Business this week

Xstrata’s all-share offer to Anglo American for a “merger of equals” was forcefully rebuffed by Anglo’s board. Big investors in Anglo urged it to keep the door open to a sweetened deal, which would create the world’s third-biggest mining company. See article

Addax Petroleum agreed to an C$8.3 billion ($7.2 billion) takeover from Sinopec, giving the Chinese state-controlled oil firm access to Addax’s operations exploring off the West African coast and developing the Taq Taq field in Iraq. The deal comes shortly before the Iraqi government prepares to auction off oil contracts to foreign companies. See article

America and the European Union lodged a complaint with the World Trade Organisation alleging that China is placing unfair levies on its exports of raw materials, such as bauxite and zinc, thereby providing cheaper materials to manufacturers at home. See article

Any dream will do

Boeing yet again postponed the maiden test flight of its 787 Dreamliner, this time because of structural weakness in the area where the wing attaches to the body of the aeroplane. The company had only recently insisted that the flight would take place by the end of the month. A new timetable will be announced within the next few weeks for the project, which is already two years behind schedule. See article

The European Central Bank provided a record €442 billion ($620 billion) to the euro area’s banking system through its offer of unlimited one-year funds at 1% interest. The measure has been dubbed a “stimulus by stealth”.

The World Bank predicted that the economies of the developing countries would grow by only 1.2% this year, significantly below last year’s growth rate of 5.9%. By contrast, the OECD raised its forecast of economic growth for the first time in two years. The Paris-based organisation of 30 industrialised countries now expects GDP among its members to contract by 4.1% in 2009 and to grow by a modest 0.7% in 2010.

The Federal Reserve sounded a bit more optimistic about the American economy than it has for a while. After a two-day meeting, the Fed said that the “pace of economic contraction is slowing”, though the economy would “remain weak for a time”. The central bank played down the threat from deflation, a threat it had emphasised earlier this year.

Beware of the bear

Russian stockmarkets fell further when the World Bank forecast Russia’s economy would shrink by 7.9% this year. Russian indices have tumbled this month from their previous highs for the year, as have stockmarkets in many emerging economies. (China’s stockmarkets bucked the trend by reaching their highest levels for a year.) Analysts have sounded a note of caution about American and European stockmarkets, too, warning that underlying economic fundamentals are not as strong as the rallies of the past three months would suggest.

Apple said it sold 1m of its next-generation iPhone 3GS handsets during the first weekend the device was on sale. The figure was higher than most had expected, providing a fillip to Steve Jobs as he prepared to return to the helm after six months of medical leave. This did not stop investors from speculating about the health of Apple’s chief executive, who recently underwent a liver transplant.

MySpace announced more job cuts. After drastically reducing the size of its American workforce, the social-networking website slashed its international staff by two-thirds as it adapts to a sharp decline in advertising revenue.

Kohlberg Kravis Roberts adjusted its plan to turn itself into a public company by proposing an offering through a merger with an affiliate already listed on the Euronext exchange. The “back door” move is viewed as a stepping stone to an eventual listing on the New York Stock Exchange.

Let shareholders supervise?

Royal Bank of Scotland was embroiled in more controversy over executive pay when it emerged that Stephen Hester, its chief executive, would receive a compensation package worth up to £9.6m ($15.8m). The package was backed by the bank’s institutional shareholders to “incentivise” Mr Hester. His predecessor, Sir Fred Goodwin, only recently agreed to return half of his £700,000 annual pension after a public outcry.

The number of people with net assets of at least $1m (excluding their homes) fell by 14.9% in 2008, according to an annual report from Capgemini and Merrill Lynch. The total wealth of these 8.6m “high net-worth individuals” stood at $32.8 trillion. Over half of the super-rich live in America, Japan and Germany, but China passed Britain to take fourth place for the first time.

The recession and pay

The quiet Americans

Employees are proving stoical in the face of pay cuts and compulsory unpaid leave

BACK when times were better and the newspaper industry wasn’t fighting for dear life, reporters at the Cleveland Plain Dealer would regularly grumble at the measly pay increases their union negotiated. Last month, when the union announced it had negotiated a 12% pay cut in exchange for a promise of no lay-offs, there was applause. “It took me aback,” says Harlan Spector, a medical reporter and one of the negotiators.

