So wouldn’t it be cheaper and more efficient to stick with what we already have and works?

Big Infrastructure brings in Big Federal Money

Yeah, well, that’s not how politics work.  Politicians run for reelection based on how much money they’ve brought home to their districts.  And big infrastructure brings home big federal money (see High Speed Funding in President’s Budget Means More Waste of Taxpayer Dollars by Kathryn Nix posted 2/9/2011 on Heritage’s The Foundry).

Heritage’s Ronald Utt writes that a high-speed rail program would create “perpetual massive government subsidies and larger budget deficits” and “additional burdens imposed on hard-pressed state governments, which will be required to match the perpetual federal subsidies to build the system.”

And bringing home federal money to their districts will be the only benefit of high-speed rail.

Despite its cost, high-speed rail will be ineffective at achieving its goals, if Europe’s experiences are any indicator. High-speed rail is expected to reduce auto and air travel, but in Europe, the trend is actually the opposite: Despite huge government subsidies, travelers are opting more and more to take non-subsidized and less expensive forms of travel.

Per capita spending on rail alone in six European countries was comparable to the United States’ entire transportation budget, yet, says Utt, “these countries received a poor return on their money given that more than 90 percent of passengers in these countries chose other travel modes—mostly auto—despite the subsidies.” Moreover, Utt cites the U.S. Department of Transportation’s Inspector General’s finding that reducing travel time between major East Coast cities by 30 minutes would cost $14 billion but only reduce auto transportation by less than 1 percent.

Can you say boondoggle?

Passenger Rail cannot Subsist without Taxpayer Subsidies

High-speed rail will never pay for itself, it will require perpetual government subsidies, it will not reduce our energy consumption or reduce our carbon footprint.  All it will do is increase deficit spending at the federal and state levels. 

There’s a reason why government subsidizes passenger rail service in the United States.  Because the railroad companies know there is no money in it.  They can make money moving freight.  But not people.  So they move freight.  And let people fly or drive their cars when they want to travel.  Or let the government pay for those passenger trains the way only government can.  With our tax dollars.

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