By Christopher Leonard
October 18, 2019 "Information
Clearing House" - The
election season of 2015 and 2016 was defined by
chaos, infighting and a pool of deep resentment that
came boiling over when votes were cast. But this
election was barely noticed. It happened on February
17, 2016, in a rundown labor union hall in Portland,
Oregon. Union members were voting on a new contract
with their employer, Koch Industries. The union
members felt powerless, cornered, and betrayed by
their own leaders. The things that enraged them were
probably recognizable to anyone who earns a paycheck
in America today. Their jobs making wood and paper
products for a division called Georgia Pacific had
become downright dangerous, with spikes in injuries
and even deaths. They were being paid less, after
adjusting for inflation, than they were paid in the
1980s. Maybe most enraging, they had no leverage to
bargain for a better deal. Steve Hammond, one of the
labor union’s top negotiators, had fought for years
to get higher pay and better working conditions. And
for years, he was outgunned and beaten down by
Koch’s negotiators. So even as the presidential
election was dominating public attention in late
2015, Hammond was presenting the union members with
a dispiriting contract defined by surrender on
virtually everything the union had been fighting
for. He knew the union members were furious with his
efforts. When he stood on stage to present the
contract terms, he lost control and berated them.
“This is it guys!” his colleagues recall him
yelling. “This is your best offer. You’re not going
to strike anyway.”
I thought of the free-floating anger in that
union hall often as I travelled the country over the
last eight years,
reporting for a book about Koch Industries. The
anger seemed to infect every corner of American
economic life. We are supposedly living in the best
economy the United States has seen in modern memory,
with a decade of solid growth behind us and the
unemployment rate at its lowest level since the
1960s. Why, then, does everything feel so wrong? In
April, a Washington-Post/ABC Poll found
that 60% of political independents feel that
America’s economic system is essentially rigged
against them, to the advantage to those already in
power. Roughly 33% of Republicans feel that way; 80%
of Democrats feel the same.
What reporting the Koch story taught me is that
these voters are right— the economy truly is rigged
against them. But it isn’t rigged in the way most
people seem to think. There isn’t some cabal of
conservative or liberal politicians who are
controlling the system for the benefit of one side
or the other. The economy is rigged because the
American political system is dysfunctional and
paralyzed—with no consensus on what the government
ought to do when it comes to the economy. As a
result, we live under a system that’s broken,
propelled forward by inertia alone. In this
environment, there is only one clear winner: the
big, entrenched players who can master the
dysfunction and profit from it. In America, that’s
the largest of the large corporations. Roughly a
century after the biggest ones were broken up or
more tightly regulated, they are back, stronger than
ever.
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I saw this reality clearly when I
went to Wichita, Kansas to visit
Charles Koch, the CEO of Koch
Industries, a company with annual
revenue larger than that of Facebook,
Goldman Sachs and U.S. Steel combined.
Charles Koch isn’t just the CEO of
America’s biggest private company. He
also inhabits one extreme end of the
political debate about our nation’s
economy. A close examination of his
writing and speeches over the last 40
years reveals the thinking of someone
who believes that government programs,
no matter how well-intended, almost
always do more harm than good. In this
view, most government regulations simply
distort the market and create big costs
down the road. Taxing the wealthy only
shifts money from productive uses to
mostly wasteful programs. Charles Koch
has been on a mission, for at least 40
years, to reshape the American political
system into one where government
intervention into markets does not
exist.
But for all the free-market purity of Charles
Koch’s ideology, there is not much of a free market
in the corporate reality he inhabits. Koch
Industries specializes in the kinds of businesses
that underpin modern civilization but that most
consumers never see—oil refining, nitrogen
fertilizer production, commodities trading, the
industrial production of building materials, and
almost everything we touch, from paper towels and
Lycra to the sensors hidden inside our cellphones.
This is the paradox of Charles Koch’s word – he is a
high-minded, anti-government free-marketeer whose
fortune is made almost exclusively from industries
that face virtually no real competition. Koch
Industries is built, in fact, on a series of
near-monopolies. And it is these kinds of companies
that do best in our modern dysfunctional political
environment. They know how to manipulate the rules
when no one is looking.
