Capitalism Needs Competitive Capital Markets

Frightening news about the state of United States financial markets has received far too little attention, perhaps obscured by the euphoria over fresh Dow Jones record highs, until recently. Last year, New York slid to third in initial public offering volume behind London and Hong Kong. And this year the value of all European stocks has passed the value of all United States stock for the first time since World War I. While U.S. stocks have been booming, largely due to reduced tax rates on dividends and capital gains in 2003, European stocks are outperforming U.S. stocks considerably as capital continues to flee U.S. markets. If U.S. financial markets fail to regain their competitiveness the fallout will reach far beyond Wall Street and cause real economic pain on Main Street.

Since Sarbanes-Oxley, the so-called corporate governance law passed in the wake of Enron and Worldcom that only a Big Four audit firm could love, audit fees for Fortune 1000 companies have more than doubled. Equally as important but perhaps even less noticed is the fact that complicated, unfair, and arbitrary regulations and lawsuits, enforced by multiple agencies with overlapping jurisdictions have pushed the cost of civil penalties imposed on companies in the U.S. to $4.74 billion versus just $40.48 million in the United Kingdom.

Not surprisingly, the vast majority of corporate execs now say they would prefer to do business in London. Senator Charles Schumer and New York Mayor Michael Bloomberg have warned that these developments threaten to reduce New York to a mere regional financial power in the next decade. But the relative decline of the American financial sector is not just a matter of concern for New York; global financial services leadership should be a national priority.

New communications technologies like broadband access and Voice Over Internet Protocol (VOIP) are transforming even distant rural towns into members of the global economy. With the flow of goods, services, ideas, and capital across borders accelerating, the international competitiveness of all American industry sectors is at stake.

In short, the financial services sector is a keystone of the American economy. Its relative decline in the world will mean a relative decline in the entire US economy. America’s reputation as a land of immense wealth and opportunity is being threatened. No one can defeat us but ourselves and that’s exactly what we are doing. Byzantine regulations enacted as an extreme overreaction to the Enron and WorldCom scandals, and an unpredictable and unfair legal atmosphere are driving the best and most innovative companies away from American shores.

The financial service sector is the third largest sector of the US economy, behind only manufacturing and real estate. The importance of financial services will only increase as globalization drives the shift of labor-intensive production to lower-cost markets. Moreover, the availability of capital is crucial to driving innovations in all sectors of the economy, by making capital available to entrepreneurs to experiment and pursue risks. We need innovative new companies to be able to raise capital in U.S. markets and we need U.S. investors to benefit from American ingenuity.

Without this capital, starting a new business will become harder, making it more difficult for ordinary Americans to pursue the American Dream and create better lives for themselves. Consumers won’t benefit from increased choice and competition – Bill Gates, for example, may never have gotten enough investor support to create Microsoft without such powerful US capital markets. Furthermore, capital markets lower risk for large financial institutions and US companies through diversification and advanced risk management, providing a more stable economy overall.

Put simply, robust capital markets are critical to the American economy and way of life. Without them, hard work and an entrepreneurial spirit may no longer be enough to succeed in this country; and America will no longer be the economic envy of the world, the nation of entrepreneurs and innovators, or the land of opportunity. These recent developments have shown that American dominance in the financial sector is being seriously threatened—if we do not return to our free market roots soon, it could be lost forever.

Steve Lonegan is the Mayor of Bogota, NJ, and Executive Director of Americans for Prosperity – New Jersey. Americans for Prosperity (AFP) and Americans for Prosperity Foundation (AFP Foundation) are committed to educating citizens about economic policy and mobilizing those citizens as advocates in the public policy process. He is a prolific writer, having been published in newspapers and blogs. He currently has a book in pre-publication on the impact of New Jersey state government on the well being of the taxpayers of the state, where he offers solid and workable solutions.

Capitalism Needs Competitive Capital Markets