Timber Industry Economic Profile

Timber Industry Economic Profile

Following is a discussion of the timber industry including how several economic factors affect it, including: price elasticity of supply and demand; positive and negative externalities; wage inequality; and monetary and fiscal policies.

Price Elasticity

Important to note is that the timber industry and the lumber industry are not one in the same and experience differences price elasticity. The price elasticity of demand for the timber industry is inelastic. Often landowners will hold inventory to sell at a later date if demand is low. The timber will not lose value in storage so price does not need to change. The price elasticity of supply for the timber industry is elastic, as prices typically increase in the spring due to low volume of timber as a result of winter weather.

Possible Negative Externalities

Recreational and Commercial Fishing: Corporations may elect not to harvest timber and lose earnings if timber harvesting damages the fish habitat.

Water Pollution: If timber harvesting pollutes the public water system, costs may be incurred in the remunerations effort.

Risk of Flooding: Increased runoff my decrease sewer capacity costing taxpayers additional money to repair the damage.

Water-Quality Reduction: If timber harvesting decreases the quality of water, other companies that use the water to cool or clean their equipment or products may suffer damages.

Possible Positive Externalities

Recreational Opportunities: Forests provide many recreational opportunities such as hunting, fishing, camping, and hiking.

Essential Habitats: Forests provide essential habitats for endangered plant and animal species.

Wage Inequality

Wage inequality is virtually nonexistent in the timber industry. However, false accusations of wage inequality are sometimes floated by anti-forestry groups such as Greenpeace. One example of this happened to a Papua New Guinea (PNG) forestry company called Saban Enterprises Limited. Throughout Saban’s efforts towards legal certification of its timber products, they were met with false claims and harassment. Green non-governmental organizations (NGOs) wanted to stop commercial forestry in PNG, despite the fact that less than 20% of the country had been set aside as forest production areas and the industry employed 10,000 workers. It could easily be concluded that they did not care about the welfare of Papua New Guinea 's people (Stutz, 2008).

Monetary and Fiscal Policy

The United States government can influence various industries through the powers of the Federal Reserve. The Federal Reserve created Federal Reserve notes (dollars) which are used as the standard form of paper money in the United States. The Federal Reserve manages the integrity of the United States’ financial system by controlling the quantity of money in the system. The Federal Reserve is responsible for regulating and overseeing all other United States banks, thereby protecting consumers’ rights. The Federal Reserve also supplies loans and other financial services to the United States public, government entities, and banks, as well as foreign banks.

The Federal Reserve System is run by a Board of Governors which manages the Federal Reserve Banks, advisory committees, and member banks. The seven Federal Reserve Governors, including a chairman, are appointed by the United States President and are then confirmed by members of the Senate. The Federal Reserve chairman is an extremely influential person who’s decisions directly affect the United States economy (Mankiw, 2004 pp.634, 635).

In his 1997 article The Impact of Inflation, Hellerstein explains how distortions in economic activity may occur due to the effects of inflation. For example, the timber industry must forecast its future sales to determine how much logging is necessary to meet demand. This is accomplished chiefly by monitoring new housing starts in the housing market. The Federal Reserve often makes interest rate changes to affect the national inflation rate. Consequently, if the Federal Reserve makes a significant interest rate change that moves the housing starts market in a major direction, timber forecasts could be greatly off resulting in inadequate or over supply.

In Hellerstein’s example, the unprecedented dramatic fall of inflation in 1981 led to many timber firms holding contracts for timber they could not afford to harvest (1997). Congress passed a bill in the early 1980s enabling the timber firms to renegotiate their contracts with the Forest Service. This was in effect a government bailout which: positively affected employment rates and growthamong smaller timber firms and negatively affected prices in the industry as a whole

Inflation is calculated using a computation called the consumer price index. If CPI is rising, the economy is said to be experiencing inflation. If CPI is falling, the opposite (deflation) is true. Inflation can be caused by many factors, including: governments printing too much paper money, thereby devaluing the currency; increases in production costs; federal taxes imposed on the sale of goods; increased national debts resulting in increased interest payments; and natural disasters. A natural disaster is an example of a cause of inflation. Natural disasters result in unexpected expenditures which throw budgets off and require immediate attention. Inflation would increase as a result of a natural disaster. Since governments consider high inflation to be a bad thing, they attempt to lower it. This is accomplished through raising interest rates and taxes which results in a slowing of economic growth. Higher domestic prices of goods make foreign goods more attractive, taking money out of the domestic economy. Most people believe that inflation will result in them getting less for their dollar. No one wants less.

Taxation and Price Controls

Taxation and price controls can have varied positive and negative effects on the economy, but most importantly a change in the supply of goods, and an increase in the cost of goods. For example, if the United States Federal Government decided to levy a one dollar specific tax on the sale of wood products, it would directly affect the timber products industry. When a tax is imposed on a consumable good such as lumber, several things occur. Obviously first of all there is an increase in the cost of the good. This increase in price results in a left shift of the lumber supply curve and consequently less quantity is available at the same prices. In addition, the higher prices result in a decrease in quantity demanded and a new equilibrium of supply and demand is realized.

