Deficits, Compound Interest and the Forest Service

John B. Crowell, Jr

Tuesday, October 01, 1985

Deficits, Compund Interest and the Forest Service

John B. Crowell, Jr.

Before I address the topic I have assigned myself this evening, I want to express my appreciation to Professor Teeguarden - and to any others here tonight who may have shared the decision to invite me here - for the opportunity to give the 1985 S.J. Hall Lecture in Industrial Forestry.

I am the seventeenth in a line of persons so honored. Of my sixteen predecessors, I have known and worked on one thing or another with thirteen of them. For all thirteen I have a very high and fond regard. It goes further than that, however, because four of the thirteen are very close friends, and two of them - George A. Craig and William D. Hagenstein - were principal among my many mentors on forestry matters. (You discerned, no doubt, from the introduction, that I have not had the benefit of formal schooling in forestry; virtually all my knowledge on the subject was acquired in the school of vicarious experience.)

I have also long had a high regard for the forestry school here at Berkeley, personified as it has been for me through those full-time faculty members with whom I have had the pleasure of working from time to time - John Zivnuska, Henry Vaux, Dennis Teeguarden, and Bill McKillop. My regard for the school of forestry here at Berkeley - and I know you have a fancier name for it now - has also been enhanced by the school's many graduates with whom I have worked from time to time on matters of mutual concern over the last two decades. It is very nice for me to see some of them in the audience here tonight.

I can say to the students here that, from my experience with the people who are affiliated with or are products of this fine school, you have a high tradition of excellence and of proven performance to look up to as you take your places in the practice of the honorable profession of forestry.

Although, as I have said, I know personally most of my predecessors in this lectureship, I did not know the man whose name it bears. I wish I had, because Mr. Hall "...felt strongly that economic understanding is basic to effective forestry and to a strong nation," a sentiment I have come to share with considerable passion. Because I want to expose you tonight to some of that passion, what follows is likely to be rather heavy, unleavened by frivolity, partly because of time constraints, but mostly because we are dealing with "the dismal science".

Not that the science of economics is inherently more dismal than any other science. In fact, because it is a science principally affecting the conduct of human affairs, economics, for me at least, is a particularly fascinating study. It is dismal, I suspect, mostly because of the consequences which accrue when the precepts of economics are flouted or ignored by mankind, individually or collectively. The laws of economics seem to be every bit as much of the body of natural law to which the world we know is subject as are the laws of gravity, of motion, or of energy. One cannot flout economic laws or attempt to ignore them without incurring, sooner or later, a consequence which usually must be regarded as indeed dismal.

The Federal government for most of the last fifty years has been following a fiscal policy of incurring annual deficits which clearly is leading to some pretty dismal consequences. Not that incurring debt necessarily entails dismal consequences. On the contrary, it is unquestionable that incurring debt is often entirely salutary. No, the dismal consequences of debt appear if debt undertaken is never really repaid because it repeatedly is refinanced through further borrowing when it falls due, while at the same time, total debt is added to by additional new borrowings to cover gaps between spending and income. That, of course, is what the Federal government has been doing for fifty years.

The results of such a policy are that eventually total debt load becomes so large that, in succession, first, the costs of borrowing both for the Government and for everyone else, go up; second, annual interest payments on the total accrued Government debt require an increasingly disproportionate amount of annual income; and third, new societal projects which are either desirable or even absolutely necessary for public safety or well-being cannot be reasonably financed. This country has already incurred the first two of these dismal consequences and is now at the point of confronting the third.

Both of the first two consequences - higher interest rates and an ever larger proportion of national income to pay accrued interest - would have been more pronounced were it not for the fact in recent years that much of the imbalance of payments in our foreign trade has come back to this country for investment, both in Federal government debt issues and in private borrowings. Had that increase in the supply of capital available to both government and private borrowers in this country not occurred, interest rates would have been considerably higher and there would have been much more "crowding out" of private investment by government borrowing, with subsequent reduced economic activity and lower job creation by private sector investment than has been the case in the last five years.

