College of Natural Resources, UC Berkeley

The extension of capital gains treatment to timber was a policy move favorable to timber management. There have been few forest policy moves that have had such a favorable impact, unless we want to consider the rejections by the Congress of proposals for government regulation of private forest practices, At least in the case of industry lands, those decisions by the Congress have proved to be wise ones.

Not all forest-policy decisions are favorable to industrial forest management, of course. There are now numerous proposals to regulate timber management practices through Federal and state laws in the name of improved water quality. It is difficult to see how these regulations can do anything but raise the costs of timber management. While the public may expect to receive some benefits from these regulations on private practices, it must also expect to pay the costs which will result from a diminished supply of timber products, other factors remaining constant.

This matter of costs is too frequently misunderstood by too many people, including forestry students. They have the idea that the timber grower or the wood products manufacturer can pass the costs of environmental regulations, property taxes, or higher timber prices on to the consumer of wood products in the form of higher prices. But if you haven't forgotten what you learned in Economics 1 about the structure of industries, you will remember that some industries are price makers and others are price takers. The price makers are able to add up their costs, attach a profit margin and tell the market the price they will accept. Few firms and price leadership, such as we see in the automobile industry, help us to identify price-making industries. As we have seen in the case of automobiles, pollution control and safety equipment costs have not been absorbed by the manufacturer. They have been added to the price.

The price takers, however, are too competitive to allow such cost pass-throughs. No firm in a competitive industry is big enough to exert price leadership. Their prices, in the short run, are determined largely by the strength of demand. When a producer's costs rise he is unable to pass them on to the buyer, unless for other reasons the demand for the product happens to be rising. If demand is falling and prices are falling, the producer will find himself in a cost-price squeeze which may force him out of business. The wreckage of sawmills around the country stands as evidence that this has been the case in the past in the lumber industry. The closure of numerous mills today, at a time when the market is extremely poor, is evidence that the lessons of the competitive model in your Econ. 1 textbook still apply.

Similarly, this principle of cost absorption by the producer in a competitive industry applies to timber growing, since most timber is sold on an auction basis and the buyer is limited in what he can pay for it by what the market is willing to pay for the products manufactured from it. Of all the principles of economics discussed in this S. J. Hall series, this one is of basic importance.

Of course, the consumer eventually suffers the higher cost that might be incurred by the competitive producer. But it is the price increase that results from a reduced total supply, not one that he is forced to accept from the producer.

Not all companies handle their forest lands as well as those that advertise achievements on television and in magazines. Some companies, usually the smaller ones with less available capital, do virtually nothing but harvest the natural timber growth and make few, if any, provisions for reproduction. Such companies are probably poorly financed, living on a hand-to-mouth level, and most likely unaware of or unable to take advantage of the opportunities for income from timber management. Many of them are "peckerwood" mills with little remaining undepreciated capital investment in plant and equipment that need protection from the risks in the timber market. Such protection is needed much more by the company with millions of dollars invested in buildings and machinery. Large investments require the insurance of a constant supply of raw materials that company-owned timberlands can provide.


OTHER PRIVATE LANDS A "PROBLEM"

This relationship between the size of a forest property and the excellence of the management it receives has been noted also in many studies of nonindustrial private forest ownerships. This ownership group is a very heterogeneous one. It includes farmers, school teachers, and forestry professors in the smaller forest size classes and railroads and coal companies at the other end of the scale owning the larger forest properties. The smaller forests may be owned only incidentally as part of a farm or as a vacation home site. The income opportunities from such small forests are not great, even if their owners were able to afford to practice intensive forestry on them. The facts of the matter are, however, that these forest properties in the smaller sizes tend to be owned by people in the lower income categories and with less than average number of years of formal education. Their knowledge of management and their abilities to make the long-term investments characteristic of forestry are probably limited. Nevertheless, because these properties are so numerous and in total make up such a large share of the nation's commercial forest area, they have the potential of offering a great contribution to the supply of timber needed by timber product manufacturers. Failure to receive the level of timber management foresters would like to see on these lands has been called a problem. I am sure that these properties are not regarded as a problem by their owners. In fact, I am sure that on many of these small forest properties it would be difficult to prove that the low technical level of forest management being applied is not the optimal one, considering the owners' economic situations. Better technical management of the smaller private forest properties may depend more on the improvement of the owners' incomes than on any other factor.