Consider the oil refining business, which has
been a cash cow for Koch Industries since 1969, just
two years after Charles Koch took over the family
company following his father’s death. Charles Koch
was just in his early 30s at the time, but he made a
brilliant and bold move, purchasing an oil refinery
outside Saint Paul, Minnesota. The refinery was
super-profitable thanks to a bottleneck in the U.S.
energy system: the refinery used crude oil from the
tar sands of Canada to be refined into gasoline
later sold to the upper Midwest. The crude oil was
extraordinarily cheap because it contained a lot of
sulfur and not many refineries could process it. But
Koch sold its refined gas into markets where
gasoline supplies were very tight and prices were
high.
Why didn’t some competitor open up a refinery
next to Koch’s to seize this opportunity? It turns
out that no one has built a new oil refinery
anywhere in the United States since 1977. The reason
is surprising: the Clean Air Act regulations. When
the law was drastically expanded in 1970, it imposed
pollution standards on new refineries. But it
“grandfathered” in the existing refineries with the
idea that they would eventually break down and be
replaced with new facilities. That never happened.
The legacy oil refiners, including Koch, exploited
arcane sections of the law that allowed them to
expand their old facilities while avoiding the newer
clean-air standards. This gave them an
insurmountable advantage over any potential new
competitor. The absence of new refineries to stoke
competition and drive down prices meant that
Americans paid higher prices for gasoline. Today the
industry is dominated by entrenched players who run
aged facilities at near-full capacity, reaping
profits that are among the highest in the world. In
this industry and others, the big gains go to
companies that can hire lawyers and lobbyists to
help game the rules, and then hire even more lawyers
when the government tries to punish them for
breaking the law (as happened to Koch and other
refiners in the late 1990s when it became clear they
were manipulating Clean Air regulations).
The oil refining business is just one example of
how Koch has benefited from complex regulatory
dysfunction while public attention was turned
elsewhere. In the 1990s, for example, a Koch-funded
public policy group called the
American Legislative Exchange Council (ALEC)
pressured states to deregulate their electricity
systems. California was a pioneer in this effort,
and the results were disastrous. Lawmakers in
Sacramento created a sprawling, hyper-complicated
system that surgically grafted a free-market trading
exchange onto an aged electricity grid. Virtually no
one paid attention to the 1,000-page law as it was
being written. Almost immediately after the markets
went online in the early 2000s, electricity traders
at Koch Industries and Enron began gaming the
system. They earned millions of dollars doing so,
even as prices skyrocketed and the state’s grid
collapsed in rolling blackouts. Lawmakers were
blamed when the lights went out, and then Governor
Gray Davis was recalled. The role that traders
played in the crisis was hard to understand and
hidden from view. Federal regulators filed a case
against Koch for manipulating markets in California,
but the legal proceedings dragged on for more than a
decade. Koch ended up settling the charges and
paying a fine of $4.1 million, long after the damage
was done.
To take another example: In 2017, Koch helped
kill part of the Republican tax reform plan to
impose a “border adjusted” income tax that almost
certainly would have hurt Koch’s oil refining
business. The plan was being pushed by none other
than Paul Ryan, a onetime Koch ally who was then
Speaker of the House. Ryan wanted to include the
border adjustment in President Trump’s tax overhaul
because it would have benefited domestic
manufacturing and would have allowed the government
to cut corporate taxes without exploding the
deficit. But former Koch oil traders told me that
the border adjustment tax would have hurt profits at
the Kochs’ Pine Bend refinery in Minnesota. Koch
played a vital role in killing the border adjustment
tax before a vigorous public debate about it could
even begin (A Koch Industries spokesman insisted
that the Koch political network opposed the
border-adjustment measure only on ideological
grounds, because it was basically a tax, and not to
protect profits at Koch’s oil refineries) . By the
time most people started paying attention, Paul Ryan
admitted defeat and jettisoned the border
adjustment.
