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The Road to Serfdom?

By Weston J. Wellington

A recent Newsweek cover story proclaimed “We Are All Socialists
Now” and observed, “whether we want to admit it or not, America
of 2009 is moving toward a European state. . . . As entitlement spending
rises over the next decade, we will become even more French.”1

Newsweek does not clarify their definition of “socialist” or
what it means to be “more French”; but for discussion purposes,
let us assume that, in the years ahead, government intervention in the
US economy assumes a greater role than in the past. What are the implications
for investors in US equities?

Based on global equity market results over the past ten years, perhaps
very little. Among the 23 developed countries with ten years of MSCI data,
the US ranked 20th in US dollar terms, with an annualized return of -1.67%.
When results are computed in local currency, the US ranking improves a
bit, to 17th. Either way, US stock returns over this period compare unfavorably
with countries often characterized by greater government intervention
in business affairs.

Were these results an aberration? Using the 39-year period ending in
2008 (the limit of MSCI data) produces a similar overall result: The US
ranks 15th among 18 countries in US dollar terms. Sweden ranked 2nd, with
a total return of 11,034%, compared to 2,921% in the US.

We are not suggesting that policymakers can enhance US equity returns
by implementing a 57% maximum income tax rate, a 25% national sales tax,
and mandating a minimum of five weeks of annual vacation for all employees.
It seems plausible to us that such an approach, although perhaps politically
popular, would likely bring about higher unemployment and weaker economic
growth. Researchers have found that high rates of employment and GDP growth
offer no assurance of high stock market returns, just as low rates of
employment and GDP growth do not predict low stock market returns.2 If
market prices reflect the expected results of government policies, investors
are not necessarily disadvantaged.


The degree of government intervention is just one of many factors
affecting expected stock returns, and investors should be cautious
in assuming it is the principal factor.

Annualized Return (%) 

10 Years as of December 31, 2008

In US Dollars

Annualized Return (%) 

39 Years as of December 31, 2008

In US Dollars

Canada 8.97 Hong Kong 14.68
Australia 8.36 Sweden 12.84
Norway 8.25 Denmark 12.57
Denmark 6.82 Netherlands 12.16
Singapore 6.48 Switzerland 11.47
Spain 5.04 Belgium 10.72
Hong Kong 4.34 Singapore 10.65
New Zealand 3.62 Norway 10.51
Sweden 3.29 France 10.35
Austria 3.21 Germany 9.90
Finland 2.55 UK 9.87
France 2.36 Spain 9.77
Switzerland 2.10 Japan 9.75
Germany 1.42 Canada 9.43
Japan 0.58 USA 9.12
Italy -0.36 Austria 8.69
Netherlands -0.93 Australia 8.45
Portugal -1.05 Italy 5.99
UK -1.05
USA -1.67
Greece -2.13
Belgium -5.69
Ireland -9.47


Weston J. Wellington

Vice President, Dimensional Fund Advisors

1. Jon Meacham and Evan Thomas, “We Are All Socialists Now,” Newsweek, February
16, 2009.

2. Jim Davis, Economic
Growth and Emerging Market Returns
, Purely Academic, August



Comment from Dennis Gogarty,

President of Raffa Wealth Management

Financial media outlets fill a critical role for information and news.  In
a society that requires buyers to ‘beware’ these
media sources are often relied upon to inform decision making.  The
information delivered by many in the media can do more to elicit strong
emotional reactions than to educate and inform.  Such emotions tend
to inhibit sound decision making – particularly when it comes to
money. Clearly there are many sources of reliable and helpful information.  My
word of caution is simply not to let emotions guide decision making.  If
a story you read or hear makes you feel like the sky is falling or that
you deserve to have more for less – consider if it’s your emotions
or your intellect responding.  I hate to rain on the parade but
let’s think calmly and rationally before we pronounce capitalism