THE BLOG
09/20/2012 09:32 am ET | Updated Nov 20, 2012

The Physicist's Economics

The economy is the top concern this election season. This is not surprising and it is also not surprising that so many people have varying perceptions of how the economy is doing. If you are corporation or stock analyst, then they are likey to say that the economy is doing pretty well. However, if you ask the average employee, then you are worried that your job may be on the chopping block. So why is there such a disparity? From a scientists perspective, there must be a reason that can explain these two opposing views.

Before I go any further, I should note that I am neither an economist nor a corporate person. I am a scientist, a number cruncher, or a data analyst. Specifically, I am a theoretical physicist, and I like to learn facts. Being a physicist/scientist, I have the training to be objective and look at data without bias. This is not easy in a world where you have political and social ideologies pulling people in multiple directions and providing false or misleading information. Therefore, my words and ideas are based from my observation of the economy and my logic behind what needs to be done to attempt to fix it.

Four years ago, the economy was tanking. President Bush signed the TARP program into law on October 8, 2008 to help businesses stay afloat after troubled assets collapsed many major financial agencies, which helped drop the Dow index to around 6500 points (a 7,500 point drop in about one year). On January 21, 2009, President Obama was inaugurated into office, and he signed the American Recovery and Reinvestment Act 27 days later to help the ever-sliding economy. This had many public works projects, as well as a plenty of pork for both side of the aisle to feast off for a few years. Many economists said it was not enough and that the rate of turn around would be slow. While some feel it was ineffective, the numbers show different.

After three and a half years of President Obama being in office, the stock market is floating above 13000 points (doubling the low of 6500 during the recession). This translates to mean, in my naive opinion, that large companies are doing fairly well. Unemployment is down to around 8.3% when compared to the practically double-digit peak in late 2009.

Another economic indicator is the actions of the corporations. With CEOs getting record bonuses and major companies are having record profits, you would think that, by the numbers, the country is fine and people should be dancing in the streets, but this is not the case. Why? Why are companies not hiring? Why do the American people still feel like they have been dropped in the mud?

The answer may be as simple as demand. Companies do not have to hire because they are already keeping up with demand. Why hire more people, when the job is getting done with your current staff. Granted, the current staff may be moving at maximum capacity, but this is most likely because they are afraid of losing their job, and the company is taking advantage of that fear and is doing well. If they do hire more people, then it is viewed as an extra cost with very little benefit to the bottom line -- revenue. Therefore, to get more jobs, you need to increase demand, which begs the question, 'How is this done?'

With my basic understanding of economics, I feel that you increase demand by elevating the purchase power of consumers; the same people that are still hurting and in need of relief. The best way for this to be done is to have the government lower the tax rate and/or provide a stimulus for middle to lower class people and families.

The logic comes down to a cup of coffee. Well, a metaphorical cup of coffee. Let's say this cup of coffee represents the needs and necessities for a family or individual. If you are the average middle or lower class family, then your cup is not full and you are struggling month to month to full it. This means you are barely fulfilling your basic necessities, whether this is you are late on your payments or not getting a healthy, full meal for you and your family. The facts are that you have bills to pay and food to buy, and you are not getting ahead in any way. Somewhere in the range of 80% of all Americans are in debt. Therefore, their cup is not full.

If you are in the upper class or wealthy, then, typically, your cup is full and, in most cases, over flowing. This means your basic necessities are being met and you have no or very small amounts of debt, and you have a decent amount of overflow into savings or investments. This is great for you and you should be commended. However, investments are not fundamental basis for the economy. If that were true, then with a 13000 point Dow index, we would all be doing great.

The parties have a different ways to deal with this. The Republicans say that we should cut the taxes on the upper class, and they will create jobs. This is your "trickle down" idea from President Reagan. However, if that were true, then we would be doing fine already. As I mentioned, the stock market has completely rebounded.

The idea is that when the company's cup is full, they will pour excess coffee into other people's cups, but that is not true. Well, that is not what has happened. The excess has gone into bonuses for executives and, in some cases, is just being stashed away for a rainy day. General employees are not seeing rises, and there is still no increase in demand and no motivation to hire.

The Democrats feel, well, it is unclear what the Democrats think. They say they want to help the middle and lower class, but they are not projecting any confidence. A badly publicized plan is no plan at all, and people then choose between talking points.

In my opinion, if you lower the taxes on the middle and lower class, then they will use the extra money for paying off bills or buying more food and necessities. Hence, they are filling their cups. This means more products are purchases and bills are paid down or off. When more products are purchased, then there is an increase in demand. When bills are paid, then money is injected into the financial sector, which will provide more capital for those banks and institution to give out business loans. Overall, this will increase revenue for companies. If there is more demand or more business, then companies will be inclined to hire to relieve the demand's pressure on the work force.

What about the 50% that supposedly doesn't pay taxes? Well, that is income tax, and it is typically those who are close to the poverty level with regards to income. However, these people still pay Social Security, Medicare, and local taxes. Therefore, there are plenty of areas to be addressed. Maybe a bailout of the American people would have done a better job, then directly bailing out the companies.

This idea is quite simple and I am sure I am not the first person to discuss it, but it is a start. However, we have another variable: the national debt and deficit, which is not a favorable topic. Lowering taxes does decrease revenue for the government and would increase the deficit. However, that could be temporary, since the increase in the employment level will produce income tax revenue.

Another idea is that you temporarily increase the taxes on the upper class, with tax incentives for every person that is hired for a year or more. Once the economy stabilizes, then taxes can be re-assessed. The basic idea that people are forgetting is that tax rates are dynamic (ever changing) and should treated as such. When you only allow for a static taxes or only tax decreases with no possibility of increase (the Grover Norquist method), then you produce the dangerous environment in which your economy cannot change with the normal fluctuations of society.

Now, I am sure that many will read this as corporate hating propaganda. However, that cannot be further from the truth. The way I see it, this idea provides a way for companies to increase revenue, while helping the average person/family to get some relief in a time when they need it most. While cutting programs and spending will help the deficit, it will likely hurt the people who are not in a state to be hurt. There is a lot of fat in the budget that could be cut from all ends. However, to get people employed and the economy working again, we all have to do our parts. For the good of the country, there will be times when it is necessary for the upper class to pay more to maintain that the ideals of the country can be preserved. The thing to remember is that economic thinking is like a body of water. If the water is dynamic, then it runs smooth efficiently, and benefits life all around it. However, when the water is static, then it is stagnant, stationary, and while life does grow, it is usually only a localized benefit. In a global economy, your thinking must always be changing; since static thinking leads to no change and will not benefit anyone.