On the other hand, it has been the total demand for borrowed capital - about half of which demand has emanated in recent years from the Federal government - which so far has prevented the adjustments usually resulting from a severe imbalance of payments in international trade such as this country has been experiencing. The usual consequence of an imbalance of payments is to cause the supply of the importing nation's currency - in the present case, U.S. currency - in foreign hands to be more than those foreign citizens want or can use. When such a surplus occurs, that currency is less valuable in relation to their own currencies. Other nations then begin to use the unbalanced currency to purchase goods of that country; those purchases in turn stimulate economic activity there and provide jobs. It is quite certain, therefore, that another present dismal consequence of our Federal debt has been a deferral of adjustment to our current imbalance of payments, with subsequent loss, for now, of the economic activity which will result from increased exports when adjustment occurs, as it ultimately must.

Contributing to the present strength of the U.S. dollar, along with the Federal government's seemingly insatiable demand for borrowed capital, is the enviable investment climate in this country. That climate is created by at least five factors. The first of these factors is the undoubted political stability enjoyed by the United States; the second factor is the amazing and historically unprecedented vitality of our free enterprise system; a third factor is our military defense structure which protects late twentieth-century America and its interests. A fourth reason for the current strength of the U.S. dollar is the still universally accepted belief that the United States government will not default on its indebtedness. The fifth factor is the evidence that the inflation which began in 1963 and culminated in the galloping inflation of 1979 and 1980 has been substantially controlled; there is a growing conviction among investors, both here and abroad, that the Federal Reserve Board, with support from the administration, is not intentionally going to inflate the currency as a cheap and dishonest way of easing Federal debt obligations. Absence of inflation is a prerequisite to the integrity of loaned capital, so that upon repayment that capital has essentially the same purchasing power it had when it was loaned. The fact that prime interest rates and rates for long-term Government securities currently are 5 to 6 percentage points higher than historic real interest rates is attributable to two things. First is that for the last two years inflation, though much reduced, is still at a 4 percent annual rate, and second is that there still are lingering doubts in the investment community about the U.S. government's permanent commitment to avoiding future inflation.

Although it still is an article of faith with investors that default by the United States on its debt is or should be unthinkable, default becomes an increasingly likely possibility the longer deficit financing continues. Default may be temporary, as was the case with New York City some years ago, or permanent, as has been the case with some foreign governments in the past and is even now being talked about by some debt-beleaguered third world countries today. Default, plainly and simply, is confiscation of the borrowed funds. If default does not immediately seem to be catastrophic, remember that the real lenders are not the banks and insurance companies, but are instead the individual depositors of the banks, the policy holders in the insurance companies, and the pension funds financed by individual workers and their employers. Clearly, default would be the ultimately most dismal consequence of long-prevailing U.S. fiscal policy. Default, however, is not imminent, and there is reason to be optimistic that today's most significant domestic policy issue - annual government deficits - can be resolved before default actually becomes likely.

The first dismal consequence of continued Federal deficits and a constantly growing Federal debt mentioned earlier is increasing interest rates. High interest rates are deployed by borrowers, but are very pleasant to savers. High interest rates have the hidden effect, though, either of raising costs for everything in which capital is an element of production, or of lowering the value of land and labor which are the other elements of production. Not only is the cost of borrowed capital higher, but the rate of return on equity capital must also be higher to justify devoting capital to a particular enterprise. The higher the interest rates go, the greater becomes the discouragement to the investment of capital in enterprises like forestry, that require a long time to generate a return.

Take, for example, the cost of growing seedlings in a nursery and of then planting them on the site where they will grow to maturity. An annual imputed interest rate should be charged to the cost of the planting, because if the capital were productively invested elsewhere, it would earn interest or dividends. Thus, if it is assumed that the cost of planting is $100 per acre and the imputed interest rate is 4%, the investment would earn $4 a year every year it remained invested. And if that $4 per year were in turn reinvested at 4%, the original $100 would grow to $200 at the end of 17 years, to $400 at the end of 34 years, to $800 at the end of 51 years, and so on.

