The people of Tatitlik have had a spectacularly unlucky history. In 1964, much of the population was relocated from the nearby village of Chenaga, which had been destroyed by the Great Alaska Earthquake. (Chenaga sat on what turned out to be the epicenter of the 9.2 Richter quake, the most powerful recorded tremor in North American history.) Then, in 1989, the drunk captain of the Exxon Valdez plowed his tanker into Blythe Reef, just five miles down the coast from Tatitlik. The Valdez spilled 10.8 million gallons of oil onto the seal beaches and herring runs that the villagers relied on for food. Tatitlik tried to get Alaska to use some of the compensation funds to build a small boat harbor for its fragile fishing fleet, but the state instead built massive industrial docks to accommodate clean-up tankers in the event of another spill. Those docks loom over the village’s fishing boats, which look in comparison as if they’ve been imported from Lilliput.

Tatitlik has no stores and no on-village work, save for a handful of government jobs running its health clinic and school. The pride of the village is an old Russian Orthodox church, one legacy of the long history of Russian colonization here. Used oil drums are stacked at the east end of the town, a wrecked car at the western end, and kids, on their way to hunt, sometimes lug shotguns through the streets. Until recently, the town had five cars, but the brakes on one, a black pickup, failed a couple of weeks ago, and the villager driving it had to smash the truck against the crane at the end of the tanker dock in order to keep it from rolling into the sound. So now, Tatitlik’s automotive fleet is down to four.

These same villagers are the unlikely owners of a giant multinational company: the Chugach Alaska Corporation. Chugach Corp.’s annual revenues now top $700 million, nearly all of which comes from federal contracting. The company does more business with the U.S. government than do IBM, AT&T, or Motorola. Chugach and its partners run military bases from Nevada to Iraq. They monitor seismic activity from a base in Korea in support of the Nuclear Test Ban Treaty. And on another end of the earth, Chugach operates the Reagan Test Site, a coral reef leased from the Marshall Islands, where engineers give ballistic missiles a workout and may some day run the planned Star Wars program. The contract for that one is worth $2.5 billion.

How do the villagers, most of whom would much rather hunt seals and stalk caribou herds than go anywhere near a corporate boardroom, manage these projects? The truth is, they don’t. Village chief Gary Kompkoff is vice chairman of the corporation, but no other villagers and only a handful of Eskimos are even employed on these projects. The projects are managed instead by Chugach’s subsidiary companiesrun by white contracting executives from offices in downtown Anchorage or in the Lower 48 statesor by Chugach’s corporate partnershuge firms such as Lockheed Martin and Bechtel.

These natives are being used essentially as fronts, what the Heritage Foundation’s Ronald Utt calls corporate shells, because of certain privileges that only Alaskan tribal corporations enjoy. Chief among them is the unlimited right, given to Alaskan native-owned corporations by Congress at the behest of Alaska’s senior senator, Ted Stevens (R-Alaska), to bid for sole-source federal contracts (those not put up for competitive bid). As a result, these companies and their giant corporate partners can win federal contracts without necessarily having to offer the government the lowest possible price.

These contracting advantages provide the natives with some modest benefits, mostly in the form of annual dividend checks. The villagers of Tatitlik who were born before 1971 get about $1,500 a yearenough to buy new outboard motors for their boats so they can chase the migrating seal herds. Chugach is one of the most successful native corporations; most villagers in Alaska, while connected to a native corporation, receive even smaller annual checks.

Many of the system’s benefits, though, flow to non-native people and corporations inside the Beltway. Lobbyists get hefty fees for putting together the deals. Federal contracting officers get to pad their minority and small business requirements and sidestep the headaches of competitive bidding. Bush administration officials get a tool to circumvent civil service unions. And, most of all, the Bechtels and Lockheed Martins get business they might not otherwise have obtained, with larger profit margins than they normally enjoy.

The amount of business flowing through Eskimo contracting schemes has exploded in the post- 9/11 contracting boom. An industry that was still tiny five years ago now generates billions of dollars each year. And it’s beginning to attract scrutiny. Keith Ashdown of the nonpartisan watchdog group Taxpayers for Common Sense calls the Eskimo loophole a magnet for mischief. The Government Accountability Office has launched a probe into whether federal agencies are paying far more for contracts than they should. The Senate Energy and House Armed Services Committees have also held hearings on whether some sole-source contracts run through the Eskimo loophole ought to have been competitively bid. Stevens, the author of the loophole, has been accused of making hundreds of thousands of dollars from a real estate deal involving one of the Alaskan corporations he helped to create.

