All the while, the overall size and burden of the federal government continued to grow for most Americans and small businesses. A libertarian group called the Competitive Enterprise Institute marked the increase by tallying the number of pages in the Federal Register, which records rules and regulations. In 1986, there were just more than forty-seven thousand pages. By 1995, there were more than sixty-seven thousand. The burden of these rules fell disproportionally on smaller companies, the CEI found.
There was no longer any clear consensus about the balance of power between government and private enterprise. The New Deal era was over, but it hadn’t been replaced by a new laissez-faire system. It was replaced, instead, by a theory with an appropriately vague and misleading name: neoliberalism. Neoliberal policies sought free-market reforms like NAFTA but retained federal entitlement programs and heavy defense spending. Its hallmarks were massively complex laws and programs that tried to thread the needle of unshackling markets while preserving a role for the state.
Companies that could exploit this complexity thrived. Koch Industries did it as well as anyone. There was no better example of this than Koch’s manipulation of the Clean Air Act, a sprawling set of rules that imposed a perpetual regulatory burden on oil refineries. Oil refineries were a prime target of the Clean Air Act when it was passed because they are a major source of toxic pollution like benzene and smog-producing gases. In 1970, the Clean Air Act put a strict limit on how much pollution the refineries could release.
But a loophole in the act dictated that the regulations would only apply to new oil refineries, not the existing ones. Any refinery already doing business in 1970 was “grandfathered” in to the era of clean air enforcement. This was seen as a way to avoid penalizing existing oil refineries that were built before the era of pollution controls. Congress appears to have thought that the grandfathering clause would be temporary: it was believed at the time that most oil refineries would last about forty years before their equipment wore out. Koch’s Pine Bend refinery, for example, was built in the mid-1950s. It might have been retired as early as 1995.
The old refineries were not phased out, however. The opposite happened. Companies like Koch exploited an obscure bureaucratic program called New Source Review that allowed them to expand their existing refineries. The rule stated that any major new equipment added to an old refinery must comply with the newest clean air standards. But compliance was in the eye of the beholder. Oil refineries and their teams of attorneys fought over the definition of critical terms like “new” and “significant.”
The refiners took advantage of another loophole. The Clean Air Act exempted new sources of pollution from regulation if companies could prove that curbing the pollution would be unreasonably expensive. This was easy to exploit. The oil refiners all cited the best available technology as the current technology they were already using. Any advances beyond that were arguably too expensive. This created a downward spiral: new pollution control technologies never became cheaper because there was no market for them.
Oil companies expanded their existing refineries during the 1980s and 1990s, gaming the New Source Review program and prohibiting any new refiners from entering the game. The EPA, which enforced the Clean Air Act, pushed for the New Source Review process to be updated, but the update didn’t happen. As a result, Koch Industries rapidly expanded its refineries in Minnesota and Texas during the 1990s without obtaining permits that would have limited pollution from the plants, according to data compiled by attorneys at the EPA and the Department of Justice.
DOJ attorney Dianne Shawley later prosecuted Koch and other refineries for illegal expansion. The company was able to exploit the New Source Review in part by overwhelming state regulators who enforced the Clean Air Act on behalf of the EPA. The local regulators were simply not equipped to analyze the reams of data and legal documents heaped upon them when Koch was expanding. The same tactics were used by virtually all major US oil refiners, Shawley said.
The grandfathering clause built a protective wall around a group of companies that were lucky enough to be doing business in 1970. The clause froze the oil industry in midplay, leaving the existing players to have the game board to themselves by making it prohibitively expensive for new players to enter the market and compete. The last large-capacity US oil refinery was built in 1977.
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Koch Industries didn’t just benefit from political dysfunction. The company used its newly expanded political operations to shape the government in new and innovative ways, using many of the same techniques it honed in Oklahoma.
After the Watergate scandal of the early 1970s, Congress enacted a strict and complicated set of rules around campaign donations. Individuals and companies were capped in how much they could give to any candidate in an election cycle. Donations had to be disclosed publicly, potentially embarrassing both the donor and the politician. Koch Industries circumvented this system in ways that would become widely imitated.
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. Koch funneled money through the Economic Education Trust to state and federal campaigns in Kansas and other states where it did business. In October of 1996, 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.”
Triad laundered political contributions in a way that was extremely difficult to discern from the outside. The Senate report laid out a basic picture of the money trail: (1) Koch Industries supported the Economic Education Trust; (2) that trust gave cash to Triad; (3) Triad gave the cash to campaign groups like Citizens for Reform, which, in turn, (4) pumped money into elections to defeat Koch Industries’ opponents. (Koch Industries also gave at least $2,000 directly to Triad.)
Triad was a new kind of campaign finance machine. It acted as a third party that didn’t directly donate money to politicians. Triad hired consultants who created attack ads for Republicans in tight races. Triad was careful in its language. It never used words like “vote for,” “support,” or “defeat” that might have triggered oversight from campaign regulators like the Federal Election Commission.
Triad was particularly active in Koch’s home state of Kansas. The company spent money on four of six federal races in Kansas in 1996, supporting candidates such as Congressmen Sam Brownback and Todd Tiahrt. Republicans won all four of the races in which Triad intervened. One of Triad’s consultants, Dick Dresner, said that the campaign company was designed specifically to shield the wealthy donors who supported it. “They use three or four or five or six different ways so they aren’t discovered,” he said. “Even if their names came up once or twice, the extent of their activities is underestimated.”
The Senate report about Triad’s activities was a document of frustration. It conceded that the financial shell game behind Triad was so complex that investigators could not make sense of it even two years after the election. The report was clear in its condemnation of Triad’s activities, however, and it sent a public warning: