Logging to Infinity (Dec. 10, 1997)

Viewed from a low-flying plane as it skips across the mountains, California’s North Coast looks like some strange and terrible war zone. Stretches of untouched, prehistoric forest speed by — and then, suddenly, great gouged-out patches appear. Here the hillsides are laid bare, strewn only with stumps. Streams that once ran thick with salmon are muddy brown rivulets.

Turning inland, several hundred miles to the north and east lies the ranch of Harry Merlo, CEO of Louisiana-Pacific Corporation from 1973 to 1995, one of America’s least known but surely most ruthless millionaire businessmen. Merlo’s 4200-acre spread — a miniature Shangri-La where wild animals roam the grounds — stands in ironic contrast to the barren hills. It represents an effort by this hard-driving businessman to preserve for his own enjoyment a little something of the natural beauty that his company has helped to destroy.

Harry Merlo started life as the son of hardworking immigrants in what he calls the “Dago Town” of Sterling City, a logging community in the mountains of Butte County, California. After a stint in the Marines and college at Berkeley, he worked his way up through the ranks of the timber business, ending up in charge of a division of the giant Georgia-Pacific Corporation and well positioned to head its spinoff Louisiana-Pacific.

Merlo has always depicted himself as a rags-to-riches success story, the boy from the other side of the tracks who made good. But the company that would make Harry Merlo rich was itself created not by entrepreneurial inspiration but by government regulation. And it was government, failing to oversee its own creation, that in effect propelled L-P into becoming one of the great corporate scandals of modern times — breaking laws that were meant to protect the environment and engaging in practices that led to criminal fraud charges, not to mention the manufacture of shoddy products. As such, it’s a story that can only warm the hearts of those who say government isn’t fit to oversee the economy in the public interest.

The formation of Louisiana-Pacific was the result of the anti-trust theory that has governed US economic regulatory activity for much of this century. Under this theory, the federal government tries to order the supposedly free market by adjusting the size and operations of business giants that would otherwise become ungovernable monopolies. At the same time, government has remained true to the doctrines of the early “conservationists” (Teddy Roosevelt, Gifford Pinchot and the like) who believed that large companies could develop resources more “efficiently” than could small local concerns, and that big business was thus the natural ally of government environmental policy. The federal government’s creation of Louisiana-Pacific played out the ongoing compromise between these two ideologies.

In the face of antitrust suits, Georgia-Pacific agreed, in 1972, to split off 20% of its assets (worth $305 million) to form a new corporation called Louisiana-Pacific. The new company got only about 500,000 acres of land, but it also got a number of mills. Among Louisiana-Pacific’s modest were stands of old-growth Douglas fir and redwoods in both Mendocino and Humboldt counties, which lie along California’s North Coast. Georgia-Pacific and Louisiana-Pacific together own 21% of all the land in Mendocino County, 39% of the private timberland and 56% of the timber in zones marked for cutting.

It was clear, almost from the start, that Harry Merlo had little interest in developing or exploiting the redwood or other old-growth timber resources over the long term. That would have required cutting only what fell within the limits of a sustainable yield — defined as cutting at a rate no faster than the overall rate of growth — and settling for relatively modest profits. Instead, Merlo began to exploit these resources quickly and ruthlessly, to raise capital for other, more lucrative long-term ventures. “We need everything that’s out there,” Merlo said in a much-quoted statement. “We don’t log to a ten-inch top or an eight-inch top or a six-inch top. We log to infinity. Because we need it all. It’s ours. It’s out there, and we need it all. Now.”

In Humboldt County, not far from the Oregon border, Merlo was presented with a golden opportunity to sell his timberland outright to the federal government to expand the new Redwood National Park. In nearby Mendocino County, however, no national park deal emerged to save the redwoods from L-P’s zealous saws. When L-P began operations, Mendocino was still a heavily forested county, virtually untouched by the rapid urbanization that had gripped much of the state. By the mid-90s, little was left of these great stands of trees.

“They quote 10%,” said Michael Tyrrell, a timber economist who studied L-P and advised the Mendocino County Board of Supervisors. “But I don’t think it’s 10%… There’s just scattered little clusters that private people have held onto.”

At the same time that Merlo was cutting down as many trees as he could get away with, he set into motion a plan that would reduce long-term employment through layoffs, plant closings and, eventually, the transfer of lumber processing operations to Mexico. In taking these steps, Merlo blamed poor business conditions and California’s tightening timber harvest regulations, especially regulations aimed at protecting the habitat of the spotted owl.

