A Third-Party Economic Policy Platform

Confronting Two-Party Failure with Durable Reform

Why does Social Security reform get deferred despite known arithmetic deadlines? Why does tax policy revolve around temporary fixes instead of long-term debt stabilization? Why do health insurance, student debt, energy, and education policy swing so sharply with each administration? This piece argues that the common thread is structural political incentives that reward reversal over durability — and outlines what a stable, cross-partisan economic platform would require instead.

In our current political system, most policy proposals are designed to pander to the extremes of the party. Republicans who are slightly right of center and Democrats who are slightly left, who probably have more in common with each other than the people controlling their party, have very little input on the development and enactment of policy.

The consequence is lack of permanent meaningful progress on a wide variety of financial and economic issues. Initiatives on health care, student debt, and energy and the environment, taxes, and education adopted in one administration are reversed or phased out in the next one. The problem of entitlement spending is ignored despite the measurable costs of delay.

The nation is not on the right course and the inability of the two-party system to address economic problems is the primary reason. The primary purpose of this memo is to succinctly describe how the political process is impeding progress in seven areas – (1) entitlement reform, (2) tax and budget policy (3) health insurance coverage, (4) student debt, (5) incentives and rules shaping retirement savings, (6) energy and the environment, and (7) education reforms.

Entitlement Reform

Republicans and Democrats sharply differ on entitlement reform with Republicans in general favoring changes to benefits and Democrats favoring additional revenue.

Republican positions on entitlement reform fall into four camps – fiscal hawks favoring cuts to benefits, pragmatists favoring more gradual adjustments (mostly on the benefit side), reformers who want to divert existing tax revenue into private accounts, and supply siders who believe the imbalance will disappear due to economic growth from the President’s agenda.

Democratic policymakers generally favor closing projected entitlement gaps through higher revenues, particularly from upper-income households. Proposals include raising or extending payroll taxes on higher earners, increasing capital gains and other investment income taxes, and expanding corporate tax contributions to sustain scheduled benefits.

A few Senate centrists (Mark Warner, John Hickenlooper, Lisa Murkowski, and Susan Collins) and members of the problem solvers conference in the House have considered bipartisan reform packages based on both adjustments to revenues and taxes.

Neither party has prioritized action on this issue despite current law mandating automatic benefit cuts once the trust fund is depleted, projected to occur in 2033. Continued delay increases both the magnitude of the adjustment required and the likelihood that changes will be implemented suddenly rather than phased in gradually.

· Delaying reform until the depletion date would require a permanent payroll tax increase of roughly 4¼ percentage points—about 0.6 percentage points larger than acting immediately under current Trustees estimates—or an equivalent, abrupt reduction in scheduled benefits.

Social Security provides at least half of total income for about half of retirees, and it provides 90% or more of total income for roughly 25% of retirees. Reform to Social Security must therefore proceed in tandem with policies that reduce barriers to private saving, given the central role the program plays in retirement income.

A broader discussion on the need to advance solutions that address both Social Security’s finances and household saving constraints can be found here.

Tax and Budget Policy

Tax policy reflects a deep philosophical divide about the size and role of government.

Republicans generally prioritize lower marginal tax rates, particularly on capital gains and business income, arguing that investment and growth expand the economic base and ultimately strengthen revenues.

Democrats tend to favor higher rates on upper-income households and capital gains to finance social programs and address inequality; proposals such as a federal wealth tax illustrate the breadth of that ambition, though questions remain about administrative feasibility and revenue stability.

The divergence is especially pronounced on capital gains. Republican opposed all tax hikes but their assertion that increases in capital gains tax rates would be largely offset by declines in capital gains realizations has support in the economic literature.

An alternative approach which could raise more money than simply raising tax rates on capital gains involves expanding the capital gains tax base by eliminating 1031 exchanges, by reducing the step-up in basis at death and even by a small tax on unrealized gains upon death. One discussion of the literature on capital gains realizations with insights on the housing market can be found here.