But at a time when U.S. Treasury notes with ten- to twenty-year maturities are yielding 10% per annum or more, as they do now and have for several years past, use of only a 4% compound interest rate to evaluate forestry investments is hard to justify. Even a 10% rate may then be too low in view of the risks from fire, insects, and disease, which lurk over any stand of trees and are not duplicated by any risks to U.S. Treasury notes being paid in accordance with their terms.

But a 10% compound interest rate for evaluating the same $100 per acre investment would mean that the $100 would have to hold the prospect of being doubled at the end of 7 1/2 years, to be $400 in just under 15 years, $800 in a bit more than 22 years, and so on. Obviously, high interest rates place frightfully severe restrictions on the evaluation of any investment which, like many forestry investments, holds no prospect of being paid off except in the very long term.

What then needs to be done? The theoretical answer is easy, but implementing it is monumentally difficult. Either Federal expenditures should be reduced or Federal taxes should be raised, or a combination of the two should be effected. When the economy is acting well, Federal debt should be retired; when the economy is sputtering, Federal expenditures ought to be increased, subject, however, to an effective debt ceiling which should not be raised as a matter of course every time it is approached.

The difficulties in effecting the needed remedies are obvious. Americans are increasingly resistant to having their own individual taxes raised, though they are quite willing to let someone else pay more taxes, if someone else can be found to do so. The few state-wide referenda on taxes which have gone to the electorate in recent years have resulted in rejection of new tax proposals (such as a sales tax in Oregon), or in limitations on property taxation (such as Proposition 13 here in California some years ago).

On the other hand, no special interest groups are willing to give up Federally funded benefits coming their way. So effective are these groups in lobbying their Congressional representatives that virtually no Federal programs have been eliminated in the past five years and very few have even been reduced, despite strenuous efforts in that direction by the Reagan administration. All that has happened in the last five years is that the rate of growth in newly authorized Federal spending has been drastically reduced. Federal expenditures have continued to rise, however, fueled for the major part by increases in Social Security benefits, Federal pension benefits, and by other so-called entitlement programs put in place by earlier enacted laws, and most of all, by defense expenditures in response to the terrifying realization that Soviet military might was in danger of surpassing ours, and if that happened, many of us would be likely to be dead and the survivors Red.

So difficult has the five-year effort to reduce expenditures been, that the most recent former Director of the Office of Management and Budget was reported to have declared in a speech within the past month that the only alternative left is to raise taxes. He was shielded during his four plus years in office from experiencing how difficult that would be by a President who has repeatedly said that raising taxes is an option he will refuse to consider without adoption by the Congress of significant and real reductions in Government spending proposed by the administration. Tax payments would have to go up approximately 30% across-the-board if the deficit were to be eliminated by that means alone. No senator or congressman would be willing to stand before his electorate in defense of a tax increase of that magnitude!

Clearly, the stage is being set for what may be the single biggest political deal in American history. The elements of the deal will have to be: (1) major reductions across the board in Government spending, including defense spending; (2) elimination of many existing Government-financed programs and subsidies; (3) major cost-saving and efficiency efforts in the executive branch; and (4) a substantial increase in tax receipts resulting from major simplification to the present income tax structure. Present tax rates could even be lowered if most of the existing deductions and exemptions were eliminated. There can and ought to be no such thing as "revenue neutral" tax reform.

In putting such a deal together, somehow a mechanism must be developed so that the tax changes occur only after the other elements of the package are in place and spending has actually been reduced; otherwise it would be too easy for a subsequent Congress not to deliver those elements dependent upon program reductions and program elimination. And to solidify the gains so painfully made, a Constitutional amendment requiring a balanced budget needs to be adopted. After all, the Federal government lived with such a self-imposed constraint for 150 years, and a great majority of the states continue to live with such a constraint.

What does the need to deal, and to deal pretty soon, with annual Federal deficits portend for the Forest Service, and for the almost 20% of the nation's commercial-quality forest land administered by the agency? Historically, the Forest Service has never returned more to the Federal Treasury than it has taken out each year. That is, frankly, incredible! The Forest Service after all, manages national assets which are very conservatively worth $50 billion; a good case could be made for valuing the assets considerably higher. A 4% annual net return, which is decidedly at the low range of what the private sector expects today, would mean a net return - a profit - to the Treasury, and thus to the people of the United States, of $2 billion a year. Instead, the Forest Service operates the assets entrusted to it at a net loss, even before distribution of 25% of gross receipts to the counties in which national forests are situated.

This is an abysmal performance, but it is far from being entirely or even very much the fault of the Forest Service. To begin with, the Forest Service is not mandated by law to produce a profit from the assets it manages, or even to worry about its contributions to the annual deficits. I think the time has come when the Forest Service should be mandated to make a profit and when Congress's annual process of setting Forest Service budgets should be guided by the desirability and need for the national forests to operate profitably. But even if an annual profit from the national forests is never mandated by law, the standards of good stewardship over assets (in as good shape as are the assets managed by the Forest Service) would include providing at least a modest annual economic return. We have not gotten it yet, but projections for 1985 operation of the National Forest System were getting close to a break-even point before distribution of 25% of receipts to the counties.

Forest Service timber inventory figures leave no doubt about the capability of the national forests to supply in perpetuity a great deal more timber than they ever have supplied in the past. After taking into account a myriad of factors, it is clear that an annual sale level of 20 billion board feet per year is readily achievable; that volume is both physically reachable and economically operable. This compares to the 11-12 billion board feet which has been offered in each of the last approximately 20 years. Where economically warranted, application of intensive forestry practices could raise the 20 billion board feet considerably higher. It is to be noted that 20 billion board feet per year represents something less than a 2% annual turnover of the existing volume of trees exceeding 12" d.b.h. now standing on the national forests. Private lands managed by forest industry companies achieve as much as a 4 1/2% annual turnover of sawtimber on their lands.

Another reason why the country has accepted poor stewardship from the Forest Service is because the national forests have increasingly been overvalued for their ability to supply such things as recreation of certain kinds, clean air, fish and wildlife, and esthetics. No thought has been given by the Forest Service or by Congress as to how much the incurred cost for those things outruns their measurable benefits. As a nation we should, and under a multiple-use concept balanced in part by economic considerations, we can have such things, but we cannot go on having them at exorbitant costs in foregoing tangible benefits like jobs, ample wood supplies, foreign trade, and a dollar return to the United States Treasury.

For instance, in 1964 after passage of the Wilderness Act, the national forest wilderness system was set at 8 million acres, with the assumption that it would grow by 1970 to 10 million acres. Today, the national forest wilderness system is 32 million acres, which is 17% of all land in the national forests. The system is likely to grow larger. Approximately 12 million acres of those 32 million acres are lands capable of growing trees in commercially valuable volume. To forego the benefits to mankind of managing those acres and of the annual harvest of trees they could produce imposes a very high annual cost indeed for retaining those lands in untouchable wilderness status. It is even more unreasonable to set off those 32 million acres from exploration and development of whatever scarce mineral resources a small fraction of the acres may hold. The total values annually foregone are so large that they could not possibly be recouped by charges to wilderness users. As Professor Barney Dowdle of the University of Washington has said, it would be cheaper for the country to send each wilderness user on a world cruise.

For the four years in which I was guiding the Forest Service budget-making process, I tried to implement four precepts. First, was to emphasize existing revenue-producing activities of the Forest Service. Second, was to propose means by which new revenues could be collected from the national forests. Third, was to reduce costs of overall national forest management, and fourth was to reduce or even to eliminate some research and state and private forestry programs. During my final year-and-a-half, I also proposed that the long-established system of paying out 25% of gross receipts to the counties - which all but guarantees the national forests can never provide a profit to the U.S. Treasury - be changed to a property tax equivalency system.

Changes to the Federal government's ways of doing things come with exasperating slowness, if they come at all. Consequently, it is with disappointment that I acknowledge little progress was made on some of these five goals during my four years in office. On the other hand, I am convinced that sooner or later all of these things will be accomplished. Indeed, if the Gramm-Rudman-Hollings Balanced Budget and Deficit Control Act of 1985 becomes and remains law, all five will be either in place or well underway by 1990.

