INVESTING: Free markets, low taxes power economic engine

The Empire of the Rising Sun has been seeing a lot more sun lately. The Japanese stock market, as measured by the Nikkei Index, bottomed out only a few percentage points higher than the Dow Jones industrial average in March 2003. Since then, our Dow has rebounded 42 percent, but the Nikkei is up 78 percent!

While Japan has been a democracy more than 50 years, the culture has not been as individualized as here. There is a socialist flavor in the government sauce there, and investors have long punished Japan for that reason.

Recently, however, the Japanese prime minister decided to free up portions of the large, state-controlled personal savings system and allow the money to be invested using capitalist-style decisions. The Nikkei Index began creeping up in August in anticipation of the move, and rocketed higher when he followed through.

Earlier this year, investors became hot on Germany in anticipation of a victory by the more conservative political party. Capital was flowing into public and private companies at a torrid pace.

These investors were hoping conservatives would win, and then undo some of the damaging social policies that are hampering the huge European economy. The election was very close, and the conservatives did not gain nearly as much power as investors would have liked. The German stock market fell immediately.

Hurricane Katrina was a disaster for many reasons. One negative repercussion from the storm is it added to the drive toward a larger government in our lives. People all over America are asking our government to get even bigger. As the above examples show, this will be a detriment to our ability to attract capital long term.

How much more proof do people need that free markets in free countries run by small governments are the way to increase the standard of living of the citizens? Japan was directly rewarded for decreasing the size of its government. Germany was almost rewarded. We need to learn from what is going on right in front of us.

America still enjoys more freedom than about any other country in the world. But if there is a move afoot globally to more conservative and open fiscal policies, we have to be willing to allow our policies to reflect that trend.

We have to radically cut taxes and spending. We have to eliminate barriers to entry for entrepreneurs and keep chipping away at trade barriers in other countries. We have to resist the urge to ask the government to come to our rescue.

Keep in mind, too, that as the G7 nations rein in or expand freedom, China and India on a net basis are moving closer to becoming free countries.

Investors will reward the countries that allow the most freedom. Countries that keep earning higher levels of investment will keep enjoying increasing standards of living. Those that don’t will see a drop in their standards of living. It is as simple as that.