Creative Destruction?

One key aspect of capitalism is the concept of creative destruction, coined by Joseph Schumpeter. Old business models and ideas are constantly being replaced by new, more efficient ones. There will always be winners and losers in this process. Capitalistic governments must embrace this process because in the long-run the economic pie will grow if capital is invested productively. A recent article from the WSJ is a case where the US government is doing exactly the opposite of embracing this essential - and sometimes painful - process of capitalism. I call it "impractical stabilization" of an industry that needs to make some big structural changes.

The odds of a multibillion-dollar rescue package went way up this week when Postal Service management reported a $2.2 billion loss for the first quarter, more than 25% higher than last year despite the economic recovery. It now appears that the $15 billion line of credit the feds have offered USPS will be used up by the end of this year, with low odds on ever being paid back.

And more:

If this were a private business, the obvious response to these losses would be urgent cost-cutting to avoid insolvency. Instead, Postal Service management recently concluded negotiations offering the 205,000-member American Postal Workers Union a new four-and-a-half-year contract that will provide a 3.5% pay raise over three years, dole out automatic cost of living wage hikes after 2012, and expand no-layoff protections.

One of the major pitfalls of government is misallocating funds to projects that are unproductive, and USPS is a prime example. Email, online billing, and other essentially zero-cost modes of communication are making traditional mail become obsolete. The federal government is propping up broken model here. This is not the first time we have seen cases like this, nor will it be the last.

*HT The Pretense of Knowledge