Second in a series of articles on the Forest Service and the economics of the timber industry.

BROCK Evans, vice president and chief lobbyist for the National Audubon Society, recently spoke at a University of Washington Environmental Management Seminar. In response to a question about reforming the Forest Service, he cataloged many destructive, wasteful and insensitive practices. Below-cost timber sales were high on his list of government boondoggles. We agree on these failings.

His cure was familiar too: replace the "bad" people in the Forest Service with new, "good" people; and instill the Forest Service with a new corporate culture that respects environmental values, placing them ahead of logging and exploitation. Here our opinions diverge.

I believe there are few bad people in the Forest Service, certainly no more than in any large government organization. What dooms the Forest Service are its bad budgetary incentives.

As Dale Robertson, chief of the Forest Service, put it, "It's the budget that energizes the Forest Service." And the Forest Services' budgeting process is fundamentally perverse. It provides incentives to generate below-cost timber sales and to discount the value of recreation, wildlife habitat and environmental amenities.

In the private sector, business income must cover expenditures. But the Forest Service does not run like that - and it cannot go bankrupt. An obscure 1930 law called the Knutson-Vandenburg Act is important to the budgeting process. Under it, the Forest Service is allowed to keep the revenue from its timber sales while timber sale costs are funded by Congressional appropriation.

In 1930 it cost the Forest Service 50 cents per thousand board feet to hold a timber sale. So the Forest Service wrote a rule specifying that 50 cents be returned to the Treasury for every thousand board feet. The 50-cents rule still applies - but today the average sale costs over $50 per thousand board feet.

So while the taxpayer pays a timber sale's costs (overhead, planning, road construction, etc.), the Forest Service keeps the bulk of the proceeds. There is virtually no direct connection between income and expense. And if the Forest Service is the budget maximizer its chief suggests, the incentive is to maximize timber sale volume, not net value, and therefore receipts. In this way the Forest Service's budget will rise once when Congress appropriates sale funds and then again when sale receipts are received.

As a result, according to forest economist Randal O'Toole, 90 percent of our national forests lose money on their timber-sale programs. This costs taxpayers hundreds of millions of dollars annually.

There is another reason why so many sales occur: There are 122 National Forests in 40 states. The Treasury is required to pay 25 percent of the proceeds of each timber sale to local communities. Congressmen put political pressure on the Forest Service to hold sales in their districts, seeking to funnel dollars back home. Tellingly, Puerto Rico (with no vote in Congress) has the only national forest without a timber-sale program.

Congress often passes Forest Service appropriation bills specifying harvest levels, often above even what the Forest Service recommends. These timber sales are pork barrel projects. Over time this creates communities dependent upon Forest Service welfare. As people developed stakes in this system, meaningful reform became increasingly difficult.

We can see why the Forest Service hosts so many below-cost sales. They provide its life blood, money, as well as a pipeline for Congressional pork. Not that all Forest Service personnel are willing accomplices in a grand scheme to defraud the taxpayer. Why are "good" managers so often captured and co-opted by this budgeting process? Below-cost timber sales provide funding to support the Forest Service's other work, like habitat management.

But the result is that the taxpayer gets nothing for something, subsidizing clearcuts that are seldom environmentally friendly. Al Gore states in his book Earth in the Balance, "As the world's leading exemplar of free-market economics, the U.S. has a special obligation to discover effective ways of using the power of market forces to help save the environment." Market approaches to Forest Service problems can illuminate reform. We can recognize the advantages of private sector timber management. It strives for efficiency. Private firms harvest only timber that can pay its way out of the woods. Concurrently, we recognize the need to develop the environmental sensitivity of private firms.

If the Forest Service is to salvage its reputation, it must move toward economic responsibility. The elimination of incentives to hold below-cost sales is a good first step. Make the Forest Service fund timber sales only out of net timber sale receipts. No more incentives to lose money, and no incidental environmental harm in the bargain. Only good people and good incentives can fix the Forest Service.