Like many long-standing economic relationships, “wage stickiness” is being tested by the savagery of the recession. Ordinarily, when unemployment shoots up wages do not tend to fall: they simply grow more slowly. Why the price of labour responds less to demand than that of other commodities is a bit of a puzzle. In the 1990s Truman Bewley of Yale University interviewed hundreds of employers and discovered that, faced with a slump in demand, they would rather lay some workers off than cut the pay or hours of everybody. The sackings devastated those directly affected, but broad cuts to pay and hours hurt everybody’s morale. “The main drawback of pay cuts is that they fill the air with disappointment and an impression of breach of promise, which dissolve the glue holding the organisation together,” he wrote in 1997.

In this recession hard-pressed employers are not just laying off workers but cutting wages and implementing “furloughs”—unpaid, compulsory time off. A survey by YouGov for The Economist this week found 5% of respondents had taken a furlough this year and 13% had taken a pay cut. Watson Wyatt Worldwide, a human-resources consultancy, says the proportion of American employers implementing either wage cuts or furloughs has risen sharply since October (see chart 1). Since September, as unemployment has jumped three percentage points, the average work week has shrunk (see chart 2) and hourly wage growth has slowed sharply to 3.1%. The slowing will be even sharper once a big fall in bonuses, especially in the finance industry, is included.

Higher inflation in the early 1980s and 1990s meant employers could simply freeze wages or raise them more slowly than prices to achieve real cuts in pay. This still dented employees’ standard of living but without the humiliation of a smaller paycheck. Now inflation is lower (in fact, negative because of a big drop in fuel costs). So, in the absence of big increases in productivity, wage cuts may be less avoidable. With households carrying big debts, falling incomes could heighten financial stress and, at worst, initiate a cycle of wage and price deflation.

Mr Bewley also found that psychological resistance to pay cuts melts when the employer’s survival is at stake. In January 40,000 members of the Teamsters Union agreed to a 10% cut by YRC Worldwide, a trucking company, which is at risk of bankruptcy. “The company needs some help,” a Teamster official said at the time.

Newspapers are also under severe pressure. The New York Times recently cut salaries temporarily by 5% in exchange for 10 additional days of leave. On June 23rd it reached an agreement with a union representing employees of the Boston Globe on a 6% pay cut. Employees had earlier voted against an 8% pay cut, but gave in when the Times threatened a 23% cut.

When the Plain Dealer first said this year it needed to reduce its labour costs by $5m, the newsroom was furious. For years the journalists had got by with wage increases of barely 1%, after higher health-care and pension contributions were subtracted. But the wave of closures and lay-offs throughout the industry was sobering. Last year 27 newsroom employees were laid off and only two have since found full-time work. “People are a little pale thinking about how to make their personal finances work [but] …we are ahead of what we were earning if we all had to find new work,” says Karen Long, the books editor and a union negotiator. The 12% pay cut consists of an 8% cut in pay rates plus 11 furlough days. If the company lays anyone off after the one-year agreement, pay automatically jumps back to its previous level.

In a society known for competitive individualism, pay cuts and furloughs are calling forth a spirit of collectivism. Hewlett-Packard, Advanced Micro Devices and FedEx have trimmed rank-and-file pay, but their chief executives have taken 20% pay cuts, says Challenger, Gray and Christmas, an outplacement consultancy. Slumping tax collections forced city administrators in Lima, Ohio, to draw up contingencies for a 10% cut in hours for all but emergency workers. But first the city’s eight most senior administrators gave up a 2.5% pay rise.

All together, for the moment

Not all such negotiations are being welcomed, however. In California home-care workers, who look after the infirm in their own houses, have demonstrated against Governor Arnold Schwarzenegger’s proposal to cut their pay to the state minimum wage of $8 per hour. Their pay has already been reduced to $9.50 an hour from between $10 and $12 according to UDW Home Care Providers Union, one of their unions. To take another example: when the restaurant where Sandy Jaffe is a waitress near Los Angeles cut everyone’s hours in half because of slumping business, she was annoyed management didn’t trim the hours of less productive staff more.

