If Congress didn’t think it was cause for concern when London and Hong Kong dropped New York to third in initial public offering volume last year, maybe this shocking news will get its attention: European stock markets have now surpassed American stock markets in aggregate market capitalization for the first time since World War I.

It’s not enough at this point to say that American capital markets supremacy is being threatened; it’s been lost. To get it back, Congress must pare back Sarbanes-Oxley and other excessive regulation. Congress must also address the staggering costs of out-of-control lawsuit abuse, which may equal or even exceed the costs of overregulation.

Three recent comprehensive studies on the competitiveness of American capital markets all concluded that lawsuit abuse is hamstringing American capital markets and reform is badly needed.

The first study, from the bipartisan Committee on Capital Markets Regulation, chaired by the Columbia Business School dean, Alan Hubbard, and the Brookings Institution chairman, John Thornton, spelled out the American decline in stark terms. The American share of global initial public offerings fell to just 5% last year from 50% in 2000. The American share of total equity capital raised in the world’s top 10 countries fell to just 28% from 41% in 1995.

Since 2003, private equity funds have raised more money than mutual funds, as going private transactions have become increasingly common as an escape route from the regulation and lawsuit abuse associated with being public. The report identified securities class action lawsuits as one of the key drivers of the declines — liabilities for such suits reached $3.5 billion in 2004, up from just $150 million in 1995.

The second study was commissioned by Mayor Bloomberg and Senator Schumer and conducted by McKinsey & Company. The report, about the decline of New York as a financial center, identified lawsuit abuse as one of the crucial problems driving capital away from New York. The American legal system is labyrinthine, with overlapping jurisdictions that allow plaintiff lawyers to shop for friendly judges.

In 2004 the total cost of the American tort system was estimated at a staggering $260 billion, about double the 1990 level. The problem has grown more rapidly in recent years, with costs averaging 10% annual growth since 2000, versus 4% a year in the preceding decade. A survey of chief executive officers cited in the study found that fully 85% of chief executives preferred the litigation environment in London to New York.

Finally, a study from the United States Chamber of Commerce found that in 2004 civil penalties totaled $4.7 billion in America, versus only $40 million — less than 1% of the American amount — in Britain. The report found that, because of the costs associated with class action lawsuits, directors and officers’ insurance premiums are more than six times higher in America than in Europe. Given their enormous cost, even the risk of class action lawsuits can undermine predictability in the business environment, and predictability is critical to capital formation and economic growth.

Earlier this month Thompson Financial data showed a stunning shift in the global financial balance-of-power: The total European market capitalization reached $15.7 billion, passing the American total market cap of $15.6 billion. European stocks are now worth more than American stocks for the first time since World War I, and in dollar terms European stocks are up more than 130% since 2003, almost double the 70% rise in American stocks being touted here as a bull market.

These facts and studies should settle the question of whether reform is needed. Congress should by now be taking the next step and crafting meaningful reform to end lawsuit abuse and attract world-class companies back to American public capital markets.

The New York delegation, many of whose constituents have a keen interest in the health of America’s financial services sector, should be taking a lead on this issue, and Senator Schumer deserves credit for commissioning the McKinsey report. But where is his legislation based upon the report’s recommendations? And why hasn’t Democratic leadership backed Mr. Schumer up on this issue?

Unfortunately, the political climate for reform is not good. Trial lawyers, often the only real winners in securities lawsuits, are one of the key constituencies of the Democratic Party and one of its key funding sources. The word on Capitol Hill is that there is little to no political will for tackling the securities lawsuit abuse problem in this Congress.

If Congress fails to act, then a shrewd presidential candidate should make capital markets competitiveness, and ending lawsuit abuse in particular, a key part of his or her platform. America needs a leader who understands that American capitalism won’t work very well without capital.

Mr. Kerpen is policy director for Americans for Prosperity Foundation.