Dark Money

by Jane Mayer

  “In recent years,” a prescient news story noted in 1992, “money from Wichita has gushed into the coffers of virtually every Washington think tank and public interest group dedicated to free-market economics and the libertarian credo of minuscule government regulation.” In 1990 alone, the article noted, the three main private foundations controlled by Charles and David Koch disbursed $4 million to such ostensibly nonpartisan but politically motivated groups.

  Few outside the rarefied world of far-right, laissez-faire economics noticed, but the Kochs’ multidimensional political spending kept growing. Between 1998 and 2008, for instance, Charles Koch’s private fund, the Charles G. Koch Charitable Foundation, made more than $48 million in tax-deductible grants, primarily to groups promoting his political views. The Claude R. Lambe Charitable Foundation, which was controlled by Charles and his wife, Liz, along with two company employees and an accountant, similarly made more than $28 million in tax-deductible grants. David Koch’s fund, the David H. Koch Charitable Foundation, made more than $120 million in tax-deductible grants—many to cultural and scientific projects rather than political. Meanwhile, during those years Koch Industries spent more than $50 million on lobbying. Separately, the company’s political action committee, KochPAC, donated some $8 million to political campaigns, more than 80 percent of it to Republicans. In addition, the Kochs and other family members spent millions more on personal campaign contributions.

  Only the Kochs know precisely how much they spent on this sprawling political enterprise, because the public record remains incomplete. By dispersing much of the money through a labyrinth of nonprofit groups, the Kochs made the full extent of their political “investment” difficult if not impossible for the public to detect. In 2008 alone, public tax records indicate that the three main Koch family foundations gave money to thirty-four different political and policy organizations, three of which they founded and several of which they directed.

  There were some legal boundaries. By law, tax-exempt charities, which the IRS designates as 501(c)(3)s, must refrain from involvement in lobbying and electoral politics and serve the public rather than their donors’ interests. But such laws are rarely enforced and are subject to flexible interpretation.

  Critics began to complain that the Kochs’ approach to philanthropy subverted the purpose of tax-exempt charitable giving. A 2004 report by the National Committee for Responsive Philanthropy, a watchdog group, found the Kochs’ philanthropy self-serving. “These foundations give money to nonprofit organizations that do research and advocacy on issues that impact the profit margin of Koch Industries,” it charged.

  But the Kochs defended the millions they gave to groups fighting environmental regulations and supporting lower taxes on industry and the rich as public-spirited. Several longtime associates questioned this. Gus diZerega, the former family friend, suggested that the Kochs’ youthful ardor for libertarianism had largely devolved into a rationale for corporate self-interest. “Perhaps he has confused making money with freedom,” he said of Charles. One conservative who worked closely with the Kochs but declined to be identified in order not to inflame the relationship went so far as to call their tax-exempt giving “a shell game.” He contended they merely saw philanthropy as preferable to paying taxes. “People say, ‘Wow—they’re so generous!’ ” he marveled. “It’s just the best available option for them. If they didn’t give it to their causes, they would have to give it to the government. At least this way they control how it’s spent.” He noted that by blending their corporate and charitable work, “they draw some pretty fine lines. It’s really another form of lobbying.” But he conceded, “They’ve built a pretty amazing machine.”

  From the start, the Kochs exerted unusually tight personal control over their philanthropic endeavors. “If we’re going to give a lot of money, we’ll make darn sure they spend it in a way that goes along with our intent,” David Koch has acknowledged. “And if they make a wrong turn and start doing things we don’t agree with,” he told Doherty, “we withdraw funding.”

  An early example of Charles Koch flexing his muscles took place at the Cato Institute in 1981, when he fired one of the think tank’s five original stockholders. Ironically, although Charles had criticized Robert Welch for turning the John Birch Society into a cult of personality by flaunting his ownership of the organization’s stock, Charles had set Cato up in the same way, as a nonprofit with stockholders, who picked the board of directors. The arrangement was rare in the nonprofit world. But as Charles had observed of the John Birch Society, it guaranteed the directors an unusual measure of continuing control.

