Introduction

My name is Karyn Moskowitz, and I am a resident of Southern Indiana, near the border of Kentucky. I recently moved there from the Pacific Northwest.

I have a BA in biology from Boston University, and an MBA in environmental management from the University of Washington in Seattle. I have been an independent economic analyst for the past six years, and I am presently working with various nonprofit organizations, including the Institute for Journalism and Natural Resources, the Dogwood Alliance, the Thoreau Institute, and the Ecological Law Institute, among others. I've also worked with the Institute for Sustainable Forestry at Oregon State University, Northwest Policy Institute at the University of Washington, and Forest Service Employees for Environmental Ethics. I also had a brief political life as the Pacific Party candidate for the U.S. Senate race in Oregon in 1998, where I ran against Senator Ron Wyden.

During the past six years, I've monitored federal and state natural resource agencies and their environmental and land management policies, and done several rural community socio-economic studies, in different parts of the country, including Oregon, New Mexico, North Carolina and Virginia. I've collected and analyzed information, and written numerous articles on the financial incentives and institutions within the USDA Forest Service, Bureau of Land Management, National Park Service, and other agencies. I developed a plan for a sustainable rural economy in northeastern Oregon, and edited conference proceedings on the certification of forest products for Oregon State University. Presently, I am working on an independent analysis of several of the economic portions of the North Carolina Chip Mill Study.

Lessons from the Pacific Northwest: Automation

Today, I am going to talk about the overall economy in Virginia, and the effects of chipmills and clearcut logging practices on the economy.

I understand that this committee has been asked within the bill to evaluate the experiences of other states. My various experiences with forest economics, first hand and professionally, in many different parts of the country, gives me unique insight into this issue. I was living and working in Oregon during the time that the timber industry was already beginning to lose its importance, relative to the rest of the economy, in the early 90s. I can therefore be an emissary from that region to your region, and explain why the industry slid economically, how the region diversified into a complex, more sustainable economy, and weathered virtually unscathed the national economic recession that occurred at about the same time in the rest of the country.

After the famous spotted owl decision, there were many dire predictions of economic collapse. What actually happened was quite different. Yes, employment in the lumber and wood industry fell 22 percent. In contrast, total employment rose 27 percent. This is because first, logging's importance to the economy had diminished markedly, and conversely, unlogged forests had become much more important by the beginning of the 1990s.

One called the bread of and butter or economic base of this region, by 1991, timber had fallen in importance. In fact, it was the industry itself that had made logging less important. (Wages to Timber Workers in the Pacific Northwest, 1979-1996 Slide). After logging at unsustainable rates for decades, it faced an inevitable drop in logging. This had been predicted by OSU researchers in 1976 and 1989. Basically, the industry automated and sourced themselves out of business well before any environmental regulations.

After slashing jobs and wages in the 1980s, the industry provided only a small percentage of the region's jobs. Timber employment declined by 27,000 in the Pacific Northwest between 1979 and 1989, (before the spotted owl decision) and by another 21,000 in 1996. The wages paid to timber workers also decreased during this time, as payroll per employee feel by 18.2 percent, from $39,000 to $32,000. Today the industry accounts for 1.9 percent of total employment in the region.The industry there, as well as here, still faces enormous financial pressure to curtail the level of jobs and payroll per acre. So, many workers do not earn high wages.

In the Southeast, we see a similar trend. Generally, timber production and stumpage prices are forecasted to increase. However, this probably will not mean increased employment and income for most communities in the southern Appalachians. (Combined Timber Production, Employment, and Income for Georgia, North Carolina, and South Carolina, 1983-1992 Slide). Jobs or incomes in the recent past were declining or stagnant. While timber production level increased by 20.1 percent from 1983 to 1992, real income increased by only 14.3 percent and employment increased by just 2.7 percent. Even though harvest in 1992 was greater, the number of jobs per million cubic feet of timber harvest, adjusted for inflation, was 4.8 percent smaller. In other words, each log truck filled with logs in 1992 represented 14.4 percent fewer jobs and 4.8 percent less income for workers and families in Georgia and North and South Carolina than in 1983. Southern Appalachian Man and the Biosphere (SAMAB), a federal government study, also estimates that the ration of jobs to volume harvested in the solid-wood industries is bout three times higher than the ration for pulp and paper industries. Expected shifts away toward pulpwood production and away from saw-log production in the region would consequently cause a decrease in derivative employment. Finally, the average annual wage in the timber industry is about $18,405, about $3000 below the average wages for the manufacturing sector as a whole.

Virginia's Overall Economy

Now let's relate this to Virginia's overall economy. What we see in the next five slides is very typical of the entire country. That is, services, retirees, government and retail trade are becoming the dominant sources of personal income and employment, compared to extractive industries like forestry and mining.

The Influence of Standing, Natural Forests on Locational Decisions

The forests and economies of the Pacific Northwest, as well as the forests of Southern Appalachia, interact differently today than they did in the past, and future differences will be even greater. Forests once benefited local economies only when they were cut down. Then recreation became important and some communities debated the tradeoffs between timber jobs and tourism jobs. Today, things are becoming yet more complicated. But the most important thing to remember is this: the economy has not decoupled itself from the forest. It turns out that the vitality of most regions' economies depends in no small part on the health and vitality of its forests. A standing forest is now more valuable to the economy than a logged one.

The influence forests exert on the locational decisions of households often has more impact than logging on the economies of local communities. It turns out that surveys of businesses in other parts of the country have shown that an attractive environment, high quality of life, and access to recreation are important factors affecting business location decisions. For many emerging service industries, these factors frequently rank second in importance to personnel factors (supply of skilled labor) and well ahead of cost factors (land, water, labor, and energy) and proximity of markets. Workers with the highest skills, incomes, and ability to generate new jobs seek to live where the quality of life is high, but are not attracted to communities with degraded forest environments. In particular, researchers are noting that one of the differences between nonmetropolitan communities that are thriving economically and those that are not is a connection to natural amenities. Three-fourths of the respondents to a survey in southwestern Virginia stated that the quality of life in the area would prevent them from ever leaving the area.

The Economic Base Theory is Flawed and Out of Touch with Current Reality in the Country

How do we relate this new information to figures about huge economic impacts from forest-based industries? Basically, the entire model, frequently called the economic base theory, is flawed and out of touch with the current economic reality in this country.

Traditionally, rural economic development policies in the South have focused on industrial recruitment to promote economic growth. Here, that has primarily meant industries that extract natural resources. Those industries are normally defined as "basic" industries that drive the engine of a regional economy, bringing in money as they export goods and services to other regions. This model is often used to then give estimates of value-added and/or secondary jobs and economic impacts.

There are serious flaws in this reasoning, and they give a highly inflated sense of the forest products industries economic importance. First, it assumes that all other industries stand on top of this one industry, and everything is ready to collapse if it collapses. This is exactly backwards and out of touch with economic reality. It may have made sense in the distant past, when manufacturing played a much larger economic role, capital and workers moved from place to place with difficulty, and incomes were much lower.

This approach ignores that which determines the multiplier: the character and structure of the local economy. The more quickly injected income leaks out of the economy, the smaller the multiplier. So, the multiplier is inversely related to the fraction of local spending that goes to importing goods. The more self-sufficient a local economy is, the longer injected income circulates within and the larger the overall multiplier impact. In that sense the impact of export earnings is determined by the structure of the local economy and the range of locally produced goods and services, and not just by the volume of export earnings.

This model would dismiss a restaurant or recreational facility as secondary, or passively relying on export earnings to survive. The alternative interpretation would say that such local economic activity absorbs and holds dollars longer in the local economy, increasing jobs and income. In fact, it is the strength and diversity of local sectors that determine the size of the multiplier.

Local economic activities like recreation and services slow or stop leakage and generate jobs and income. This is often referred to as "income substitution" activity. So, if an area offers abundant recreational opportunities, for example, residents will travel away less than if it offers few. An attractive environment leaks fewer dollars and therefore generates more jobs and income.

In conclusion, these other industries we see here, which are normally considered secondary industries, along with the natural environment in the state, are actually the bread and butter of the economy. It is a trend I see throughout the country. State and local economies are becoming more and more diversified and complex.

Benefits and Costs to Other Industries

Logging, taken to the extremes that it was in the Pacific Northwest, and now, Alabama and other southeastern states, can jeopardize the underlying fabric of forest ecosystems. Repairing degraded ecosystems can be very costly. And citizens have stated again and again that they are not willing to pay the high price of species extinction and irreparable losses of environmental integrity and biodiversity that come from extensive natural resource extraction. Most importantly, from an economic perspective, unsustainable logging and associated damages can create an extensive spillover costs for other industries, impeding growth in the overall economy. Let's look at some of the benefits and costs of these other industries.
Spillover Costs from the Timber Industry
(Spillover Costs from Timber Industry slide).

Recreational Fishing
Firms may forgo earnings if timber production degrades fish habitat and reduces fish populations.

Commercial Fishing
Firms may forgo earnings if timber production degrades fish habitat and reduces populations of commercial fish.

Sediment Removal
Taxpayers may pay to dredge channels and treat municipal water if timber production introduces sediment to public waters.

Risk of Flooding
Property owners may incur extra risk if timber production increases runoff and creates sediment that reduces stream-channel capacity.