Layered on top of this divide is a budget process increasingly built around sunset provisions and temporary policies. Major tax packages and spending initiatives are structured to expire within ten years, creating recurring “fiscal cliffs.” When control of the White House changes—from the Bush administration to Obama, from Obama to Trump, from Trump to Biden, and most recently from Biden to Trump the incoming administration confronts scheduled expirations, which will automatically trigger abrupt tax increases unless reversed by Congress.

As a result, most of the tax changes in a new tax bill are used to either prevent the automatic tax increase or fund new initiatives rather than reduce the trajectory of the ratio of debt to GDP. Tax policy impacts every sector of the economy, hence, these tax changes often disrupt important programs, as demonstrated by the recent impact of the 2025 tax bill on ACA state health insurance exchanges.

Health insurance coverage

The Republican Party has demonstrated over many years that expanding and improving health insurance coverage is not a governing priority. Their central focus has remained tax reduction rather than structural expansion of coverage or stabilization of insurance markets.

The progressive wing of the Democratic Party is increasingly tied to Medicare for All. The centrist wing of the Democratic party appears more focused on managing progressive expectations than on advancing and defending pragmatic reforms. A useful discussion of the conflict between progressives and centrists on Medicare for All can be found here.

The central consequence of the divides, both between and within parties, has been paralysis followed by policy whiplash. Rather than durable reform, health coverage has swung back and forth with each change in administration.

In the first Trump term, key Obama-era initiatives were scaled back or eliminated. The Biden administration restored many of those provisions and layered on temporary premium subsidy enhancements and Medicaid expansions. The second Trump term then reversed those expansions and allowed enhanced ACA premium subsidies to lapse. The instability culminated in a government shutdown fight centered on whether premium subsidies would be extended.

The current congress allowed the enhanced premium subsidy to lapse, a decision that is increasing costs and resulting in the loss of health insurance coverage for many households. Both parties deserve blame for this outcome, the Democratic party by making the enhanced credits temporary when they could have prioritized permanent credits and the Republican party for basically being indifferent about health care.

The ACA premium tax credit is not perfect, but it and Medicaid are the only options for most working-age households without employer-based insurance. Interestingly, the 2025 tax bill cut both programs.

State exchange health insurance market can and should be improved. Go here for a discussion of potential improvements.

The test over enhanced premium tax credits was in some ways the canary in the coal mine for the coming battle over the likely reaction to pending automatic cuts to Social Security benefits. Failure to act on automatic Social Security benefits, projected to occur around 2033, would impact more households and have a large effect on the overall economy than the decision to allow the enhanced ACA premium tax credits to lapse.

Financial distress caused by gaps in health insurance coverage increase medical debt can reduce quality and access to health services which reduces life expectancy and creates financial hardship by increasing medically related debt. The increase in medical debt makes it difficult for people to save for retirement, which makes it more difficult to implement a Social Security reform based on the assumption that household savings increase.

Student Debt Policy

Student debt policy reflects another sharp philosophical divide.

The Biden student debt policy was motivated by the progressive wing of the party, which has the goal of free college or debt-free college. The administration attempted to implement broad-based student loan discharges through two primary mechanisms: an initial effort grounded in the HEROES Act and a subsequent regulatory approach undertaken by the Department of Education pursuant to its authority under the Higher Education Act.

Biden also enacted an executive order to expand IDR loans (the SAVE act). Both the broad debt discharge efforts and the proposed SAVE program were either overturned or halted by the courts and eventually killed by the Trump administration.

Republicans, by contrast, have emphasized limiting federal exposure and curbing what they view as open-ended subsidies. The 2025 tax bill included a complete overhaul of student loan programs in the United States including the consolidation of all IDR student loans to one new program (RAP) and significant limitations on student use of federal loan programs.

The new student loan provisions were enacted without any Democratic input. It is accurate to say that Republicans are responsible for student loan policy and they appear to have gone too far.

· The increase in required payments prior to any loan discharge (360 verified payments under RAP) increases the likelihood that borrowers will approach retirement still carrying student debt.

· The elimination of most deferments and forbearances makes it harder for borrowers who experience abrupt job transitions or other financial hardships to every reach the full 360 qualifying payments.