By the early 90s it had become clear that L-P was fast approaching the depletion of its finite resources in Northern California. So Merlo moved on. The forests of Northern California had provided one leg of L-P’s future; Alaska would provide the other. Compared with California — where timber acreage was limited, government regulations were comparatively strict and pesky environmentalists were always close at hand — Alaska was a free for all. In addition, government policy in Alaska, on both the local and federal levels, offered the kind of sweet deals that appealed to Merlo.

While Alaska has long been viewed as America’s final frontier, it has also been seen by some as the nation’s domestic Third World — an underdeveloped area in need of civilization, industry and jobs. Since much of the land in Alaska lies in the public domain, the federal government has frequently offered subsidized deals on the publicly owned resources to lure companies into the state. One large tract of resource-rich public domain land was the Tongass National Forest, in the southeastern part of the state. At 17 million acres, the Tongass is by far the largest national forest in the country. It is also the largest relatively intact temperate rainforest in the world.

Beginning in the 50s the US Forest Service, in the hope of providing year-round employment, tried to lure big pulp companies into Alaska by offering long-term contracts in the Tongass and timber prices cheaper than they would have to pay on the open market. In 1976 Merlo used some of the capital acquired through the rapid cutting of Mendocino County timber, along with funds from the sale to the Redwood National Park, to gain control of the Ketchikan Pulp Company, which became a subsidiary of L-P. Along with Ketchikan, L-P acquired a lucrative Tongass contract that assured the company a guaranteed supply of timber (about 180 million board feet a year) until the year 2004.

In the Tongass timber contract, Harry Merlo found an even more direct means for the federal government to pave his way to profits. In addition to selling the timber at a fraction of its true value, the federal government has heavily subsidized its cutting. From 1980 to 1990 Congress annually appropriated $40 million to finance surveying, roads and other infrastructure in the Tongass to aid companies in their operations. When, under fierce pressure from environmentalists, the Forest Service scaled back some of its contracts, L-P counterattacked with a suit claiming the cutbacks amounted to “takings” and that the government ought to pay it for altering the terms of the original deal.

Meanwhile, timber prices were changing. Faced with a decline in pulp prices, L-P cut back its mill operations; at the same time, as the prices of sawtimber and cedar soared, L-P capitalized by cutting valuable sawtimber, much of which it exported to Japan as raw logs.

The changes meant L-P mill jobs were declining, but L-P was contributing something else to the local community: a host of toxic pollutants. When the pulp mill did operate, it created a foul mess, polluting both the air and the waters of Ward Cove. During the 80s and 90s, repeated EPA inspections and whistleblowers’ accounts turned up many infractions, including midnight dumping, tampering with pollution-control equipment, altering reporting data, PCB emissions and numerous violations — one of them felonious — of the Clean Air and Clean Water acts. The company was eventually fined more than $4 million and agreed to pay for the cleanup of Ward Cove.

Louisiana-Pacific’s success in Alaska was and is due in large part to its close relationship with the state’s Congressional delegation, Representative Don Young and Senators Frank Murkowski and Ted Stevens. Murkowski in particular is in a position of considerable power as chairman of the Senate’s Energy and Natural Resources Committee; from that perch he successfully fought off whatever feeble reforms were proposed by Clinton to make modest reductions in timber cutting and restorative moves for the environment. At the Senator’s side was subcommittee staff member Mark Rey, a former lobbyist for the timber industry. In 1995, faced with conflict of interest accusations, Murkowski announced he was selling $57,300 in stock in five companies dealing with natural resources, including $20K invested in L-P.

The capital Merlo realized from his California operations also financed another, even more lucrative new business venture in the form of manufactured panels. These panels — known, in various manifestations, as waferboard, oriented strand board and Inner-Seal — resemble traditional plywood but are constructed of slices, or wafers, of wood held together with a glue resin. Because they require only small pieces of wood rather than logs or boards, they can be made from smaller, younger and cheaper trees; and because they appeared to be strong, durable and affordable, the panels quickly became popular, accounting for 34% of total L-P sales by 1994.

The environmental picture, on the other hand, was less rosy. The manufacturing process for waferboard results in air pollution in the form of particulates and waste chemicals from burning and drying the wood and from gluing it together with chemical resins under pressure.