  The director whom Charles fired at Cato was a major figure in libertarian circles, Murray Rothbard, a radical Upper West Side Jewish intellectual whose work Charles had subsidized in happier days. Rothbard called the putsch “iniquitous,” “high-handed,” and “illegal.” He went on to claim that Charles had “confiscated the shares which I had naively left in Koch’s Wichita office for ‘safekeeping,’ an act clearly in violation of our agreement as well as contrary to every tenet of libertarian principle.”

  Some suspected that Rothbard, an Austrian economic school purist, was fired for criticizing Koch, whom he had accused of watering down unpopular libertarian positions in order to get more votes for his brother’s 1980 candidacy. The platform, for instance, had pulled back from advocating the complete abolition of all income taxes. It also called for shrinking rather than abolishing the military. The controversy set off alarms in the hothouse libertarian community, marking Charles in the eyes of those who took Rothbard’s side as ruthless and rapacious, more interested in power than in principle.

  Charles’s drive for control was the focus later of testimony that Rothbard gave in one of the many rounds of fights between the four Koch brothers over their patrimony. A memo summarizing Rothbard’s prospective testimony quoted him saying that Charles “cannot tolerate dissent” and will “go to any end to acquire/retain control over the nonprofit foundations with which he is associated.” Rothbard accused Charles of dictating everything from the office decor to the design of Cato’s stationery. Further, he alleged that while Charles wanted “absolute control” of the nonprofits with which he was associated, he was intent on “being able to spend other people’s money.” This criticism would later be reprised in connection with the Koch seminars, which some saw as Charles’s means of creating a political slush fund filled with other people’s money but under his own control. Rothbard also accused Charles of using nonprofit organizations to “acquire access to, and respect from, influential people in government.”

  In the mid-1980s, as called for in the first phase of Fink’s plan, the Kochs also began to establish an academic beachhead of their own. Their particular focus was on George Mason University, a little-known campus of Virginia’s prestigious higher-education system, located in the Washington suburbs. In 1977, The Washington Post described the school as toiling in “the wilderness of obscurity.” By 1981, Fink had moved his Austrian economics program there from Rutgers, eventually naming it the Mercatus Center. The think tank was entirely funded by outside donations, largely from the Kochs, but it was located in the midst of the public university’s campus, so it touted itself, somewhat misleadingly, as “the world’s premier university source for market-oriented ideas—bridging the gap between academic ideas and real-world problems.”

  Financial records show that the Koch family foundations donated some $30 million to the school, much of it going to the Mercatus Center. The Washington Post described Mercatus as a “staunchly anti-regulatory center funded largely by Koch Industries Inc.” This, however, raised questions about whether the Mercatus Center was in fact an independent intellectual center or an extension of the Kochs’ lobbying operation. Clayton Coppin, who taught history at George Mason and compiled the confidential study of Charles’s political activities for Bill Koch, describes Mercatus outright in his report as “a lobbying group disguised as a disinterested academic program.”
The arrangement, he points out, had financial advantages for the Kochs, because it enabled Charles “to have a tax deduction for financing a group, which for all practical purposes is a lobbying group for his corporate interest.”

  Sharing a building with the Mercatus Center was the heavily Koch-funded Institute for Humane Studies, chaired by Charles Koch. The IHS was founded by F. A. “Baldy” Harper, a free-market fundamentalist who had been a trustee at the Freedom School, where he had written essays for The Freeman, calling taxes “theft,” welfare “immoral,” and labor unions “slavery” and opposing court-ordered remedies to racial segregation. Charles Koch had eulogized Harper glowingly, saying, “Of all the teachers of liberty, none was as well-beloved as Baldy, for it was he who taught the teachers and, in teaching, taught them humility and gentleness.”