· Payment tiers that are not indexed to inflation will quickly result in sharply higher student loan payments, undermining the ability of the RAP loan to keep payments affordable for future borrowers. The discussion of the impact of inflation or RAP payments can be found here.

· The current RAP loan payments increase implicit marginal tax rates, which in conjunction with ACA premium tax credits that are linked to AGI, will substantially reduce disposable income after an increase in AGI. See this paper.

· The provision of the RAP loan program applying the rate in each income category to all income instead of just incremental income can result in a small increase in income leading to a large increase in payments

· Borrowing caps and restrictions on graduate lending fall heavily on physicians leading to large increases in total student debt during residency and fellowship programs. This change could impact health care costs and access to training. Published here on my blog and at NASFAA.

Any student debt framework that increases long-run household indebtedness or impedes private retirement savings makes comprehensive Social Security reform more difficult to achieve. Neither current political party is offering an economically efficient way to reduce student debt burdens to facilitate additional savings for retirement and other purposes.

Savings Incentives

Unlike other economic issues, retirement savings incentives have drawn meaningful bipartisan cooperation. Congress enacted the SECURE Act in 2019 and followed with SECURE 2.0 Act in 2022, both designed to expand access to tax-advantaged retirement savings.

The original SECURE Act raised the required minimum distribution age, removed age limits for traditional IRA contributions, facilitated pooled employer plans to expand small-business access, and extended eligibility to long-term part-time workers. These changes modestly broadened participation and modernized plan rules.

SECURE ACT 2.0 added automatic enrollment requirements for many new employer plans, enhanced startup tax credits for small businesses, increased catch-up contribution limits for older workers, and replaced the Saver’s Credit with a federal “Saver’s Match” intended to boost incentives for lower-income households. The legislation reflects serious bipartisan effort to strengthen retirement security.

These reforms do not address the core problem: millions of households lack both sufficient income and financial margin to save meaningfully for retirement. Many provisions enhance tax advantages for workers already participating in plans rather than materially increasing net saving among households burdened by medical costs, housing expenses, or student debt.

A more detailed evaluation of SECURE 2.0, including distributional effects and long-term fiscal implications, is available at Economic Memos: https://www.economicmemos.com/p/evaluating-the-secure-act-20

Energy and the Environment:

Energy policy under President Biden and President Trump reflects sharp partisan differences — but also an uncomfortable similarity Both administrations based decisions on energy projects on its predetermined preferences rather than the economics of the proposal or even the national interest.

President Biden entered office committed to rapid decarbonization. The Inflation Reduction Act and aggressive EPA rulemaking tilted incentives decisively toward wind, solar, batteries, and electric vehicles. Federal oil and gas leasing slowed. Methane rules tightened. Pipeline politics became symbolic. Even when U.S. oil production later hit record highs — largely driven by private-land drilling and global prices — the federal message was clear: fossil fuels faced regulatory headwinds and a narrowing long-term runway.

President Trump’s return brought an equally forceful reversal. Withdrawal from the Paris Agreement, regulatory rollbacks, and a reopening of federal leasing re-centered oil, gas, and coal. At the same time, offshore wind permitting stalled and renewable tax preferences were narrowed.

On the surface, these are opposing philosophies. Biden favored wind; Trump favored LNG and oil. But neither Biden’s opposition to LNG nor Trump’s opposition to wind can be supported by a rigorous economic analysis and in both cases the administration’s actions were contrary to the national interest.

A more detailed examination of how Biden’s approach to LNG and Trump’s approach to wind favored political considerations over economic ones can be found here: https://www.economicmemos.com/p/trump-and-biden-on-wind-and-lng

Education Policy: Philosophical Divide and the Case for Competition

Education policy reflects a fundamental divide between the parties about the role of government and markets in delivering core public services.

The Democratic Party perspective emphasizes strengthening traditional public school systems through increased funding, regulatory oversight, and equity-driven accountability. The Republican Party perspective prioritizes parental authority and school choice.