It is very clear that there are ample opportunities for enhancing existing revenue-producing activities of the Forest Service. Volumes of timber sold could be greatly increased, and the mineral leasing program could be expanded. From 1981 to 1985 we did have some modest successes with the latter; the annual costs of administering the leasing program for oil and gas production are recovered many times over by receipts to the Treasury generated from such leases which pay a modest per acre charge annually plus a royalty for all production.

My efforts to increase the timber sale program were thwarted by the coincidence of a number of factors. First and foremost were the competitive woes of a majority of national forest dependent manufacturers who had large volumes of national forest timber under contract at prices it turned out they could not afford. They simply had bid too high in the years of high inflation, expecting that accelerating inflation, by the time the timber had to be cut, would justify the prices they had bid. Timber purchasers' preoccupation with obtaining relief meant that the energies once devoted to assure timber sales were directed elsewhere for four years. Then, when wood markets did improve about mid-1983, Canadian producers captured a bigger share of the U.S. market than they have ever held before. The reasons are, (1) cheap Canadian stumpage, and (2) the 30% premium of the U.S. dollar over the Canadian dollar caused, as earlier explained, by our Federal deficit.

A very difficult area holding possibility for enhancing receipts from an existing program involves grazing fees. It is quite clear that grazing fees charged on Federal lands for the last seven years under the Federal Range Improvement Act of 1977 are generally at less than market value, even after recognizing the costs borne by grazing permittees for improvements and maintenance to such things as roads, fences, water sources, and range. The less-than-market value charges seem to have been perpetuated for a long time prior to the Act, so that they have been capitalized in the prices paid for ranches to which the permits, though not legally appurtenant, have been de facto appurtenant. No fair way to change this situation has surfaced; the only way in which to resolve it, it seems, would be gradually over, say, twenty years to raise the fees to where they are ultimately at a fair market value equivalent - much easier said than done. I might say that one of my reliefs at leaving office was to escape having to participate in developing an Administration position on grazing fees. Although I am convinced that cattle and sheep men are no more entitled to a subsidy in their use of the public lands than are recreationists, the elimination of whatever subsidy they now enjoy will impose some economic burdens on them which may be unbearable in view of the long-prevailing slump for cattle and sheep prices.

If nothing can or should be done soon to increase receipts from grazing fees, certainly the Forest Service is going to have to make a much more strenuous effort to reduce the costs of administering grazing lands and leases. These outrun receipts by more than two to one, and when one takes into account the fact that half the receipts are plowed back into grazing land improvements, the imbalance is even worse.

There are some good possibilities for new revenue sources from the national forests. Chief among these would be imposing a modest charge for recreational entry onto national forest lands. If $1 were collected for every recreational user-day which the Forest Service estimates is spent on the national forests, it would raise $230 million per year. That would cover the $160 million the Forest Service has estimated it spends exclusive of road costs on recreation programs or recreation related activities, and would leave a large sum each year for investing in additional recreational facilities.

Until recently, the Forest Service was collecting only about $25 million annually from recreational users. That amount was collected principally from ski and other resort operators under permits, summer home permit holders, and users of improved campgrounds and boat launching sites. The Forest Service raised some of those fees in response to encouragement from me to do so, so the total amount collected in 1985 should be up somewhat. It is still, however, appallingly short of annual expenditures on recreational items.

Clearly, charging an entry fee to national forests would not be feasible. However, a system of providing one-day, three-day, one-week, two-week, monthly, and annual passes for an appropriate charge ought to be workable. Such a system would require statutorily adopted Congressional consent which doubtless would be much more promptly forthcoming if the executive branch would forget its usual objection to designating receipts for specific future expenditures. In this case, the receipts should be designated for uses like campground and trail construction and maintenance, fish and wildlife habitat enhancement, wilderness administration, and the like. There are difficulties in developing a workable proposal, not the least of which is making the proposal reasonably congruent with what the National Park Service and the Corps of Engineers are doing, what the Fish and Wildlife Service is doing, and what they all might want or ought to do differently.