  The aim of the IHS was to cultivate and subsidize a farm team of the next generation’s libertarian scholars. Anxious at one point that the war of ideas was proceeding too slowly, Charles reportedly demanded better metrics with which to monitor students’ political views. To the dismay of some faculty members, applicants’ essays had to be run through computers in order to count the number of times they mentioned the free-market icons Ayn Rand and Milton Friedman. Students were tested at the beginning and the end of each week for ideological improvement. The institute also housed the Charles G. Koch summer internship program, a paid fellowship placing students who shared the Kochs’ views in like-minded nonprofit groups, where they could join the libertarian network.

  George Mason’s economics department, meanwhile, became a hotbed of controversial theories that began to transform Americans’ tax bills, serving as an incubator for the supply-side tax cuts in the Reagan administration that hugely advantaged the rich. Paul Craig Roberts, an adjunct professor at GMU, drafted a precursor to the first supply-side tax cut bill of the Reagan era, which was introduced by his former boss Congressman Jack Kemp. While these tax cuts starved the government, George Mason also belittled its role philosophically. A star on its faculty was James Buchanan, the founder of “public choice” theory, who often described his approach as “politics without romance” because he categorized elected officials and public servants as just another greedy, self-aggrandizing private interest group, a view popular with antigovernment libertarians. In 1986, Buchanan was awarded a Nobel Prize in economics. Liberal economists were aghast. Robert Lekachman, for instance, lambasted Buchanan for reducing “all human behavior to simple self-interest.” The prize nonetheless was an indisputable achievement, helping to put the school, and libertarianism, on the map.

  Julian Sanchez, a fellow at the Cato Institute, soon exalted George Mason as a “libertarian mecca,” saying, “It may well be the most heavily libertarian-staffed institution of higher education in the country.” Liberals, however, regarded the Kochs’ singular influence over the school with suspicion. “It’s ground zero for deregulation policy in Washington,” said Rob Stein, the Democratic political strategist who studied how the right wing spent money. Noting the Kochs’ unusually large role, he said, “George Mason is a public university and receives public funds. Virginia is hosting an institution that the Kochs practically control.”

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  The many hats that Rich Fink wore only underscored critics’ concerns. As he grew in importance to Charles Koch, Fink relinquished his formal role at the Mercatus Center, handing its stewardship off to a protégé, and joined Koch Industries as its head of lobbying but remained on the university’s prestigious Board of Visitors. He also was at one point the president of the Charles G. Koch Charitable Foundation, the president of the Claude R. Lambe Charitable Foundation, a director of the Fred C. and Mary R. Koch Foundation, and an integral member of several of the Kochs’ political groups. The fungibility of his roles hinted at the fine line between nonprofit and for-profit pursuits within the Kochs’ enterprise.

  As Fink’s star rose, Crane’s fell. Crane still ran the Cato Institute, but in 1992 Charles Koch resigned from the libertarian think tank’s board, although David remained a trustee. Associates suspected that Crane, who didn’t take orders gladly, had not demonstrated sufficient fealty to his patron. Crane had privately ridiculed Charles’s management philosophy, which Charles trademarked under the name Market-Based Management, or MBM, and later distilled into his book The Science of Success. In essence, Charles believed that businesses’ corporate culture should replicate the competitiveness of the free market. Employees at almost every level of his company were compensated on the basis of the value they created, competing with each other for bonuses, which constituted large portions of their annual pay. Charles described MBM as a “holistic system” containing “five dimensions: vision, virtue and talents, knowledge processes, decision rights and incentives.” Some company employees privately mocked the cutthroat culture that MBM fostered as “Making the Brothers Money.” Forbes, too, lampooned Charles a bit, in its review of his book, describing him as an “autodidact” who had “almost a Marxist faith in ‘fixed laws’ that ‘govern human well-being’ ” and whose “system for grading employees” was “especially obtuse.”