Water-Quality Reduction
Industries that use water as an input to their products or for cooling may incur costs if timber production reduces water quality.

Ecosystem Damage
Taxpayers may pay the costs of habitat reduction and litigation if timber production causes ecosystem damage.

Tourism
Firms may forgo earnings if timber production diminishes the value and supply of recreational opportunities.

Quality of Life
Individuals may experience a decrease in their quality of life if timber production degrades consumption amenities.

Unemployment Insurance
Other industries bear costs when the timber industry fails to pay the full cost of unemployment.

Below Cost Timber Sales
Taxpayers pay for programs that provide the industry with timber at below-cost prices.

Source: ECONorthwest

Time dictates that I only cover a portion of these costs. I will focus on recreation and tourism, water quality, and ecosystem damage.
Recreation and Tourism

The Southern Appalachians is one of the most heavily visited regions in the country, and growth in service-related employment in the study area is partially explained by the increasing demand of and use of recreational opportunities available on federal lands. Throughout the South, the Forest Service expects 50 percent more dispersed recreation use of national forests by the year 2005 and a doubling over current rates by the year 2040. Currently, wilderness use exceeds the carrying capacity.

Recreation and tourism is a composite of businesses in the service sector, retail trade, and some transportation and public utilities. And, not all jobs in these sectors are related to tourist/recreation expenditures-as locals also spend money at these businesses. So, to compare this industry with that of other industries I highlighted in my slides, the committee might check with local universities to track down any research on the tourism industry, or try the state tourism agency, or make a rough estimate or range of estimates on what percent of expenditures are non-local (i.e. export income).

Some statistics that I can show today, give us an idea of expenditures on wildlife-related recreation in Virginia. (Virginia State Expenditures on Wildlife-Related Recreation slide). In 1998, the US. Dept. of Interior reported that total spent on both hunting and fishing and wildlife-related recreation was $2.1 billion. Looking specifically at the Blue Ridge Parkway in Virginia, total direct expenditures were $477 million in 1996, with $42 million generated in state and local tax revenues. According to another study visitor spending directly supported more than 26,500 jobs in the area. (Travel to the Blue Ridge Parkway in Virginia slide).

The most important benefits to visitors was the beauty of nature, a peaceful vacation, and feeling close to nature. Most frequent activities were visiting a scenic area, historical site, and hiking. Logging in this viewshed, may not be appropriate because of visual quality objectives. Research has generally found old-growth forests more than 200 years in age are preferred over young forests, natural-looking stands over stands with obvious human impacts, partial-cutting techniques over clearcuts, and uneven-aged management over even-aged management. These results seem to hold for both eastern hardwood forests and forest in the Pacific Northwest. In fact, a survey of southwestern Virginia residents revealed that two-thirds of the respondents believe that when it comes to clearcutting trees, safe environmental measures outweigh the supposed economic development benefits. Conversion to pine plantations directly contributes to losses of genetic diversity in many native tree species and reduces mast or acorn production for important game species.
Water Quality

Activities in the Southern Appalachians affect water quality over much of the southeastern portion of the continent. This can be very expensive for municipalities and taxpayers. One way to estimate water benefits and costs is to look at Forest Service data on values, and added or avoided costs other communities have had to pay for increased logging in their watersheds.

Forest Service economists have estimated the value of consumptive uses of water on national forests. The total value for these uses of water on national forests range between $26.7 and $75.03 per acre-foot. The value of water for in-stream flow is much higher. In stream flow value for a watershed in Colorado with a high proportion of national forest land has been estimated at $810 to $940 per acre/foot, or $312-$362 million dollars per year.

Water supply managers increasingly are coming to realize that watershed protection may be the best and cheapest way to guarantee both the quality and quantity of drinking water. In an epic demonstration of the economic value of protecting the sources of drinking water, the city of New York, by spending $1.5 billion to safeguard its vast upstate reservoir system, is avoiding the expense of constructing filtration facilities estimated to cost between $6 and $8 billion dollars, and $200 million dollars a year in operating expenses. The city's multifaceted plan includes the purchase of some 80,000 acres of watershed, much of it forested. Sterling Forest, a key portion of the watershed supplying water to 25 percent of the population of New Jersey, is being protected for less than $55 million with the added benefits of preserving more than 15,000 acres of mature-growth forest for recreation and wildlife.

When national forests are logged, especially on steep slopes, it results in watershed erosion, landsliding, and sedimentation, which increases turbidity, disrupts water flows and destroys water quality. These effects translate into lost value of freshwater and marine recreation, increase in damage from floods, increase in the cost of maintaining roadside ditches, reduction in the productivity of commercial fisheries, increase in municipal drinking water treatment costs, reduction in the quality of municipal and industrial water, and increase in the cost of using water for industrial cooling processes.

