Politics and Personal Financial Planning

by | Feb 1, 2010 | Weekly Column | 7 comments

Recently I’ve heard from a few readers that some of my columns are too political. Yes, I sometimes discuss politics, because political issues and governmental actions have a direct impact on our personal finances.

One of The American Heritage Dictionary’s definitions of “political” is “relating to or dealing with the structure or affairs of government.” A fundamental power of our federal government has to do with money: creating it, regulating its value and its cost (interest rates), and, of course, taxation.

Money isn’t a natural force. It is an artificial system created by social agreement. Currencies are the “money” of modern society, and government policy regulates how individuals borrow, invest, exchange, and pay taxes on money. Separating personal finance from the politics of finance is just not possible.

Therefore, a critical 21st century survival skill is understanding how money works. This includes understanding and anticipating the governmental policies that will influence how we earn, save, spend, and give money.

Changes in political leadership generally result in some changes in the policies that affect our money and finances. The recent financial crisis and the last national election resulted in what may be the most significant changes to our fundamental economic policies since the 1930’s. The economic decisions our government makes today will affect our personal money decisions and lifestyles for years to come. Helping clients anticipate, understand, and deal with the impact of such decisions is part of my job as a personal financial planner.

What I see as one of the significant changes occurring in government economic policy today is a shift toward higher regulation and taxes. These are two important components of wealth redistribution. Most attempts at wealth redistribution have resulted in a decrease of personal freedoms in exchange for increased benefits from the government.

Wealth redistribution is not new. Starting with the Roman republic in the third century B.C., many societies have attempted to limit or redistribute wealth at times when only a privileged few lived in luxury while the masses lived in poverty. It is somewhat of a myth, however, that wealth redistribution works to the benefit of the less fortunate, unless it results in an increase of personal freedom and encourages greater capital accumulation.

In many instances, the wealth is taken from the handful of people who control it and simply redistributed to another handful of people—typically the leaders of the opposition rather than “the people.” This was the case after Russia’s Bolshevik Revolution in the early 19th century. A modern-day example is China, where 90% of all billionaires are the children of high-ranking officials (WSJ.com, The Wealth Report, December 12, 2009).

I am in no way suggesting that we are on the verge of an upheaval like the Bolshevik Revolution. It isn’t that obvious. Wealth redistribution in the U. S. is a shift away from capitalism and toward socialism. This didn’t start with the election of President Obama or the current Congress; they’ve only intensified it.

We’ve been slowly moving toward a more socialist economic model for decades. This long-term trend toward higher tax rates and increased social entitlements diminishes individual incentive to work toward financial and entrepreneurial success. If unabated, it will eventually result in slowing the financial engines that produced the lifestyles Americans have come to take for granted.

If one of your goals in life is financial independence, it is important that you understand the full implications of this trend. National political decisions do indeed affect our personal finances. Financial planning is impossible to separate from the politics of money.

Next week’s column will offer some financial planning strategies for the changing economic times that lie ahead.

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