  Despite the mixed reviews, Charles insisted that personnel in all corners of his enterprise adhere to his system, setting aside regular time to practice and review the techniques. “It became exactly the kind of bureaucracy that libertarians detest,” noted one former employee, before adding, “He’s the billionaire, not me, so who knows?” Market-Based Management embraced the notion that employees at every level, even the bottom, might have superior ideas to those at the top. Theoretically, it was an egalitarian approach, yet how open Charles really was to those like Crane who challenged his top-down authority is debatable. Many found him remarkably humble for one of the wealthiest men in the world, noting that he lunched regularly in the company cafeteria alongside his employees. But in a 1999 speech, Charles likened his fixed beliefs to those of Martin Luther, the founder of Protestantism. “In that, I echo Martin Luther,” he said of his own free-market views. “Here I stand. I can do no other.” The comparison was revealing.

  In any case, Crane was less than reverent when Charles tried to impose his management system on the Cato Institute. From his large office in Cato’s strikingly modern, light-filled Washington headquarters, Crane later made clear that he regarded Charles as a serious thinker and an exemplary businessman, but he couldn’t help but poke fun at MBM. “He thinks he’s a genius. He’s the emperor, and he’s convinced he’s wearing clothes,” Crane said with a snicker. Fink, by contrast, was much more solicitous of Charles’s ideas. “Richie exploited MBM to the hilt,” a Cato official said of Fink. “He took over with a shiv” in Crane’s back. “He’s well named.”

  With Cato and the Institute for Humane Studies, the Kochs checked off the first item on Fink’s shopping list for social change—institutions that could hatch scholarly ideas in line with their own thinking. The Mercatus Center checked off the second item, a more practical organization aimed at promoting these ideas into action. Its location, just across the Potomac from the Capitol, was a bonus, enabling its fellows to testify regularly as independent experts at congressional hearings. By 2004, The Wall Street Journal dubbed it “the most important think tank you’ve never heard of” and noted that fourteen of the twenty-three regulations that President George W. Bush placed on a “hit list” had been suggested by Mercatus scholars. Eight of those were environmental protections. Fink told the paper that the Kochs have “other means of fighting [their] battles” and that the Mercatus Center does not actively promote the company’s private interests. But Thomas McGarity, a law professor at the University of Texas who specialized in environmental issues, argued that “Koch has been constantly in trouble with the EPA, and Mercatus has constantly hammered on the agency.” One environmental lawyer who clashed repeatedly with the Mercatus Center dismissed it as a lobbying shop dressed up as a nonprofit, calling it “a means of laundering economic aims.” The lawyer explained the strategy: “You take corporate
money and give it to a neutral-sounding think tank,” which “hires people with pedigrees and academic degrees who put out credible-seeming studies. But they all coincide perfectly with the economic interests of their funders.”

  In 1997, for instance, the EPA moved to reduce surface ozone, a form of air pollution caused, in part, by emissions from oil refineries. Susan Dudley, an economist who became a top official at the Mercatus Center, came up with a novel criticism of the proposed rule. The EPA, she argued, had not taken into account that by blocking the sun, smog cut down on cases of skin cancer. She claimed that if pollution were controlled, it would cause up to eleven thousand additional cases of skin cancer each year.

  In 1999, the District of Columbia Circuit Court embraced Dudley’s pro-smog argument. Evaluating the EPA rule, the court found that the EPA had “explicitly disregarded” the “possible health benefits of ozone.” In another part of the opinion, the court also ruled, 2–1, that the EPA had overstepped its authority.

  Afterward, the Constitutional Accountability Center, a watchdog group, revealed that the judges in the majority had previously attended one of the all-expenses-paid legal seminars for judges that were heavily funded by the Kochs’ foundations. This one had taken place on a Montana ranch run by a group that the Kochs helped subsidize called the Foundation for Research on Economics and the Environment. The judges claimed that their decision was unaffected by the junket. Their embrace of the Mercatus Center’s novel argument, however, soon proved embarrassing. The Supreme Court overruled their position unanimously, noting that the Clean Air Act’s standards are absolute and not subject to cost-benefit analysis. Although their side lost in the end, the case illustrated that the Kochs’ ideological pipeline was humming.