Still, most Americans seem to be responding stoically. Signs that the recession is bottoming out means the pressure for more cuts is ebbing: this week, a report from the OECD suggested that growth in the rich countries could resume next year, albeit at an anaemic 0.7%.

Although no one is happy to have their pay cut, many seem to like a brief break from the rat race. Some employers forbid employees to do anything even work related on their furloughs, such as checking voicemail or BlackBerrys. In some circumstances that could require the employer to pay the employee for the whole week.

When the teachers’ pension plan that Susan Daniel works for in California decided to furlough employees for two days each month, she welcomed the chance to spend the days at home with her husband and to get around to rebuilding the backyard deck. To cut costs, she gave up bottled water and her cable-TV service. The fact that everyone, including her boss, is getting the same treatment makes it much more bearable. “At least we have our jobs and our benefits,” she says.

Illustration by KAL

America's climate-change bill

In need of a clean

America’s climate-change bill is a bundle of compromises

THE headline is a big one: for the first time, America’s House of Representatives agreed, by 219 votes to 212, on Friday June 25th to cap emissions of carbon dioxide, the main greenhouse gas. The bill envisions modest reductions of 17% from 2005 levels by 2020, but the cuts get more swingeing over time (under the assumption that technology to mitigate emissions will improve). By 2050 the cuts should hit 83%.

But environmental campaigners have gritted their teeth as the bill has passed through the legislative process. Drafted by Henry Waxman and Ed Markey, with support from the Obama administration, the bill originally envisioned a cap-and-trade system whereby credits conferring the right to emit greenhouse gases would be sold to the highest bidders. The revenue from such an auction would be used to offset increasing energy bills.

But to the ire of the green faithful, the bill will now give away 85% of the permits to emit carbon, while auctioning off the rest. Even in that form, though, the bill looked like it might generate opposition from fiscally conservative Democrats or those that represented states with lots of farmers. The support of those Democrats would be needed to get the legislation past near-unanimous Republican opposition.

To mollify the farmers, Mr Waxman had to agree that “indirect land-use changes” would not affect how American farmers producing crops to make ethanol would be considered under the bill. Farmers had howled that, by the original proposals, planting more crops to produce ethanol would mean less land devoted to food crops. This would clearly cause food prices to rise. Farmers in (say) Brazil might then cut down Amazon rainforest to make up the shortfall in America. That chopped-down Amazon would have counted against the Iowan corn farmer when carbon credits were doled out. Mr Waxman agreed to suspend the provision for five years, so the National Academy of Sciences could further study the subject.

The next big trade-off also came late in the day at the insistence of the farmers. The Department of Agriculture, rather than the Environmental Protection Agency, will determine what counts as a carbon “offset”. This means that farmers who prevent carbon emissions by, for example, planting trees or reducing tillage, would get carbon credits. The EPA is reckoned to be a tough regulator that would make sure farmers did not get credits for doing things that they would do anyway. The Department of Agriculture is expected to be more friendly to farmers.

Many of the mainstream environmental groups-the Natural Resources Defence Council, the Environmental Defence Fund, the Sierra Club and others-have said that the bill is flawed but far better than nothing. More than that, they claim that once in place it can be tightened over time.

But the bill must pass the Senate where farm states have even more clout than in the House (since each state, no matter how sparsely populated, gets two senators). It must go through another clutch of committees, each of which is susceptible to lobbying by special interests with long experience of getting their way. The energy committee, for example, has already passed a bill on renewables that has disappointed greens. The Senate’s majority leader, Harry Reid, wants a vote on the package by mid-September.

With just a few months to go before global talks in Copenhagen on a successor to the Kyoto protocol other big countries are showing their hands on climate change. Russia and Japan have announced targets that are well shy of the goals set by European countries, currently leading the world with their green ambitions. China and India are refusing to countenance any hard ceilings on their own emissions. An American carbon bill is regarded as a necessary step before anything of substance can be agreed in Copenhagen. But a weak bill might mean that the impetus for serious discussions is lacking.