The alternative to soon developing a fee system for recreational activities on national forest lands is to reduce recreation expenditures. Perceived reductions already are not popular with a segment of the public. Although appropriations to the Forest Service for recreational and related purposes have not been markedly reduced in the last five years, neither have they increased by the 23% inflation which has accrued in those years, 9% of it in 1981 when inflation was down from the 12% range of each of the preceding two years. The result has indeed been a reduction in possibilities for accomplishment with an essentially fixed annual appropriation.

Another potential source of revenue from the national forests would be to sell bits and pieces which are isolated, or which are expensive to manage. In 1982 the administration proposed that some portion of the one-third of the nation's land base which is owned by the Federal government be sold. The proposal met with angry cries from fishing and hunting groups, some of whom outrageously misrepresented the proposal to the public. At the time the concept was proposed, I told the Forest Service nothing would come of it because of the politically insensitive way it was being handled. Unfortunately, I was right in my prediction. A modest land sale program carried out gradually and after careful analysis would reduce custodial costs for the future, and would bring in one-time receipts to the Treasury.

In the case of the Forest Service, statutory authorization for selling any land which is part of the National Forest System would be necessary. In response to the Administration's initiative, the Forest Service identified some 6 million of its 191 million acres as lands which ought to be considered for sale under criteria they developed with my guidance. We proposed legislation which would authorize sale of so much of the 6 million acres as subsequent Forest Service study might identify for sale. Senator McClure of Idaho, who is Chairman of the Senate Committee which would have to pass on the legislation, wanted us to perform the study first, and then to recommend the acres to be sold for review by Congress. This I declined to do because we were unwilling to spend $ 10 million ($1.66 per acre) to perform the studies with no assurance that the cost of performing the studies would be recouped from later-authorized land sales. I was also concerned about the burden such a study would place upon the Forest Service at a time when wilderness issues and the land planning process remained unresolved and were requiring a great deal of effort. The stand-off was an example of the conflict which can arise between the executive branch and the legislative branch, even between members of the same political party with largely identical objectives. I believe that, in time, some accommodation can be found, and that a modest program for selling some national forest system lands can be implemented.

It is with satisfaction I report that under my third budgeting precept of reducing expenditures we did make considerable progress. Although comparisons are difficult because of a change in treatment to general and administrative expenses in 1982, in the five budget years spanning 1981 to 1985 (1981 being the last Carter Administration budget year), only one major category of National Forest System expenditures increased more than inflation for the same period. That category was Mineral Leasing, which was entirely appropriate in view of the fact that it is a clear money-maker. The major categories of Timber Sales Administration and Forest Trail Construction increased about as much as inflation (which is how the timber sale program remained approximately constant in volume through the five years). Forest Fire Protection did not quite keep up with inflation.

All other National Forest System items in 1985 were within 10% of where they were in 1981, except for Trail Maintenance and Reforestation. Reforestation was down because 1985 was the final year in the ten-year program for eliminating the reforestation backlog. Trail Maintenance was down by about the amount Trail Construction was up, so the two Trails categories, taken together, also held approximately constant for the five years.

The Forest Service succeeded in building approximately the same miles of road in 1985 they had built in 1981, but they did it for some $80 million less than the same construction would have cost five years earlier. Obviously, this was done with some reduction in road standards, which met with rare general approbation from the various sectors of the public which monitor Forest Service activities.

My fourth precept of Forest Service budgeting, which was to achieve some reductions in the Research and in the State and Private Forestry programs, met with mixed success. I had concluded such reductions were appropriate for research because very early during my tenure I was satisfied that insufficient evaluation of potential economic benefits likely to accrue from given research projects was made before research projects were authorized.
For example, why incur the expense now of doing research on the regeneration of certain hardwood species which are in great oversupply and are likely to remain so for decades to come? Such research could have no possible application for twenty, thirty, or forty years, and might never have an application. In that case the project should be deferred and the money either spent on something with better likelihood of a more immediate return, or, if there was no such alternative, should not be spent at all. In short, though I could agree that some research was good, I could not agree that more was necessarily better. I fear I got the reputation of being opposed to research generally, when in fact, I wanted only to be sure that the dollars being expended were likely to be recovered with some increment of return as well.