If these investigations develop into a full-fledged scandal, it will be the third in just a few months involving senior Republicans in Washington and aboriginal populationsand three’s a pattern. A Senate committee is looking into the case of Jack Abramoff, the conservative lobbyist and former aide to House Majority Leader Tom DeLay who is accused of bilking millions of dollars from native Americans to help them fend off non-existent threats to their special rights to operate casinos. Meanwhile, DeLay himself is the subject of inquiries as a result of donor-funded trips to the Marianas Islands, an American protectorate where textile manufacturers operate sweatshops with imported Chinese labor outside the reach of federal wage and workplace rules, yet have the rightthanks to DeLay’s influenceto stamp Made in America on their products.

That all three scandals involve the exploitation of federal regulatory loopholes constructed to benefit native Americans is no coincidence. It is instead an illustration of how government now works under GOP control. Once upon a time, when Democrats ran Washington, federal tax dollars for the poor and other constituencies flowed largely through federal agencies and projects. The system was often inefficient, didn’t always do much for its intended beneficiaries, and over the years became unpopular with voters. Now, a new system is arising, one more in tune with the zeitgeist. The new system funnels tax dollars not through wasteful federal bureaucracies but through crony capitalist enterprises. It is as inefficient and ineffective as the old system, maybe more so. But while the old system bolstered Democratic control of Washington, this one supports Republican rule. Welcome, then, to the new conservative welfare state.

This convoluted, controversial system is the product of one of the most bizarre and ambitious social engineering projects in recent American history, a plan designed to lift Alaskan natives out of poverty through the private sector. It’s hard to imagine a group more deserving of government help; since they first began to have significant dealings with white Americans at the turn of the 20th century, Alaskan natives have had a brutal time of it. In the 1905 Yukon gold rush, they were chased off their lands by prospecting Russians and Californians. During the 1940s, the Bureau of Indian Affairs (BIA) began forcing tribes to abandon their itinerant hunting and settle in permanent locations; alcoholism became rampant, and children were sent off to BIA-run boarding schools, horrid dens of physical and sexual abuse. In 1957, the government physicist Edward Teller, one inspiration for Dr. Strangelove, and the U.S. Bureau of Atomic Research even developed a strange plan to detonate a hydrogen bomb under the native village of Point Hope.

By the time modern Alaska emerged in the mid-1960s, native Alaskans seemed natural recipients for sympathy and affirmative federal action. When oil was discovered in Prudhoe Bay on Alaska’s mostly frozen and uninhabited north coast, oil companies needed to figure out how to acquire native lands to build a pipeline through the interior of the state to the ice-free port of Valdez. A small group of government and community leaders stepped in to oversee the task. These menincluding Johnson administration officials, a handful of Senate aides, and some native leaderswanted to avoid the standard reservation solution, which they believed create only dependency and stasis. The result was a break from history: They privatized the reservation. We believed then, and I still believe now, says Bill Van Ness, one of the Senate aides involved in the effort, that we were creating a revolution.

They cut a simple deal. The natives would give up most of the land they had hoped to win, reducing their claims from more than 300 million acres to 44 million. In return, the government would create special native corporations (more than 200 in all), owned fully by nativesa $1.5 billion cash settlement from the federal government was divided between them as seed money.

One of those pushing hardest for the bill was Ted Stevens, then a young, conservative junior senator from Alaska. The deal, ideologically appealing for him, would ultimately prove politically useful as well. While in the lower 48 states, native reservations almost invariably voted for Democrats, the involvement of Stevens’s staff in creating these corporations helped to secure the loyalty of Alaska natives. Locally, Eskimos often vote Democratic, but for 30 years, they have steadfastly supported Stevens and the state’s Republican delegation in Congresslargely, says Sarah Lukin of the Native American Contracting Association, because they’ve been such a great help to the natives and the ANCs [Alaskan native Corporations].

From the beginning, Stevens demonstrated not just a political but also a personal stake in native advancement. Native leaders around the state still remember fondly the senator’s first wife, Ann, who during Stevens’s early campaigns spent many weeks in tiny villages and developed a real rapport with the natives there. We’d tell him, if you want our votes, don’t come, just send Annie, a longtime Native leader told me. (Ann Stevens died in a plane crash in 1978.) Stevens eventually inserted an exemption in the land claims settlement act that allowed native corporations to ignore sole source contracting limits. At the time, few noticed the provision largely because natives weren’t exactly in a position to run government contracts. We spent our first years learning to spell ‘corporation,’ remembers Willie Hensley, an influential early native political leader who now works in Washington as a lobbyist for the Alyeska Pipeline Corp. Life for the natives at the time was so rudimentary that Hensley has called it the twilight of the stone age.