Charles Koch doesn’t talk about issues like this
when he talks about free markets. When I met him,
Charles Koch was giving interviews for his new book
that described his highly detailed business
philosophy, called Market-Based Management. I had
heard a lot about this philosophy, but what
surprised me most when I interviewed the people who
worked with him, some for decades, is how much they
admire him. They said he was brilliant, but also
unpretentious. He was uncompromising, but fair. I
felt this way too, the minute I met the billionaire.
I remember him telling me something along the lines
of: “Hello, Chris! You didn’t need to put on a tie
just to see me,” when I walked in the door (my audio
recorder wasn’t even running yet, so the quote might
be inexact).
Charles Koch’s avuncular, aw-shucks persona masks
his true nature. I think of him instead as an
uncompromising warrior. He has been fighting since
he was a young man. He fought his own brothers, Bill
and Freddie, for control of the family company (and
won). He fought a militant labor union at the Pine
Bend refinery (and won). Most of all, he fought
against the idea that the federal government has an
important role to play in making the economy
function properly—even while taking advantage of
government laws to maintain his company’s
advantages.
When Charles Koch became CEO in 1967, the U.S.
economy operated under a political system that is
almost unimaginable today. The government intervened
dramatically in almost every corner of the economy,
and it did so to the explicit benefit of
middle-class workers. This happened under a broad
set of laws called the New Deal, which was put in
place in the late 1930s. The New Deal broke up
monopolies, kept banks on a tight regulatory leash,
and even controlled energy prices, down to the penny
in some cases. It greatly empowered labor unions and
boosted wages and bargaining power for workers.
Charles Koch dislikes every element of the New Deal.
He has formed think tanks to attack the ideas behind
it, donated money to politicians who sought to
dismantle it, and built a company that was hostile
to it.
As it turned out, the American public joined
Charles Koch, to a certain extent, during the 1970s.
Vietnam, Watergate, rampant inflation and multiple
recessions shattered Americans’ confidence in the
government’s ability to solve problems for ordinary
people. Passage of the Civil Rights Act shattered
the political coalition behind the New Deal, which
had relied on Southern segregationists for support.
Ronald Reagan rode the tide of antigovernment
sentiment to the White House. But even Reagan wasn’t
able to repeal the New Deal. He failed miserably
when he tried to repeal Social Security, for
example. He cut taxes, but never could restrain
spending. What emerged during the 1980s and 1990s
was an incoherent governing system, one that is
deregulated in some key areas, like banking and
derivatives trading, but hyper-regulated in others
like the small business sector.
If the American political system is confused,
Charles Koch is not. He rules over his company with
undisputed authority, and he uses that authority to
spread his Market-Based Management doctrine. This
philosophy inspires the rank-and-file employees at
Koch Industries—the company cafeteria is full of
young, entrepreneurial workers who thrive in a
system that heaps promotions and bonuses on top
performers, while unsentimentally weeding out
employees considered weak. But the unbending nature
of Market-Based Management, and how it applies to
the factory floor, played a big role in building the
rage that swept through that union hall in Oregon.
When Steve Hammond, the union boss, tried to
bargain with Koch, he found himself fighting over
ideology, not benefits. In one case, the Koch
negotiators wanted to strip down workers’ health
care benefits, requiring employees to pay more money
out of pocket for their benefits. The Koch team
framed their request not as a way to make more money
for Koch, but to create a system that better
reflected the ideals of Market-Based Management.
“It’s a matter of principle,” recalled
union negotiator Gary Bucknum. “The principle
is that an employee should be paying something
toward their healthcare, or otherwise they’ll abuse
their health care.” It was hard to bargain against
principle. And the unions didn’t have the leverage
to fight. The policies that once supported labor
unions have been steadily undermined since the
1970s, dragging union participation in the private
sector down from about 33% of the workforce to less
than 10%. The union took the cut in health care
benefits.
The current American political debate is focused
on the shiny objects, the high-profile contests
between Team Red and Team Blue. But companies like
Koch Industries have the capacity to focus on the
much deeper system, the highly complicated plumbing
that makes the American economy work. This is where
Charles Koch’s attention has been patiently trained
for decades, as administrations have come and gone
in Washington.
Thanks to this focus, Koch wins every time.
This article was originally published by "Time"-
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