The net result was that research appropriations remained approximately constant from 1981 through 1984, and then were raised by Congress enough in 1985 to cover the inflation which had occurred in the interim. I was assured by the Forest Service that better economic analysis of proposed projects is now being done, and I hope that is true.

The state and private forestry programs of the Forest Service basically involve grants to state forestry programs; they are, in my opinion, a luxury the Federal government cannot afford when running annual budget deficits. Consequently, I favored stepping down many of the grants toward the goal of eventually terminating them. It is my view that forestry investments and protection costs should stand on their own feet; it is not the business of the Federal government to subsidize such investments, no matter how popular they are with the recipients. We succeeded in achieving a 20% reduction in the State and Private Forestry programs before taking into account a comparable reduction in purchasing power caused by inflation during the five years.

The necessary efforts to reduce and eventually to eliminate Federal deficits are going to mean further belt-tightening for Forest Service programs. Those activities like mineral leasing and timber sales which are profitable, or can become so, should logically be expanded. Those like Recreation which have the potential for being self-supporting should be put on such a basis. In short, the Forest Service should be expected to return an annual profit to the Treasury.

A major impediment to financially sound management of the national forests is the legal requirement that 25% of gross receipts be paid to the counties in which the national forests generating the receipts are located. The national forests would have to generate a profit of 25% just

to break even on their operations - without covering the Research and the State and Private program costs. This is impossible. Consequently, so long as the 25% revenue sharing system remains in place, the national forests, even if they were run very efficiently and economically, are being run not for the owners of the national forests, who are the people of the United States, but instead for the counties in which the national forests are located.

The 25% revenue sharing system has to be changed in order to remove the disincentive it now provides to the Federal government for investing in the national forest lands it owns. In early 1984 1 put out a tentative proposal which was designed to change the 25% revenue sharing to a property tax equivalency system, at the same time assuring that no county would receive less than the average of what it had recently been receiving, adjusted for inflation. I was surprised when the proposal encountered considerable opposition, most of it coming from California for reasons, as it turned out, peculiar to the state tax structure following Proposition 13. I think legislation to change the present 25% revenue-sharing system could deal reassuringly with the California problem. It would not obviate concerns of county officials and assessors that the counties would have more costs in administering a property tax equivalency system than they have now (except there would be a reasonable expectation that increased payments would in many, but not all, cases more than cover the new costs). Only with a change in the present 25% revenue sharing system will the Federal government have any reasonable expectation of receiving a return on the investment represented by the national forests.

Another significant consequence to future management of the national forests which should arise from the need for Federal fiscal responsibility will be the necessity for evaluating returns on planned investments. One might assume that proposed investments always had been reviewed for prospective return before being carried out. Unfortunately, there have been too many examples over the years of overbuilt roads, of costly timber stand improvement work on young stands, of insect control programs carried out - or not carried out - of tree nursery construction, of elaborate campgrounds replete with sewage treatment facilities, or of helicopter logging, to provide assurance that evaluation of investments from the standpoint of expected return was the rule. Hopefully, the Forest Service is becoming increasingly aware of the need for so viewing prospective investments.

Recently the Forest Service has been sensitized to such a need from an unexpected source. Forest plans for three national forests in southwestern Colorado were challenged by environmental groups on the ground that timber harvest rates contemplated by the plans were uneconomic. The Office of the Secretary of Agriculture agreed that the challenged plans did not contain an adequate economic analysis of the action plan favored by the Forest Service, and directed that the needed analysis be performed before the proposed plans are put into effect.

Environmental groups also have alleged that the Forest Service fails to recover costs with many timber sales. Of course, they usually overstate their case by ignoring the need to apply generally accepted accounting principles in making such allegations, but the fact remains that, even with properly applied accounting, there may be instances when their conclusions are indeed correct. The Forest Service needs to become much more adept at performing and applying economic analysis in order to arrive at rational investment decisions and to settle upon supportable courses of action.