The size of the average nonindustrial private forest is about sixty acres. Their total area is 296 million acres, 59 percent of the nation's commercial forest area. The larger ownerships in this class generally receive a higher level of technical forest management because a larger property is more likely to be a significant part of the owner's total assets and he will thus be more likely to look to it for its income-producing possibilities. The unit costs of practicing forestry are also less with larger forest properties than with smaller ones.

In considering the so-called small forest problem, we foresters often tend to overlook the objectives of the owner. On many of these properties the owners have decided not to allow timber harvesting. As citizens of a free, democratic society, we must respect these decisions because we have made the same decisions on publicly owned forest lands. Eleven percent of the 153 million acres of forest land of commercial capability owned by the Federal, state, and local governments has been set aside by law or regulation from timber production. While a private forest owner may have made a no-harvest decision for his property, unlike the decisions made for public forests, the no-harvest policy can be changed by the next owner or even by the same owner if someone offers him a good price for his timber at a time when he could use the cash. The timber on such "reserved" properties cannot be considered as permanently lost from the supply. However, the additional wood that might have resulted from the application of sound timber management practices is permanently lost.

Some foresters regard lack of markets as a reason why some owners of small forests do not practice better forestry. Granted, there are some areas of the country where markets are less developed than in others. But I reject lack of markets as a reason to be given much consideration because it begs the question of why a property should be growing more timber in the first place. And certainly that reason is not one easily lending itself to change by any policy action. However, there are a number of other reasons that lend themselves to policy action. These were listed by the Trees For People Task Force.¹ The Task Force called these problems barriers to improved management of private woodlands. They are:

1. The attitude of owners and the public toward timber management,
   
   
2. Lack of technical forestry knowledge,
   
   
3. Risk, including that from fire, insects, disease, animals, storm, and trespass,
   
   
4. Small scale diseconomies,
   
   
5. Lack of manpower and equipment,
   
   
6. Lack of investment capital, and
   
   
7. Excessive taxes.
   

Each of these barriers to improved management of the nonindustrial private forest is already the focus of programs or efforts to overcome them. There are too many such undertakings to mention here, Suffice it to say that these programs are being carried out by the forest industry, the Forest Service, Extension Foresters, State Foresters, the Soil Conservation Districts, and many other organizations. Most such programs are thought to be underfunded, at least by the people who work with them. This is difficult to prove. The programs have existed for years but the problem of the small private forest ownerships is still with us. The short ownership tenure of the small private forest properties, averaging about 12-15 years, presents a continuing problem for program administrators in working with owners.

Within the past 10 years there has been a rapid increase in cooperation between the forest industry and the federal and state agencies that administer programs for private forest management. This cooperation is a result of the Forest Service having abandoned its earlier attempts at public regulation of private forestry practices. The industry's cooperation has ranged from support for increased funding for the public programs before national and state legislatures to the use of industry equipment in tree planting and fire protection on state and private forest lands. Any new attempts to impose Federal regulations on private forest practices would likely destroy the working relationships that have been developed and set back any achievement of timber-growth objectives on private lands.

The purpose of the Trees For People Task Force was to conduct a broad overview of the small private-forest ownership situation, to identify any program gaps that might exist in the total effort to achieve better management, and to promote initiatives to close those gaps. I think it was successful in its efforts. Several pieces of Federal legislation were advanced by the Task Force and eventually became law, the most significant being the Forestry Incentives Program which was included as part of the Farm Bill of 1973. Under that program, the Federal government will share up to 75 percent of the cost of tree planting and timber stand improvement on nonindustrial private forest ownerships of less than 500 acres in size. In 1974, the first year of the program, 68.5 percent of the $9.2 million available for obligation under the program was allocated to the southern states. This allocation was based on a formula which considers not only the area of eligible ownerships, but also the site quality of an area's timber-producing land. In 1975, the amount of money available for the program will be $15 million. The Forestry Incentives Program is a significant departure from the usual pattern of farm programs because by focusing on the better sites it clearly aims at increasing production, rather than at redistributing tax funds to low-income farmers and landowners.

Some westerners are critical of any federal funds being spent to grow more timber on the nonindustrial private forest lands. They feel that the money would be better spent if invested on better site lands of the National Forests. The argument has some appeal if for no other reasons than the investment would not face the risk of liquidation with a change in ownership and could mature under the supervision of professional foresters. On the other hand, there are political realities to be considered when explaining why programs for private forestry exist. But a most compelling reason justifying a program like the Forestry Incentives Program is the cost effectiveness. In 1974, the average per acre planting cost to the government was $33 under the program out of a total cost of $44 per acre.² But the average planting cost on the National Forest was $149 per acre.³ The average total planting cost on the private ownerships, therefore, was less than one-third the average cost of planting on the National Forests. Nursery costs are not included in either figure.

