Kochland (part 3)

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The “corporate power” referred to in the subtitle of Kochland is not just economic power, but political power. The Koch brothers became poster boys for the role of big money in the political process. They played a leading role in pushing the Republican Party toward more libertarian, pro-market and anti-government policies, and in blocking collective efforts to address national problems like climate change.

David Koch declared his views publicly, running for vice president as a Libertarian in 1980. Kochland author Christopher Leonard characterizes the Libertarian platform as “calling for the abolishment of everything from the US Post Office to the Environmental Protection Agency to public schooling.” Charles preferred to operate behind the scenes, quietly funding a wide range of conservative organizations and campaigns. The Charles Koch Foundation, created in 1974, soon changed its name to the Cato Institute, but its policy positions were also libertarian, with relentless support for tax cuts and privatization of public programs like Social Security.

The “Kochtopus”

Leonard describes Charles Koch’s political influence machine, nicknamed the “Kochtopus,” as a multifaceted operation “including think tanks, university research institutes, industry trade associations, and a parade of philanthropic institutions to support it financially.”

In part, this is a traditional political operation, working to elect candidates and lobby legislators. But it is especially large and well-funded. Leonard compares Americans for Prosperity, the main Koch advocacy group, to a franchise business with “semiautonomous state chapters” all serving “products from the same menu.” Its organization as a tax-exempt “social welfare” entity spares it from having to disclose its donors. It can easily create the appearance of spontaneous, grassroots movements at the local level. Also, today’s corporate lobbyists do not just provide information and persuasive arguments; they organize lavish fundraisers for politicians who vote their way. Another focus of Koch political influence is education, but it is education of an economically and politically motivated kind. The Koch-funded Mercatus Center at George Mason University promotes free-market economics, while the Law & Economics Center at the same university provides a forum for legal scholars who take a dim view of government regulation. It appears to have shaped the views of a generation of judges by inviting thousands of them to its seminars. By blurring the distinction between education and political contributions, Koch has circumvented the restrictions on campaign contributions.

In 1996, Koch Industries created a nonprofit group called the Economic Education Trust. The group did not need to disclose its donors because it was not ostensibly a lobbying or campaign finance organization…. The Economic Education Trust gave $1.79 million to a company in suburban Washington, DC, called Triad Management Services Inc. Triad was supposedly a political consulting firm, but it had a strange business model: it offered its services for free, to Republican candidates. A US Senate report in 1998 concluded that Triad was “a corporate shell funded by a few wealthy conservative Republican activists.”

Instead of just helping elect legislators and influencing their votes, corporations have sought a direct role in writing legislation. Koch has been a major contributor to the American Legislative Exchange Council (ALEC), originally founded by Paul Weyrich of the religious right, which writes model laws to be adopted by state legislatures. Leonard says it has evolved into a “pay-to-play” organization, allowing its largest contributors to write the bills that its member legislators try to get passed.

Energy deregulation

In the 1990s, ALEC developed model legislation for energy deregulation. Koch Industries and other companies that stood to gain from the legislation (notably the notorious Enron corporation) had a large role in writing it. Utility companies, who were more comfortable with the traditional system, opposed deregulation, but Koch and Enron had their way on ALEC’s energy task force. Leonard tells the story of deregulation in California, one state that adopted ALEC’s general approach.

Before deregulation, utility companies were essentially regulated monopolies. Having more than one utility trying to deliver energy to the same house wasn’t practical, but state regulators could protect the public from price-gouging by setting rates to allow a comfortable but not exorbitant profit. When energy prices became more volatile and the need for both conservation and pollution control more pressing, price regulation became more challenging. Setting prices too high would burden consumers, while setting them too low would dampen supply by discouraging producers from bearing the costs of production and pollution control. The free-market solution advocated by ALEC and the libertarians was to let the market set the price. The California deregulation law, passed in 1998, created a competitive market for power, the California Power Exchange:

The law was radical in nature. It instantly broke apart the state’s big utility companies. The utilities became glorified middlemen, buying energy on an open market from traders at Koch and Enron and then selling it to the utility’s customers. The utilities had to sell their power plants to outside companies—many of them in Texas—that operated the plants as independent companies. The utilities also lost their transmission lines, which were taken away and turned into something that resembled a railroad or a pipeline. Anybody could now schedule power to run across the transmission lines, making them the common carrier of power.

In theory, competition among the producers to sell their energy would keep prices under control for consumers. And the competition among utilities to buy energy would keep prices high enough to incentivize production. The price mechanism would balance supply and demand, as in any competitive market.

But what if demand rose faster than supply, pushing up prices? With many other products—let’s use electric cars as an example—some people would just have to wait to buy one until supply caught up and prices went down. But electricity is special, because it has become a necessity. People can conserve energy up to a point, but they need a lot of it all the time. It won’t do to have too many customers seeing their power cut off because they can’t afford it, or to have utility companies going broke trying to buy power on the open market. So, in order to protect the utilities and their customers, California put a cap on the wholesale price charged by producers to utilities, and a floor under the retail price charged by utilities to customers. The retail price was supposedly high enough for utilities to profit, but not so high as to make energy unaffordable for consumers.

What if shortages occurred because the producers would not or could not produce at the capped price? Then another agency—the California Independent System Operator (ISO)—could step in to buy and sell energy for more than the capped price on the exchange. The system was still partly regulated, but with the good intentions of protecting consumers and avoiding blackouts.