Local municipalities are often left to pay for these externalized costs. For example, the economic costs imposed on municipalities and private citizens by the runoff of sediment average $1.94 per ton of sediment in the Little Tennessee River basin of the Appalachian region. The offsite damages attributed to logging are $1.4 million annually. Sedimentation in the Willamette Valley Oregon, surrounded by Forest Service logging, costs the public nearly $5.5 million annually.

Intense winter storms in February and November/December of 1996 triggered thousands of logging-induced landslides in the Pacific Northwest. The city of Salem, downstream from the Willamette National Forest, had to spend $700,000 on a temporary pretreatment facility, and $200,000 treating turbid water. Recently the City built a $1.2 million permanent pretreatment system, and estimates they will spend an additional $100 million to build a plant to treat low quality water, plus $3.2 million in additional yearly operations and maintenance. Private companies, like Mitsubishi Corporation, which relies on pure water for its high technology processes, spent over $2 million when the City's water system shut down.
Ecosystem Damage

A host of what economists call "ecosystem service" values may be lost due to increased logging from chip mills. These are services provided by natural forest ecosystems and the species that make them up, sustain and fulfill human life. This includes basic life necessities, such as the production of oxygen and clean water, and other life-support functions, such as cleansing, recycling, and renewal. For example, forests recycle important nutrients, protect property through flood control and storage of carbon that regulates climate, keep soil fertile by storing and cycling soil nutrients, and break down and assimilate society's wastes. They also provide economically important water filtration services, habitat for wildlife important in pest control and pollination, wildfire control, and numerous other benefits.

While these services may be without formal prices in the market, they are not without value. Economists are now very active trying to estimate these values, so that better public policy decisions can be made, and the playing field between wood products and preservation can be evened. For example, in Georgia, the non-market value of the ecosystem services produced mostly by the natural environment, left alone, was estimated to be worth $2.6 billion annually in 1988, with a total present value of $65.7 billion.

Unlogged forests provide habitat for birds, reptiles, amphibians, bats and other mammals that prey upon economically harmful insect pests, rodents, and other forest and agricultural pathogens. Maintaining populations of predators that are natural to an ecosystem may help the system survive an attack of pests more efficiently than application of continually greater concentration of expensive and toxic pesticides.

For example, Gypsy moths, which damage deciduous forests, have many forest-based predators-wasps, flies, beetles, ants, several spider species, a number of birds (chickadees, blue jays, nuthatches, towhees, and cuckoos), and five or more species of common woodland mammals, including white footed mice, shrews, chipmunks, squirrels, and raccoons. In Missouri, forest birds have been shown to increase the productivity of live oak forests by preying upon leaf-chewing insects and permitting more young trees to survive.

Although these services are provided free of charge, they are not without value. For example, the benefit of avian predators alone is similar to using chemical insecticides costing at least $4700 per square mile treated. Managers could then reasonably make investments with a present value of $250 per square mile annually to increase populations of songbirds and other avian insectivores. Another study concluded that it would cost $54 billion annually to replace natural pest control services in large, monoculture croplands throughout the U.S. Unlike pesticides that tend to become less effective with time, birds, insects, fungi, and microorganisms co-evolve with pests and thus maintain their effectiveness over time. In economic terms, pesticide use has decreasing returns to scale, whereas natural predation provides constant returns to scale. Thus, sustaining a network of forests that contains habitat for natural predators may be economically rational.

Bats are also important insect regulators. The Indiana bat, found on older forests in some parts of North Carolina, and other forests throughout the east and the midwest, consumes three times its weight each night in insects, including harmful pests like corn borers, corn ear worm moths, and several varieties of beetles.

According to many economists, over 50 percent of total economic value of natural forests is something called passive use benefits, or nonmarket values. That is, the intangible or philosophical benefits that are consumed by people either directly or indirectly, from a resource. This issue, while important, is beyond the scope of my talk today. However, I urge the committee to not ignore these values, even if they are difficult to quantify. The North Carolina study team has made a commitment to including these values and costs in their analysis.

Conclusion: Avenues for Further Study
In conclusion, I'd like to thank the chairman, committee, and audience for taking the time to listen to the economic analysis, and to be concerned enough to ask for this analysis. Some would even call us all brave; we economists are, after all, referred to as the "dismal scientists."

Some ideas for further study include more specific analyses of chip mills and sawmills, more specific spillover cost studies, and more citizen attitude surveys. I urge you not to get into a jobs versus environment mentality, because, as I have hopefully shown you today, these two concepts are very closely coupled. I hope I can serve as a resource to the committee in the future.