The dispute is not primarily about funding levels, although funding is never irrelevant. The deeper dispute concerns whether the education system should be organized primarily as a public monopoly or as a regulated market with multiple competing providers.

This dispute is a traditional microeconomic and industrial organization question.

Is K–12 education best understood as a competitive market, or as a natural monopoly?

A natural monopoly exists when scale economies are so strong that a single provider can supply the market at lower average cost than multiple firms. In some rural areas, with sparse population and high fixed costs, that characterization is plausible. Moreover, in many communities there is strong political and cultural support for a neighborhood school.

Competition between schools is not the only way to bring Choice can be achieved by competition among providers inside a single school. Both the recent essay in The New York Times by Luis Elorza and the essay on Economic Memos titled Competition in the Education Industry: An Industrial Organization discuss how educational opportunities can be expanded and improved by allowing multiple education providers access to students inside a school. The Times article explicitly compares this approach to the one taken by Apple when it chose to open its App store to outside developers.

In this framework, competition occurs not through price but through institutional performance and parental choice. Providers compete on instructional models, culture, specialization, and results. The state maintains guardrails to protect equity and prevent cream-skimming.

Now personalize the situation. A middle-school student is struggling in math: the textbook is dense, the pace is misaligned, and the teacher is overwhelmed. Unless the parents are wealthy, there is little practical alternative—private tutoring costs hundreds per month, test-prep firms charge thousands, and specialized programs are geographically limited.

Under a modular course system, that student could enroll in math with a different approved provider while remaining in the same school for other subjects. Course-level competition makes targeted substitution possible and broadens access in a way whole-school choice often cannot.

The policy debate properly defined is not about eliminating schools but allowing the consumers (the students and parents) the right and ability to gravitate towards the courses giving the best outcomes.

Conclusion

Across entitlement reform, tax and budget policy, health insurance coverage, student debt, retirement savings, energy, and education, the pattern is consistent: neither party has demonstrated the capacity to deliver durable, economically coherent reform.

Republicans emphasize tax reduction, deregulation, and fiscal restraint, yet repeatedly defer structural entitlement adjustments, tolerate debt expansion when in power, and design student loan and health insurance retrenchments that create new distortions.

Democrats prioritize distributional goals and expansion of public programs, yet rely on temporary measures, aggressive executive action vulnerable to reversal, and revenue assumptions that often understate long-term fiscal constraints.

The result is not progress but pendulum swings—initiatives layered on, scaled back, reversed, and reinstated with each change in administration.

Nowhere is the cost of delay clearer than Social Security. Postponing reform until trust fund depletion, currently projected around 2033, would require a permanent payroll tax increase of roughly 4¼ percentage points—about 0.6 percentage points larger than acting today under current Trustees estimates—or an equivalent abrupt reduction in scheduled benefits. Delayed action converts a manageable, phased adjustment into a sudden and economically disruptive correction. The failure to address predictable arithmetic is not ideological disagreement; it is sustained avoidance of governing responsibility.

This instability carries measurable economic costs. Temporary tax and spending provisions undermine long-term planning. Health insurance expansions that lapse and student debt policies that oscillate create financial uncertainty for households and employers. Energy policy alternates between regulatory constraint and regulatory rollback rather than applying consistent economic criteria. Even in retirement policy, where bipartisan cooperation has been real, incentives alone cannot overcome stagnant income growth, rising medical debt, and educational borrowing burdens.

A viable third-party economic platform would begin from a different premise: durable reform requires combining elements traditionally claimed by both parties—measured entitlement adjustments with revenue reform, stable tax policy paired with base broadening, market competition alongside targeted safety nets, and energy and education rules guided by economic performance rather than ideology.

The objective has to become the betterment of society not partisan advantage. The analysis presented here casts doubt about whether this objective is achievable in our current two-party system.

About This Blog

This is a foundational post for the blog because it defines its core mission: advancing durable, economically grounded policy beyond the constraints of the two-party system. It serves as a framework for many of the analyses that follow. Most material here will remain free and accessible in order to encourage open and serious discussion. Support through free or paid subscription helps sustain the work and is appreciated.