Although well-intentioned, the plan to turn nomadic caribou hunters and fishermen with no formal education into effective corporate managers was inherently problematic. The natives mostly created enterprises that were inefficient and returned little in the way of profitszinc mines, timber logging, fish processing, etc. Basically, says Hensley, they were jobs programs. By the mid-1980s, most of the corporations were floundering, and they returned to Stevens for help. The senator worked to obtain additional benefits for themmost notably, loopholes in tax lawbut by 1992, the corporations were still having a hard time getting their feet on the ground.

That’s when Chugach, down to 12 employees and in bankruptcy, hired Mike Brown. Brown was a native of Seward and had been a career Air Force officer, retiring as commander of an Alaskan base. He had dealt with contracts in the service, and knew both that minority firms had some advantages in dealing with the federal government and that Alaskan natives didn’t seem to be earning much benefit from them. Some months earlier, he had sent a lawyer to Anchorage to investigate, and the attorney discovered that although the BIA listed Alaskan natives as an economically and socially disadvantaged group, the Small Business Administration (SBA) did not. Brown convinced the SBA to list Alaskan natives as eligible for minority small business loans, and realized, with gathering excitement, that they had unique access to sole-source contracts. When he interviewed for the job of running Chugach, Brown told the board, If you hire me, it’ll be to commit completely to government contracting. They agreed.

Brown told me this story in mid-June in the Anchorage Sheraton’s lobby restaurant as tour organizers herded senior citizens into teams for cruises around Prince William Sound. Brown is a little over 60 now, tall with a white mustache and still prone to military expressions like hit the head. The state’s prosperity traces the arc of his lifetime. When he was born in 1940, Anchorage had a population of 3,500; today, it is home to 300,000. Brown is sometimes referred to in the press as the godfather of native contracting, and his face breaks into a wide and sudden grin when I mention it. He has visible reasons to be proud: There are only a handful of affluent-looking buildings in Anchorage, the kind of modern glass office structures that signal wealth, but all of them seem to house either oil companies or native corporations. The ANCs, says University of Alaska economist Steven Colt, have become the state’s establishment.

There’s no natural reason why an out-of-the way place like Anchoragea place so far from the American mainland that Russia appears on the local TV station’s weather maps, but not Seattleshould have become a center of the government contracting industry. Native corporations, however, were holding some valuable cards. The combination of their sole-source contracting exemption and status as minority-owned firms gave them an advantage over competitors, a benefit that Brown leveraged. He began modestly with base management subcontracts, hiring smart project managers he knew from the contracting world to run them. Running base services isn’t rocket science, Brown told me.

But there were problems. Brown found that he couldn’t find enough Eskimos with management experience to run even these simple projects. By law, minority-owned corporations and their subsidiaries are required to actually have a minority as CEO. Brown had an ace up his sleeve: Like CEOs of many of the native organizations, he had a tight relationship with Stevens and was able to get the senator on the phone. Stevens soon got his colleagues to pass legislation exempting native companies from the minority CEO rule. Then Chugach grew too big to qualify for programs favoring small businesses; Stevens lobbied for and passed an amendment letting native corporations retain their small business status regardless of how large they become. And when Chugach began to approach the nine-year limit for a single company’s participation in the small business program, Stevens won yet another statutory break allowing Alaskan native firms to create endless new subsidiaries so that the parent firm could have indefinite access to contracts.

Chugach and other Alaska native programs that followed its lead were growing fast. But as they set their aim for bigger contracts in the late 1990s, they realized that they needed help navigating the complex world of Washington contracting. Again Stevens came through. As chairman and longtime member of the Senate Defense Appropriations Subcommittee, he had dozens of former staffers and associates working on K Street lobbying on behalf of defense contractors. They knew which firms might be interested in partnering with the native corporations, and what doors at which agencies to knock on. Pretty soon, most of the Eskimo corporations had these former staffers on retainer. If the lobbyists hit an obstacle, they could get Stevens himself to call government officials to push them to send contracts to the native corporations. Lobbying, says current Chugach Chair Sheri Buretta, became the backbone of the system.