There may be some valid reasons why planting costs on public lands are so much higher than on private lands. Maybe planting is much more difficult in the National Forests. Maybe there is more site preparation work to be done. Maybe there are some administrative costs that are included in the National Forest planting costs that are not shown in the average costs of planting under the Forestry Incentives Program. But it is very difficult to resolve a difference of more than $100 per acre. And no matter how well that difference may be explained, the fact that a government dollar can go a lot further toward getting the planting job done when spent on private land than when spent on public land is apparent. This should not be construed to mean that there should be no planting done on the National Forests. But it does show that a more careful selection of investment opportunities for the federal dollar is needed and that investing those dollars on private lands, where the federal dollar stimulates private investment, deserves serious consideration.


PUBLIC FORESTS THE KEY

"The annual harvest on lands available for commercial timber production on western national forests can be increased substantially. Analyses based upon nationwide forest inventory data indicate possibilities for increasing the old growth cutting rate in the range of 50 to 100 percent."⁶

Earlier it was said that the National Forests lack aggressive management. The Forest Service should not be particularly faulted for that because this trait is altogether too common among professional foresters. Too often foresters seem more preoccupied with rationing than with producing. This is suggested in the term "allowable" cut. Aggressive management would attempt to get the land producing wood as rapidly as possible. The even flow policy precluded this.

It is sometimes claimed that the even-flow policy conforms to the dictates of the Multiple Use-Sustained Yield Act of 1960. In the Act, however, sustained yield is defined as, "the achievement and maintenance in perpetuity of a high-level annual or regular periodic output of the various renewable resources of the National Forests without impairment of the productivity of the land." It would appear that maintaining undue volumes of old-growth timber not only impairs the productivity of the land - a resource, whether it is land, labor, or machine, is not productive when it is sitting idle - but by stretching its liquidation out over a long period, the achievement of high level output is delayed.

The timber regulation decisions for the National Forests are made from models or formulas that now consider only physical or biological factors. Consideration is not given to the costs of forestry operations, the cost of time as measured by interest, the cost of holding inventory, or the dollar returns to be gained at the time of harvest. Perhaps the failure to consider these economic factors arises from a fear that few forestry operations could pass the test of a rigorous economic analysis, a fear evident in the literature of European forestry in the mid-1800's and passed down through tradition to present timber regulation methods. However, the industry experience of using economic criteria to measure the efficiency of investments in forestry demonstrates that there need be no fear of applying economic analysis to the management of public timber. Indeed, economics is the study of allocating scarce resources, including financial resources, among competing uses. As resources become increasingly scarce, the tools of economics must be given greater application in forestry. Our society can no longer afford to subsidize hobby forestry on its public lands. With the development of the economic harvest optimization model, the ECHO model, by Dr. John Walker, the forester's economic tool kit has been made more complete.⁷ The ECHO model provides a means for determining an orderly schedule of timber harvesting from a large forest property, such as a National Forest, for the purpose of maximizing present net value of income. While maximizing dollar income to the government may not be the purpose of the National Forests, the exercise of calculating income potential should be carried out for the sake of knowing what is being foregone when income opportunities are compromised by other considerations.

The failure of the Forest Service to use the tools of economic analysis in its management of timber and other forest resources brought attack from Nobel Prize winning economist Paul Samuelson and other eminent economists at a symposium at the University of Washington in November, 1974. There is also an increasing interest in the way the public forest assets are being managed by the government Office of Management and Budget, the Council of Economic Advisors, the General Accounting Office, staffs of Congressional committees and others with an economic orientation. And yet, even under the requirements of the Humphrey-Rarick Act, which directs the Forest Service to present long-range management plans to the Congress by the end of 1975, there are no clear signs that the Forest Service intends to change its policies so as to be more responsive to the economic need for better resource management. Why not?


TAKING THE PINS OUT OF FOREST POLICY

When pondering this problem of the Forest Service's apparent resistance to change while I was organizing this presentation, a Peanuts comic strip appeared that seemed to summarize the situation. (Reading the comics is essential in the preparation of any lecture.)

In the first frame of the comic strip we see Lucy looking into a bureau drawer where she discovers a shirt still in its original wrappings. She carries the shirt in its box to Linus, who is sitting as usual on his cushion in front of the television set. In the tortuous dialogue that follows, each suggestion Lucy offers for unwrapping the shirt and putting it into use is countered by Linus' excuse that the shirt has pins in it or some other similar minor obstacle that would have to be overcome before it could be worn. The last frame shows Linus knocked to the floor with the shirt box bent over his head. He says, "It's also probably not even my size."⁸ Linus, of course, represents the Forest Service in the analogy here.