By siting his plants in rural areas, Merlo initially avoided controversy. But when the local citizenry began to notice the smoke and fumes, the complaints began. At first citizens, individually and through groups, protested to state regulatory agencies. And when they turned a deaf ear, to the EPA which initially took scant interest. Then came a successful citizen suit in federal court in Colorado charging L-P with covering up pollution; in another legal action, It was revealed that the company regularly instructed a former supervisor in a Colorado plant to bypass the system that recorded pollution levels “in the interests of production.”

Eventually, during the Bush administration, the EPA charged L-P with violating the Clean Air Act. The case ended in May 1993 with a consent decree under which the company agreed to install $70 million in pollution-control equipment and pay an $11 million fine. While the fine was the largest in the history of the Clean Air Act, it represented a drop in the bucket for L-P which had sales that year of $2.5 billion and paid Harry Merlo more than $12 million in salary and bonuses. In addition, for its $11 million investment, L-P had bought itself nearly ten years of unrestricted operations.

But at about the same time the roof — quite literally — began to fall in. Legal troubles involving consumers first surfaced in July 1993 when a group of homeowners in California filed a class-action suit complaining that their siding was disintegrating. This action was followed the next year by one in Florida, and in 1995 by another in Washington State. The company agreed to a $275 million settlement in 1996. There was more bad news still to come. Following an exposé in the Portland Oregonian, the government accused L-P of fraud in certifying substandard waferboard as good quality.

In June 1995 the US attorney for Colorado announced a 56 count criminal indictment against L-P and two former managers; it included charges of conspiracy, fraud and violating environmental laws. The government charged that the defendants tried to circumvent the Clean Air Act by repeatedly turning off monitoring devices or tampering with them to give false, lower readings. And as if that were not enough, Merlo himself was charged by a former longtime L-P employee with sexual harassment, a matter that was settled behind closed doors.

Finally, it was too much. Meeting secretly in Chicago in 1995, L-P’s board of directors fired Merlo, a man who had built his company on the theory that, in the interest of profits, everything was expendable: natural resources, workers, consumers… For Merlo, the world was there to exploit, to be cut bare. What he had not realized was that he was expendable too. Today, Merlo, who declined to be interviewed, devotes himself to private business ventures and charity work.

As for L-P itself, in late October it announced a restructuring plan involving the layoff of 3,300 workers and the sale of $1 billion of Northern California assets — a quarter of the total — in order to keep going. Included in this move, which was welcomed by Wall Street analysts as a step to “re-energize” its earnings, will be the sale of 300,000 acres of California timberland. So, as it was in the beginning, California’s forests will keep the company alive.

The story of L-P makes the government’s antitrust policy look not only weak but oddly anachronistic. It also serves as a cautionary tale. Clearly, the FTC, the EPA, the Interior and Agriculture Departments and other government agencies did not forcefully apply the tools given to them to protect the environment against corporate greed. At every point they deferred to the interests of the monster they had created, leaving little doubt that they had become the weaker of the two. It took local citizens, journalists and employee whistleblowers to bring down Harry Merlo — but it seems unlikely, in the long run, that his company will do much to counter his legacy of environmental destruction. 

Looking beyond the Merlo case to the general problems connected with trying to protect the environment, it’s clear that in many ways the tools the government has available to it are ineffective, with fines inadequate and criminal charges difficult to sustain. But more important, the government lacks the will to make its sanctions hurt. Local officials, activists and potential whistleblowers operate in an environment in which they know they cannot count on the necessary support if they choose to put themselves on the line — so only the most intrepid or the least jaded do.

The government does have existing options for new policies to insure the protection of the few forests that remain. It could ban log exports completely. It could properly enforce the existing forestry and environmental laws. It could begin applying the Clean Air Act to the forests, launching regulation of pollution beyond the particular points where it originates. And it could write the forests into its global warming treaty.

Washington could also take a leaf from the libertarians and uniformly charge modest fees in national forests and other public areas and use those revenues to purchase easements from private companies. Companies might eventually find they could make more money from conservation than from cutting timber. And surely the federal government could immediately end the methodical logging in national forests and other areas in the public domain. That, at the very least, would drive up timber prices and encourage companies to practice sustainable yield forestry in their own self-interest.

All this, of course, would take political will, which is sorely lacking at present. But there is just a chance that sustained public pressure might give the government the gumption it needs to stand up to the likes of Harry Merlo.

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