Price controls are used by governments to regulate the consumption and pricing of a good or service. If a price ceiling were imposed on the lumber industry, for example, short term positive economic growth would occur. A price ceiling would have the effect of maintaining affordability of lumber products, stimulating new housing starts. However, when this type of price control is imposed, prices tend to decline artificially. When prices are lower, the public demands a greater quantity of product, but since the demand was not planned for, there is insufficient supply to meet that demand. This results in a shortage. Thus in the long term, if the timber industry failed to increase production, there would be a negative economic effect. Certainly with adequate planning, this could be avoided. A price floor for lumber products however, would have an instant and direct negative economic effect on the timber industry. Higher pricing would mean lower demand and less growth in new housing starts.

“The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment” (2010, FairTax).

Naturally, given the new set of taxation rules in the FairTax, the Federal Reserve would be forced to act differently with regard to interest rate management. The FairTax website clearly illustrates how the timber industry benefits from enacting the FairTax. The timber industry would only pay taxes on the sale of timber at the retail level (e.g. firewood). All other sales of timber to the timber processing industry would be free of taxation. Just as other industries would, “the timber industry would also benefit from the elimination of the payroll tax” (2010, FairTax). In addition, the total repeal of the estate and gift taxes is a huge boon to the timber industry. Because many timber firms are family owned companies, they routinely suffer the penalties associated with the estate and gift taxes. When an owner of one of these companies dies, ownership transfers to a family member and the taxes are levied. In addition, these ownership transfers always incur substantial legal fees and involve costly life insurance policies. The FairTax would eliminate all of these expenses.

In conclusion, it is fairly obvious that the Federal Reserve holds a great deal of power over the United States economy and subsequently the timber industry. Through banking regulation and inflation management, the Federal Reserve protects the rights and financial well being of American corporations, including the timber industry. Unfortunately, many factors (including natural disasters and inflation) can work against the Federal Reserve and cause economic turmoil for the timber industry. For example, a depressed housing market results in decreased new home starts and consequently a decrease in the sale of timber. Since successful Americans tend to buy homes, America’s economic success directly influences the well being of the timber industry.

References

Mankiw, N. G. (2004). Principles of economics (3rd ed.). Chicago, IL: Thomson South- Western.
Jamison, Michael. (2009, October 24). Battered and boarded: Recession rattles timber industry to its core. Southwest Montana’s News Portal. Retrieved March 9, 2010, from http:www.mtstandard.com

Heald, Aimee D. (Feb. 8, 2001). Timber Industry Affected by Economy. University of Kentucky. Retrieved March 9, 2010, from http://www.ca.uky.edu

Marcouller, David W. & Deller, Steven C. (1996). Natural resource stocks, flows, and regional economic change: seeing the forest and the trees. University of Winsconsin, Madison. Retrieved March 17, 2010 from http://jrap-journal.org

Courant, Paul N. & Niemi, Ernie & Whitelaw, W. Ed. (1997). The Ecosystem-Economy Relationship: Insights from Six Forested LTER Sites. University of Georgia. Retrieved March 17, 2010, from http://cwt33.ecology.uga.edu

Hlekiso, Thami & Mahlo, Nthabiseng. (2005). Wage trends and inequality in South Africa: A comparative analysis. South African Reserve Bank. Retrieved April 7, 2010, from http://ww2.resbank.co.za

Stutz, W.(2008). Legality certification a first for PNG business. Daily Timber News. Retrieved April 7, 2010, from http://www.timberbiz.com.au

Hellerstein, Rebecca. (1997). The Impact of Inflation. Federal Reserve Bank of Boston. Retrieved April 20, 2010, from http://www.bos.frb.org.

(2010). The Impact of the FairTax on Timber Related Industries. FairTax.org. Retrieved April 20, 2010, from http://www.fairtax.org.

Niemi, E. (1999). The Sky Did NOT Fall: The Pacific Northwest’s Response to Logging Reductions. Sierra Club. Retrieved April 29, 2010, from http://www.bc.sierraclub.ca

References: Mankiw, N. G. (2004). Principles of economics (3rd ed.). Chicago, IL: Thomson South- Western.  Jamison, Michael. (2009, October 24). Battered and boarded: Recession rattles timber industry to its core Kentucky. Retrieved March 9, 2010, from http://www.ca.uky.edu Marcouller, David W Courant, Paul N. & Niemi, Ernie & Whitelaw, W. Ed. (1997). The Ecosystem-Economy Relationship: Insights from Six Forested LTER Sites March 17, 2010, from http://cwt33.ecology.uga.edu Hlekiso, Thami & Mahlo, Nthabiseng A comparative analysis. South African Reserve Bank. Retrieved April 7, 2010, from http://ww2.resbank.co.za Stutz, W.(2008). Legality certification a first for PNG business. Daily Timber News. Retrieved April 7, 2010, from http://www.timberbiz.com.au Hellerstein, Rebecca. (1997). The Impact of Inflation. Federal Reserve Bank of Boston. Retrieved April 20, 2010, from http://www.bos.frb.org. (2010). The Impact of the FairTax on Timber Related Industries. FairTax.org. Retrieved April 20, 2010, from http://www.fairtax.org. Niemi, E. (1999). The Sky Did NOT Fall: The Pacific Northwest’s Response to Logging Reductions