The point is that in the United States we know a lot more about growing timber than we are applying. And we can grow more timber in ways that are both economically and environmentally sound. To do so would require the adoption of new forest policies - policies which like Linus' shirt are waiting to be unwrapped.

If the policies needed to make better use of the productivity of our forest lands are both economically and environmentally sound, why aren't they being adopted? Three explanations may be suggested: bureaucratic inertia, a lack of knowledge, and fear of legal suits brought against the Forest Service by environmentalists. To draw another analogy, because of bureaucratic inertia the Forest Service is like a supertanker. It needs lots of ocean and time in order to make a major change in direction or come to a stop. The Forest Service likely has few people who understand the complexities of economic models or who have the sophistication needed to apply them. Many decisions, therefore, cannot be defended on an economically rational basis. But these are only explanations, not acceptable reasons for avoiding change. For, at the risk of straining the analogy, the supertanker can be stopped in less than a few miles if it rams something else. That something else is being constructed by the growing needs of our people for wood products and other forest benefits, and is welded together by a growing awareness on the part of thought leaders outside the Forest Service of the kind of poor economic decisions that are being made. Unless steps are taken to indoctrinate Forest Service decision makers on more economically sound forest policies, and to train them on how to make economic analyses of their timber and other resource management decisions, a collision and perhaps a sinking is sure to occur.

There are others outside the Forest Service, of course, who could benefit from similar indoctrination, including those in industry and in forestry schools. But since the Forest Service represents one of the most important pools of professional foresters in the country, and since its image with the public is generally good, the adoption of economically sound policies by the Forest Service is important to promoting better management on other public and private ownerships, and to do so with public understanding and support. That is to say, the cause of improving forest management on all ownerships in the United States would be advanced if the Forest Service would set a better example. If its present example has not proved sufficient, it may be because non-Federal landowners intuitively know it is not economically sound.


THE TASK AHEAD

Lack of knowledge, listed as one of the barriers to the adoption of improved management practices on private woodlands, can also be listed as a barrier to the adoption of policies for improved management on other ownerships. In addition to improving the level of understanding of Forest Service decision makers about economically sound timber management, we need to continue to work with key people in the Office of Management and Budget, the Administration's watchdog agency, the General Accounting Office, the Congressional watchdog agency on government programs, and other agencies that oversee and fund public timber-management programs for all forest lands.

There is also a great need to improve public understanding of the potential production increases from our nation's timberlands. This will be a big chore because although most, Americans recognize that trees grow and many understand that trees are a renewable resource, most of them still have a deep fear that someday we will run out of trees. This fear is probably rooted in the propaganda of the early years of the conservation movement 75 to 100 years ago. It is certainly not justified under the economic conditions prevailing today when protection and production of timber is economically sound.

If it seems the usual bows to environmentalists and environmental considerations made by many forestry speakers these days have been avoided in these remarks it is because such bows are unnecessary. With reasonable application of forestry practices, timber management and the production of other forest values are compatible over the range of what is likely to be practiced under sound economic criteria. This is true even with wilderness because the application of economic criteria will likely concentrate timber growing and harvesting on the more productive timber-growing sites and leave more areas for other uses, including wilderness.

Part of the educational task, therefore, is to gain a greater appreciation of economic principles in timber management and support for these principles among the broad-based conservation groups. And part of the task is to educate the more narrow interest preservationist groups to gain their support. The conservation groups need to appreciate the renewability aspect of timber when grown under economically sound policies and the environmental superiority of wood over other materials. The preservationists need to appreciate the greater opportunity for preservation when the application of sound economic policies takes the pressure of commodity production off many of the areas they covet.


CONCLUSION

Timber production may seem to have been overemphasized in this presentation. This is because it is the identified objective and because timber production is compatible with other forest benefits under the multiple-use principle. Conceding too easily to claims that timber production is antithetical to production of other forest values may seem an easy way of avoiding conflict. But it doesn't really produce more of anything. It only allows the conflict to continue because no one finds his needs satisfied. The adoption of policies that would require hard economic analyses to be made would provide a means of weighing choices and directing economic resources to their best use in the forest. Such policies have been proposed and would surety lead to greater production of timber. It's time to take them out of the drawer and remove their pins.