Then the energy traders found a way to game the system, in effect creating make-believe shortages so they could sell energy at the uncapped ISO price more often. The game was called energy “parking”, and it worked like this:

Enron traders seem to have invented the parking scheme sometime in the late 1990s. To execute a parking trade, a trader at Koch or Enron sold electricity from a power plant in California to a customer outside the state, like PNM in Arizona. This sale was made in the day-ahead market, where prices were capped. But the sale was bogus. The next day, when power was supposed to be delivered from California to PNM, the utility would suddenly sell the exact same amount of power from Arizona into California, and into the much pricier ISO hourly market.

Such a sale was fraudulent because no actual megawatts were delivered to the out-of-state utility, which simply collected a fee for participating in the deception. Energy prices skyrocketed, and utilities couldn’t pay those prices and remain profitable without being allowed to charge exorbitant rates to customers. The state began to experience both budgetary strains and rolling blackouts.

Enron eventually went bankrupt after this and other fraudulent practices were discovered. The Republican governor who had championed deregulation was out of office, so the political blame fell mainly on his Democratic successor, Gray Davis. Voters recalled him and replaced him with another Republican, Arnold Schwarzenegger. Koch Industries was a lesser offender than Enron, but did settle charges of market manipulation by paying $4.1 million to the state. Only when the Federal Energy Regulatory Commission stepped in was the California energy crisis brought to an end.

Climate-change legislation

In 2008, Congress was considering environmental legislation that took a “cap-and-trade” approach to controlling carbon emissions. “The concept was simple. The government capped the total amount of a certain pollutant that could be released. But then it gave companies a license to release that pollution.” Companies that wanted to exceed their cap had to pay to buy credits to do so, while companies that reduced their emissions below their cap earned credits they could sell. Because it relied on a more-or-less free market in pollution credits, it had the support of many Republicans as well as Democrats. George H. W. Bush had initiated a similar approach to controlling sulfur dioxide and acid rain in 1990, with apparent success.

But even that much regulation was too much for Koch Industries. It conducted its largest lobbying effort yet in order to defeat the proposal, working through a new subsidiary, Koch Companies Public Sector. Not only that, but Koch waged a large-scale (dis)information campaign to convince the public that climate change wasn’t real, and that efforts to curb carbon emissions could only impose unacceptable costs on the economy. Between 2006 and 2009, as the planet warmed, the percentage of Americans believing in climate change dropped from 77 percent to 57 percent. Other oil companies, especially Exxon, also participated in this effort, but Koch outspent Exxon by a wide margin. Koch’s political arm, Americans for Prosperity, got many climate-denying Republicans elected by targeting their more moderate and reasonable opponents with negative advertising. Cap-and-trade lost Republican support and died in 2010. Americans for Prosperity also helped Republicans win the 2010 midterms, and one of the first things the Republican-controlled House did was cut off funding for the Select Committee on Energy Independence and Global Warming, the committee that had originated the cap-and-trade bill.

I have little doubt that the Koch brothers’ enthusiasm for libertarianism was genuine, and that they sincerely believed that what was profitable for Koch Industries was good for the economy and the country. I also have little doubt that in this case and others, they were very, very wrong.

Koch and Trump

Both Charles Koch and Donald Trump held extreme political views, but they did not agree on everything. Trump’s nationalism sometimes conflicted with Koch’s commitment to free trade. Leonard says that “the Koch political machine employed a strategy that could be called ‘block-and-tackle,'” blocking Trump’s proposals where they disagreed, but helping him tackle the problems they agreed on.

The “Kochtopus” supported Trump’s 2017 cuts in corporate and personal income taxes, which by one estimate saved Charles and David Koch personally over $1 billion dollars a year. It also supported Trump’s efforts to withdraw from the Paris Climate Accord and roll back environmental regulations.

Trump claimed that he could repeal Obamacare and replace it with something better but less expensive. Charles Koch just wanted to repeal it without replacing it with any government initiative on health insurance. Neither had his way on that issue, as Obamacare survived by one vote in the Senate.

Koch did not approve when Trump interfered with free trade by abandoning the Trans-Pacific Partnership agreement and imposing tariffs on foreign products. He also opposed the proposed Border Adjustment Tax intended to favor companies that operated in the U.S. rather than in other countries. Under existing law, companies could escape U.S. taxation by producing things abroad—or using accounting gimmicks to shift profits to foreign tax havens. Koch Industries often avoided taxes in that fashion, headquartering many of its operations in the Cayman Islands. The proposed Border Adjustment Tax would have taxed profits based on where products were sold rather than where they were produced. That would be costly for a company like Koch that imported oil and other products for sale here. In this case, Koch’s efforts to kill the bill succeeded.

One conclusion to draw from Leonard’s detailed history of Koch Industries and its political machine is that the radicalization of the Republican Party was well under way before Donald Trump came on the political scene. The ascendant philosophy was libertarian rather than nationalist, but many of the goals were the same—lower taxes for corporations and the wealthy, no action on climate change that would inconvenience the fossil-fuel industry, and a minimal role for government in regulating the economy. The political transformation of the late twentieth and early twenty-first centuries was only partly a grass-roots movement, but heavily a top-down effort directed and financed by wealthy plutocrats.

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