In the end, though, it wasn’t a very hard sell. The big contractors didn’t need much convincing that sole-source deals offered significant upsides. Contracting agents within the federal bureaucracy also saw advantagesmostly, efficiency. Competitive bidding is a complex and time-consuming process. Even though it often leads to lower prices, it’s not something contracting agents enjoy, especially when facing tough deadlines.

The bureaucrats had another incentive as well: the constant pressure they face to meet quotas for contracts to minority-owned and small businesses. Finding enough such companies with the capacity to do the work, especially on big projects, can be a nightmare. Eskimo-owned firmswhich by then were not that smallprovided an ideal solution. We needed to get our small business numbers up, but we can’t send a small business to run Los Alamos, Brad Bugger, a spokesman for the Department of Energy, told me. But because the Alaskan native firms are exempted from the size limitations, we could send them a project that would make a significant difference in our small business numbers. So when the department needed a new contractor to run the Idaho National Laboratory, that state’s biggest employer, it gave the job, on a sole-source basis, to an Alaskan native firm, Alutiiq.

Yet another party stood to benefit from native contracting. By 2001, Bush administration officials saw in the sole- source exemption a way to privatize government quickly. That year, a joint venture of two native corporationsChenega and Arctic Slopewon a no-bid, $2.2 billion deal to operate the Defense Mapping Agency, which uses sophisticated computer modeling to map potential battlefields. The companies didn’t have any of the technical experience these contracts demanded, but they did have something else. Unfettered by the need to provide civil service protections to their employees, they cut staff and streamlined operations more aggressively than the federal government itself could have.

And then came the attacks of September 11, 2001. Instantly, officials all over Washington were looking to spend lots of money on defense and homeland security contracts, the sooner the better. The native corporations looked like perfect vehicles. In 2003, Nana Pacific, another subsidiary of a native corporation, won a $70 million award from the Defense Department to rebuild the Iraqi port of umm-Qasr; it subcontracted with one of the world’s leading port construction firms, SSA-Marine, and handed off the operation of the contract. In another instance, currently under investigation by the House Armed Services Committee, two large security companiesWackenhut and Vance Internationalwon a series of sole-source contracts collectively worth $180 million by partnering with Alaskan native firms. Both companies had previously bid on similar contracts on their own and lost.

Alaska has a well-earned reputation as a rough, bootstrapping state, with a boisterous, counter-establishment character. It is a place beyond the American boundary, populated by gangly moose and whales, by hippies who head for the curving black mountain slopes, by those on a libertarian quest to get away from places with rules. In downtown Anchorage, wobbly old 12-seat planes fly overhead, bound for villages that can’t be reached any other way, ferrying passengers in search of ever more remote locales.

But while the state thrives on its identity as the last frontier, it is in many ways less like the Wild West than West Virginia. Like its poor, rugged Appalachian cousin, Alaska’s economy is overwhelmingly dependent on other people’s tax money; it is by far the nation’s largest per capita recipient of federal cash. And, as with West Virginia, it is represented in Washington by an aging senator who uses his appropriations power to keep the state’s economy afloat almost single-handedly.

Stevens rivals his West Virginia counterpart, Democratic Sen. Robert Byrd, in his ability to attract federal dollars. (Through his staff, Stevens declined interview requests for this article.) Some Alaskan economists estimate that Stevens is responsible for 10 percent of the state’s economy. Stevens and Byrd are good friends, but in personal style, the two senators are near opposites: Byrd cultivates the public persona of a florid Southern gentleman, using Senate speeches to deliver elaborate appreciations of, say, the women of Congress, or the coming of Spring. Stevens’s public image is of a force-of-nature senator from a force-of-nature state; when he brings appropriations bills to the Senate floor, the Alaskan wears a tie featuring the Incredible Hulk (’cause he’s so strong), and when he’s angry, he wears one depicting the Tasmanian Devil (’cause he might go crazy). But the more telling difference between Stevens and Byrd is in the ways in which they use federal power to do favors for their home states. But while Byrd has become a master of harnessing federal largesse primarily by physically transferring as much of the federal government as possible to his statethere is a reason, for instance, that the FBI’s crime lab is in West VirginiaStevens has branched in a different direction. Instead of funneling tax dollars through federal agencies, he channels them through federally dependent corporations.

