Why the U.S. No Longer Leads

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A disturbing milestone was reached this week. For the first time since World War I, the value of European stocks eclipsed those in the United States. According to data from Thomson Financial, Europe’s 24 stock markets, including Russia, now boast a market capitalization of $15.7 billion, edging out the U.S.’s $15.6 billion.

The narrowing differential is largely due to strong European performance. Thompson reports that since 2003, European stocks have risen 160 percent compared to a 70 percent rise in U.S. issues. It's not just our stocks that have been trounced — over the same period, the value of the U.S. dollar has fallen some 26 percent against the Euro. Generally speaking, if you’re looking for the world's best investments, I'm afraid they simply aren’t found in the U.S.

The same unfortunate reality holds true for those looking to raise money or start new businesses. London has now usurped Wall Street as the preferred location for stock market IPOs and raising capital. Thompson Financial reported this week that London's IPOs raised 50 percent more money in Q1 than those floated in New York.

Adding insult to injury, it might surprise you that the Heritage Foundation's recently published Index of Economic Freedom ranked the U.S. fourth on the list of freest economies, behind Singapore, Australia, Hong Kong and only slightly ahead of numerous European economies and socialist Canada. For those accustomed to the United States being the undisputed land of the free and home of the brave, the cleanup position is more than an embarrassment ... it's a humiliating slap in the face.

What can explain the shift? Why is the U.S., which has traditionally led the world’s economies, now finding itself being continually left in the dust?

It’s no coincidence that the underperformance of U.S. markets began not long after the passage of Sarbanes-Oxley, a comprehensive suite of anti-business legislation cooked up in the wake of the Enron scandal. Instead of merely prosecuting the tiny minority of businessmen guilty of a crime, the government burdened all businesses with a slew of regulatory hurdles that have dramatically increased costs and undercut competitiveness. Not surprisingly, more corporations have decided to leave the public markets, or in many cases, the United States altogether.

But it’s not simply legislation that is retarding the U.S. economy, but the philosophy from which it stems. After all, America’s historical economic dominance hasn’t come from vast natural resources, but the productive talents of profit-seeking individuals. Yet that’s exactly what Sarbanes-Oxley, along with so many other elements of today’s political environment, seeks to diminish.

For example, take the recent outrage over the so-called "income inequality" gap that separates the rich and poor. To varying degrees, both political parties support programs either to aid lower income workers or punish those who make more.

This sort of class-warfare is diametrically opposed to the foundation of individual achievement on which this country was based. In a free nation, one is permitted to rise as high as his ability will allow. The fact of the matter is that some folks are simply more productive than others. It's the free market, not the government, which should determine how much anybody gets paid.

Wealth is created by the productive efforts of hardworking businessmen. It is not "taken" from the poor. Yet, now we permit the government to regularly redistribute lawfully earned profits in a more “fair” manner. Private earnings have become “public” property to be passed out based on the prevailing political winds.

The distrust of achievement prompted society to expect government to function as a free-for-all service provider charged with everything from running schools to pioneering hydrogen fuel cells to supporting the price of sugar. From drug research to onerous gas taxes, the “free market” barely even exists.

You need not be a millionaire business owner to relate. Look around: from the now-ubiquitous smoking bans, to prohibition on Internet gambling and reproductive rights, we've come to accept that politicians, provided they get enough votes, can do just about anything they damn well please. Democrats and Republicans are equally guilty: both appear perfectly willing to substitute a constitutional republic with institutionalized mob rule.

The honest businessman, per usual, has become the most obvious target. And until that’s changed, the economy and country at large will continue to be left far behind.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC and markets editor for Smartmoney.com . At the time of writing, Hoenig's fund held no positions in the securities mentioned.

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