A Third-Party Candidate Is Coming: Laurence Kotlikoff

(Corrects domestic investment rate in sixth paragraph.)

July 20 (Bloomberg) -- It’s time for a third way.

The Republicans and Democrats have become dangerous extremists. They want to spend nothing or spend too much, enrich the rich or strip them bare, regulate nothing or everything, rule the world or wall it off. Their only point of agreement is that the other party is destroying the country. On this, they’re both right.

The political rift offers an unusually propitious moment for a third-party presidential candidate to give the two parties a run for their money. I’m even willing to predict we’ll have one by this fall.

The Republicans and Democrats have done a terrible job of managing our country and economy, transforming the American dream into a nightmare. They’ve squandered our youth and wealth in endless wars we couldn’t win, and spent six decades running an intergenerational Ponzi scheme, racking up huge official and unofficial debts for our children to pay.

By some measures, the U.S. is now in worse fiscal shape than Greece. True, our official debt is a much smaller percentage of economic output. But our unofficial debt is much larger. The unofficial debt includes primarily the obligation to pay 78 million baby boomers roughly $40,000 a head each year of their very long retirements in Social Security, Medicare and Medicaid benefits. To get our overall fiscal gap under control, the U.S. must cut spending or raise tax revenue by $20 trillion over the next decade, far more than either the president wants or the House Republicans seek.

National Saving

By taking ever larger sums from young savers and giving them to old spenders, the two parties have driven our national saving rate to zero (0.1 percent of national income) and our domestic investment rate to just 4.4 percent of national income. On net, foreigners are the only ones still investing in our country. That’s one reason our currency is progressively weakening.

The Reds and the Blues weakened financial regulation while pocketing hefty campaign contributions from bankers and financiers, sat back while Wall Street sold trillions in toxic assets, and then bailed out virtually every financial miscreant in sight. To cover the costs, they “encouraged” our “independent” central bank to print as much money as needed. The Federal Reserve has now injected more than $2 trillion into the financial system over four years, more than tripling our base money supply and laying the groundwork for hyperinflation.

Wall Street Architects

Rather than transform “trust me” banking into “show me” banking, our leaders hired the architects of Wall Street’s collapse to patch it up. Even worse, they promised, either explicitly or implicitly, to cover virtually all of Wall Street’s future gambling losses. The next collapse, which U.S. fiscal policy will shortly engender, will put the Fed on autopilot to print trillions more.

If the goal is a third-world economy, these folks are succeeding. The unemployment rate is stuck at almost 10 percent. Workers’ average real earnings per week haven’t budged in 40 years. Wage and wealth inequality is deplorable and getting worse.

For those not blessed with special talents, good breaks or connections, tough luck. Our primary and secondary education lags far behind that of other developed nations. For many of our children, quality higher education is now unaffordable. For others, it’s a path to student-loan debtors’ prison.

Employers in Charge

Our employers are neither our parents nor our friends, but the Red-Blues have put them in charge of our health care, much of our saving and investing, and our tax breaks. The result is a mess. Those without a benevolent employer have been left at the mercy of the cherry-picking health-insurance industry, which has succeeded in leaving 50 million Americans uninsured. Rather than fix health care from scratch, we’ve been saddled with yet another government system: health exchanges, with costs that will probably explode.

Social Security is in worse long-run fiscal shape now than it was in 1983, the last time politicians “fixed” it. It’s running cash-flow deficits and can no longer afford to mail us our annual benefit statements or even put them online. According to its trustees’ report, the system needs, immediately and permanently, a 27 percent tax increase or a 20 percent benefit cut.

Indecipherable Rules

Even if Social Security were solvent, as opposed to seriously broke, the 2,728 rules in its handbook are indecipherable. Millions of retirees are taking the wrong benefits at the wrong time because they can’t make sense of a system that redefines the word complexity.

The federal income tax offers another example of complexity run amok. Together with the other 17 major tax-transfer programs now active in the U.S., it has made a mockery of tax progressivity and left virtually the entire country in very high marginal tax brackets.

We need to fix America from the ground up, but both parties stand in the way. Come November 2012, the American public will have an alternative to the Democrats’ and Republicans’ incompetence. Mark my words.

(Laurence J. Kotlikoff, a professor of economics at Boston University, is a Bloomberg View columnist. The opinions expressed are his own.)

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