This method is unquestionably more palatable to those who oppose the idea of government handouts to the poor. But the laissez-faire Stevens system has some significant downsides. For one, it distributes benefits unevenly. Those natives with the political savvy and organization to take advantage of the system have sometimes done very well. Those without it have floundered and the average native income in Alaska is still $11,000, while the portion of natives living in poverty continues to increase. The villagers in Tatitlik, shareholders in Chugach, love the system: It has provided them not only with dividend checks, but a range of other services, the kinds of things you might normally expect to come from government. Chugach Alaska sponsors scholarships for the college-bound children of its shareholders, and corporate internship programs after they graduate. The company sends quarterly checks to the tribal elders to supplement social security and pays for programs to preserve traditional languages and culture, which had been dramatically fading. Perhaps most important to the villagers, says Tatitlik’s chief, Kompkoff, it makes you proud to be Chugach again. Most Alaskan natives, however, have gotten far fewer benefits, and some have received almost nothing at all.

A more troubling downside is that some of the biggest dividends from the system don’t flow to natives at all, but to other players in the game: the lobbyists who put the deals together, the principals who own the contracting firms, and even the politicians. Stevens has built a mini-political machine using the loophole. His loyalists run the Alaskan native corporations, delivering both votes and campaign contributions and sending substantial fees for lobbying services to a handful of the senator’s ex-staffers and close associates, including Stevens’s brother-in-law and his son. He returns favors to leading native corporation officials: In the 2005 Defense appropriation, Stevens inserted a line ordering the Air Force to spend $2.5 million to buy a parcel of land from Jake Adams, president of Arctic Slope and a longtime Stevens supporter. I’m trying to help one family, the senator told the Anchorage Daily News. The system has even benefited Stevens personally: A recent Los Angeles Times investigation found that Stevens had bought into an Anchorage office tower which was then leased to Arctic Slope for $6 million per year. Stevens’s stake, which he originally bought for $50,000, is now worth more than $1 million. Congress, whose ethics system has recently been watered down by the Republican leadership, has not launched any investigations.

What really drives the issue of native contracting is not political organizing or lobbying pressure or constituent demands but a blunt moral calculation: How do you repay historical debts and assuage a nation’s guilt? We have given up an awful lot to be part of this country, says Buretta, the Chugach Corp. chair. It doesn’t seem unfair that we’re now getting a little bit back. Buretta and others argue that the program has helped the native corporations grow and that Chugach and others are beginning to win competitive contracts. But these competitive deals still account for only a slim minority of Chugach’s government business. And if the overarching goal is to provide a better life for the Eskimos, it would be far simpler and many times cheaper for the government to simply send along a check. It is hard to argue that sluicing the tax dollars through no-bid contracting deals somehow makes Alaska natives any less dependent upon political aid. Instead, it simply changes the nature of what the natives are dependent on, from government welfare spending to government loophole spending.

The question of whether these contracting schemes are really the best way to help Alaskan natives deserves a serious debate. Instead, Washington seems to be shoring up and expanding their special privileges. On the Democratic side, Sen. Daniel Inouye (D-Hawaii) has already won certain contracting advantages for his islands’ natives that are modeled on, though not as substantial as, the Alaskan program. Earlier this year, the Alaskan Natives joined with other contracting companies to found the Native American Contracting Association, a new group whose goal is to expand contracting opportunities and privileges to all American natives. In the lower 48, several native contracting firms have entered the arenaa firm called S&K Technologies, jointly owned by the Salish and Kootenai tribes is partnering with Chugach on a base management contract for Iraq.

When the plugged-in Chickasaw tribe of Oklahoma lost out on a Defense Department contract last year, they used their influence with Rep. Tom Cole (R-Okla.) and the Bush administration to rain down holy terror on the DOD’s contracting officers. If you’ll excuse my language, one peeved DOD bureaucrat told Indian Country Today, the Chickasaws went ape shit. And at last month’s national Native American conference in Green Bay, the nation’s tribesmany of which have been skeptical of, or outright opposed to, special exemptions for Alaskan native corporationsvoted to support the retention of the Alaskan privileges.

Indian tribes aren’t the only ones eager to see the exemption expanded. While some in Washington are uneasy about its costs and corrupting effects, many in the GOP leadership view it as a model for the kind of federal government they would like to see more of. It is a privatized system that circumvents the civil service, enriches politically-connected corporations, provides a trickle of money to the poor, and secures Republican power. For some conservatives, in other words, the Eskimo loophole is not a failed experiment in social engineering. It is the future.

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Benjamin Wallace-Wells is a staff writer at the New Yorker.