Tuesday, May 29, 2007

We Have Nothing to Fear But FIRA Itself

Apparently, the federal Liberal Party -- tired of the reputation it painfully acquired in the nineties for fiscal discipline and economic literacy -- has decided seventies nostalgia is the road back to power. Former Bank of Montreal economist John McCallum, sounding oddly like a British sailor inveighing on the importance of Iran's rights under the Law of the Sea, says ""The government should hold back decisions on major foreign acquisitions and any changes to foreign ownership rules" until a new Investment act protecting "global champions" is put in place.

If the Liberals go through with this, it will benefit neither Canada's entrepeneurs nor her workers. Everyone who starts or builds a business is motivated by the desire to increase its value. The value of a business is what the highest bidder would pay for it. If you eliminate a class of bidders or require them to go through an uncertain and costly regulatory process, then they will pay less and therefore the business will be worth less. Ultimately, it will be harder to finance in the first place. Some Canadian entrepeneurs who would have succeded in a world without foreign investment review won't even exist in a world with it. .

Workers will lose too. Businesses are ultimately deals between suppliers of labour and suppliers of capital. Each side of a transaction benefits from competiton on the other side. To the extent Canadian workers can only be employed by Canadian capital, their opportunities and (on average) their income will be reduced. The only real winners will be Canadian rentiers, who will be able to pick up assets for less, although in the nature of these things the gain to them will be less than the loss to everyone else.

According to the Globe story, the Liberals deny that a moratorium on foreign takeovers until a new Foreign Investment Review Act can be put in place is "protectionist." To the extent that there is a difference between regulatory restrictions to keep ownership of companies Canadian and standard-issue protectionism, the advantage is all on the side of protectionism. Despite its economic costs, I can see a social rationale for protectionism to preserve jobs. There is no rational benefit to making sure the shareholders spell "colour" properly.

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