:LPE:

One of the effects of the international merger and consolidation is hollowing out, the effective transfer of corporate control to another jurisdiction. Firm’s decisions are made elsewhere and after that, firms no longer need large local business law advice (that gets purchased in the home jurisdiction). In a sense, the “seven sisters” (the 7 largest law firms in Canada) have had a feeding frenzy on the M&As, made a pot load of cash, and watched their clients leave the country. Lawyers aren’t the only losers - all sorts of producer services are less in demand.

It will be interesting to watch the local law firms cope with this. One firm has tried to establish a foothold in the mid-tier US market, although the results are unclear. Corporate — more broadly business — law is an interesting problem. Labour, environment and other regulatory laws are, in theory, sufficiently particular to a jurisdiction that foreign firms won’t practice them, and there will always be some kind of local demand. Corporate law is, again in theory, sufficiently transnationalized and standardized (on the US model) that local knoweldge of corporate statutes is not quite as important. This is a simplification, and more work on the role of corporate law on the political economy of corporate decision-making under these conditions would be useful.

The Globe’s report on same. Link.

More from the Globe on the M&A binge. As reported in previous posts, commodity companies are leading the charge. Link.

On May 25, the UK government announced wide-ranging pension law reforms. I have not reviewed them yet but news reporting suggests the following major initiatives.

First, the state-pension age will start rising from 65 to 68 in 2046. Second, the basic state pension, which has generally risen with prices since 1980, will be linked to earnings beginning in 2012. Earnings are expected to rise faster than inflation. Third, retirement saving will be encouraged by enrolling employees into a national scheme of personal retirement accounts, from which workers may opt out, and which requires matching contributions from employers.

More on this soon.

Statistics Canada reports that the record profits of corporations continue. Link. The graphic below is from the Statisitcs Canada Q1 report on same.

Overall, enterprises have had banner years in profits since 1995. We also know that some sectors (finance, mining, energy) are having a better time of it than others (manufacturing). Although we do not know what the allocation decisions are with these profits, there are some likely implications I’ll list below.

Corporations are sitting on piles of cash. They have also likely not been paying down important debts, such as accumulated pension deficits.

These also suggest that tax cuts to corporate rates are not causing re-investment or economic growth, as they are intended to (the explicit policy rationale for corporate tax cuts is to increase investment and create economic growth). These tax cuts have been retained by enterprises. The theory supporting corporate tax cuts was always suspect, because it relied in large part on this particular connection — that enterprises would re-invest those windfall savings.

These high earnings are in part fuelling an M&A binge, especially in the resource sector and to some extent in the secondary manufacturing sector (steel). This is a consolidation effort, and does not appear to be leading to a large number of IPOs or investment in new businesses. The main beneficiaries of this re-organization of existing resources are investment bankers, lawyers, and former owners who are selling in a peak market. As the meteoric rise in commodity prices appear to pause, we see a consolidation while the going is good.

To be sure, wages have risen, and unemployment has fallen, more rapidly in the past year or so than in previous years. However, a more useful comparator is the phase in the business cycle. On the whole, these profits have not been distributed through wages. Although some wages have been rising quickly (finance professionals), aggregate measures indicate that wage growth is behind where it typically is at this stage in a business cycle, and 20 and 30 year measurements indicate that average wages are, relatively speaking, flat.

The latest threat proposal is that energy income not be included in the revenue-sharing deal (equalization payments) run by the Federal government.

If I understand the way the deal works, this is the same as Conrad Black saying that he won’t support handing out food stamps unless he gets the same number as anyone else — and complaining that poor people get more social assistance than rich people.

It leads me to Spenglerian thoughts about the worst in people rising up, and forming government.

The Economist reports of a new book that sumarizes the recent work and turn to the economics of technology, especially development and change of same. This was the famous “residual” element in Solow’s model of economic growth, the variable that in fact accounted for most of the growth shown by the model. It has been the subject of speculation since.

The Economist contends that theories of the economics of technology are now addressing this under-examined aspect of growth. The implications could be important for the theory and role of capital markets, intellectual property law, and the role of the state in development, among other things. More on this soon.

Link.

The National Post had a bit of fun on the weekend at the expense of the Congress of the Humanities, a.k.a. the Learneds, which takes place each year. It is a jamboree of several thousand professional academics and students. Link.

I suppose there is some irony in seeing a journalist with (likely) a Bachelor’s degree in journalism or some other humanity, who regularly writes about subjects she has no formal training in or time to conduct serious study, writing in a paper largely devoted to one of the most abstract of the social sciences, economic analysis, created by a right wing idealogue, edited by a family that is widely regarded as censurous, poking fun at those who spend several (poorly paid) years attempting to professionalize themselves and make some kind of contribution to Knowledge. It looks like glass houses to me…

As posted in this space before, the U.S. House and Senate are currently attempting to reconcile two bills on pension reform. The NYT (Mary Walsh) has identified some serious problems with the legislation, including the extension of long (very long) time periods for the amortization of unfunded liability, in some cases, up to 20 years.

Barry McKenna, the Globe U.S. business reporter, has identified another issue, although it is difficult to evaluate the claim as he does not cite a single easy source to confirm his report. He suggests that changes to the accounting rules for pensions will require plan sponsors to delcare the actual liability associated with the pension plan. To date, he reports, these liabilities have been permitted to be under-reported (that is, to be reported as smaller than they are, and not listed in corporate financial reports). If a mark-to-market principle is used, defined benefit plans will show larger deficits, claims McKenna.

Link.

Posts in this space have traced the new economic nationalism that is accompanying the recent binge of M&As in the US, Europe and now in Canada. The Harper government is proposing some new legislation permitting it new powers of review of these mergers. See Link.

There are so many delicious issues here, from the indicia of “good” (U.S.-led) versus “bad” (Chinese-led) takeovers, to an assertion of some interest, maybe even the national or public interests, over corporate decision-making and the profit motive, to another installment on the “hollowing out” of corporate Canada that Arthurs traced in the last major binge of consolidation in corporate Canada, 1985-1995. More on this soon.

I’ve had to take a break from posting news for a month or so. I hope to continue in the near future. SA