Critical in such economic analysis is the concept of compound interest which was addressed earlier. We noted then that high interest rates, because of their compounding effect, place severe constraints on making long-term investments. Reforestation costs following timber harvesting are not subject to this constraint because a provision of the National Forest Management Act of 1976 prescribes that national forest lands are not to be harvested unless "...there is assurance that such lands can be adequately restocked within five years after harvest." The corollary effect of this provision for purposes of performing economic analysis on the feasibility of a proposed timber sale is to require that, if reforestation costs must be incurred as a consequence of the timber harvest, they be taken into account as a cost of the proposed sale. They cannot by law be left out of account to be capitalized as an investment to be subsequently recovered from the next crop of trees. Without incurring the reforestation expense now, there can be no generation of cash flow now, since the existing stand may not be cut.

However, reforestation of timberlands which require stand reestablishment because of natural disasters should be evaluated from the standpoint of whether reforestation costs can be recovered at an appropriate rate of interest compounded. If they cannot, then the investment in reforestation should not be undertaken; to do so when the investment cannot be expected to be recovered except at a less-than-prevailing interest rate would be a misallocation of scarce and valuable capital resources.

One of the implications of so applying this economic principle is to require a distinction between the reforestation backlog physically extant at any given point in time and the backlog which is economically reducible at the same point in time. The economically reducible reforestation backlog will range anywhere from zero to the full physical reforestation backlog, depending on interest rates and the costs of accomplishing reforestation. In recent years the Forest Service has been measuring the reforestation backlog by the number of acres it calculates to be economically reducible. This is a sound approach, although subject to breakdown if the interest rate applied is either excessively high or low.

The same economic principle of making investments only if they appear to be recoverable at appropriate rates of interest compounded is equally applicable to timber stand improvement activities, including control of brush and undesirable species, and, theoretically at least, to protection from fire and insects. In the case of fires and insects, however, it is frequently impossible to predict the extent of damage which will occur if the outbreak goes unchecked, so that protection expenditures, within reason, can be regarded as though they were insurance premiums.


We are at a time in our national history when fiscal responsibility must be restored to the conduct of its affairs by the Federal government. The longer we defer adoption of the solutions, the more painful the needed solutions will be. Yet, because the laws of economics work inexorably, continuing the course of the last fifty years would be catastrophic. At this point it is difficult to predict just how the solutions may be worked out, but a look back at our nation's history and at how potential catastrophes have been averted in the past provides encouragement for optimism that, in one way or another, needed solutions will be forthcoming. Once those solutions are in place we will be positioned as a nation for even greater achievements and accomplishments in the future than we have made in the past.

Introducing: John B. Crowell, Jr.

John B. Crowell, Jr.
Mr. John B. Crowell, Jr. is an attorney who has worked in the field of natural resources law and administration for the past 27 years.

He is a graduate of Dartmouth College (A.B., 1952) and the Harvard Law School (L.L.B., 1957). From 1957 to 1959, he was Law Clerk to Judge Gerald McLaughlin, U.S. Court of Appeals, Third Circuit, in Newark, N.J.

Mr. Crowell's association with industrial forestry began in 1959, when he joined the legal staff of the Georgia-Pacific Corporation. Subsequently, from 1972 to 1981, he served as General Counsel to the Louisiana-Pacific Corporation. During this period his activities mainly involved such matters as property taxation, contracts, and corporate acquisition of other companies.

Mr. Crowell served as Assistant Secretary of Agriculture for Natural Resources and Environment from May 20, 1981 to January 21, 1985. His responsibilities included general supervision of the Forest Service and the Soil Conservation Service. He advised the first administration of President Reagan and Secretary John Block on policy matters concerning the programs of these agencies.

During his period in office, Mr. Crowell dealt with important and very difficult issues in natural resources policy and administration. These included preparation of land management plans for the National Forest System under the complex requirements of the National Forest Management Act of 1976; revision of secretarial rules and regulations for guiding the land management planning process; wilderness allocations; and towards the end of his term, controversies over federal timber sale contract "buy-back" relief and deficit timber sales on the national forests.

He is an avid student of field birding, having served for 12 years as a volunteer regional editor for American Birds. He is a member of the American Bar Association, American Ornithologists Union, Society of American Foresters, Soil Conservation Society of America, Wilson Ornithological Society, and the Cooper Ornithological Society.

Mr. Crowell resides in Portland, where he is presently pursuing personal interests.