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MEMORANDUM [SAMPLE ONLY]

Date: May 11, 2010

To: President Barack Hussein Obama

From: Student B

Subject: Macroeconomic Policy Recommendations

Executive Summary

Overall, the economic situation has improved over the course of the past year.

Unemployment is still disturbingly high however, all indicators point to that turning

around. The GDP numbers have improved and look for continued growth through 2011.

In terms of inflation, total consumer price inflation has increased since October whereas

core consumer price inflation has remained steady.

Two short-term policy options to address the economic growth are expansionary money

policy and an increase in government spending. Two long-term policy options are

reducing the government debt/spending and implementing a fair tax policy,

State of the Economy

The current economic situation is an improvement over what has been seen earlier in the

year. The rate of job losses has begun to slow and there has been an increase in the hours

worked by employees. The GDP numbers are much stronger as a result of many factors

including an increase in home sales and the pace at which jobs are being hemorrhaged

has begun to slow and the total number of hours worked by employees has steadily

increased.1 This is a key indicator that unemployment, although still uncomfortably high,

will begin come down as more firms begin to hire. Increased hours are a result of

                                                         1 Minute of the Federal Open Market Committee; Dec. 15‐16, 2009. Bernanke. 

increased business, which can only result in further economic recovery and additional

jobs. Production by the industrial sector continued to increase after beginning a rally in

the third quarter, however it is still producing well below capacity utilization.2 Industrial

production numbers are broken down in the following graph, year over year:

3

Mr. President, after your crucial pivot from the health care debate to the economic

situation, it is important for you to be aware of the current jobs situation. The rate of job

losses slowed significantly in more recent months in comparison to the first half of 2009.4

Across all industries, the decline in private sector payrolls was much improved from even

the third quarter of 2009. The unemployment rate actually dropped in November of 2009,

although it is still significantly high. It is imperative, if you desire to be reelected, that

you take steps to stimulate genuine economic growth so that private sector jobs are

included into the economy. Despite the new jobs created by the stimulus bill as you

                                                         2 Minute of the Federal Open Market Committee; Dec. 15‐16, 2009. Bernanke.  3 Federal Reserve Website; Industrial Production Utilization: Summary  4 Minute of the Federal Open Market Committee; Dec. 15‐16, 2009. Bernanke. 

discussed in your State of the Union Address, what happens when the stimulus money

disappears. Despite the continuing unemployment claims moving down across state

programs, the average length of those on unemployment increased.

Another thing to keep in mind with unemployment is that it is a lagging economic

indicator. This means that “vital sign” of the economy improves after an improvement in

the economy as a whole. Mr. President, an easy way to think of it is that in order for jobs

to be created and thus the unemployment rolls to be reduced, there must be economic

growth.

GDP

In terms of the GDP numbers, better than expected employment numbers, increases in

consumer spending, home sales and increases in industrial production are all signs of

GDP growth for the rest of 2010 and even stronger into 2011. The positive data coupled

with improving market conditions will result in growth of real GDP through

2011.

Consumer spending increased convincingly in October fueled partly because of an

increase in light motor vehicle sales.5 This continued into November along with an

increase in consumer spending. Another strong economic sign is that new homes sales

increased dramatically in recent months resulting in a diminished inventory of new

homes. Imports and exports continued their improvements over levels that were seen

earlier in 2009 and the U.S. trade deficit in October and November was wider that in

previous months.6 GDP is a leading economic indicator meaning that it typically is ahead

of the curve of overall improvement in the economy.

Inflation

In terms of inflation, total consumer price inflation has increased since October whereas

core consumer price inflation has remained steady. Increased readings on headline

consumer price inflation were the result of increasing energy prices as a result of ongoing

global economic recovery.7 According to Ben Bernanke, “substantial resource slack

likely to continue to dampen cost pressures and with longer-term inflation expectations

stable, the Committee expects that inflation will remain subdued for some time.”8

Short-term Economic Policy Options

To address the struggling economy, the most important short-term economic policy

action taken by the Federal Government should be an expansionary money policy. As

was seen in the Great Depression, allowing large institutions to fail while also imposing

strict reserve requirements on bank that were incapable of doing so, froze the wheels of

                                                         5 Minute of the Federal Open Market Committee; Dec. 15‐16, 2009. Bernanke.  6 Minute of the Federal Open Market Committee; Dec. 15‐16, 2009. Bernanke.  7 Minute of the Federal Open Market Committee; Dec. 15‐16, 2009. Bernanke  8 Minute of the Federal Open Market Committee; Dec. 15‐16, 2009. Bernanke.   

commerce, resulting in a retraction of the economy.

The best step that can be taken for the economy in the short term is an expansionary

monetary policy so that the economy does not contract too drastically. Thus far, the

Federal Reserve has been very successful at implementing a loose money policy. The

result of this kind of policy to fight an expansionary gap is explained by this

graph. 9

The second short term policy step that should be taken is an increase in government

                                                         9 Chow, Clifton. Class Notes. 

spending. Although, Mr. President, you must be cautious that this spending is not

frivolous or out of control. The best thing to do is to move forward with public projects

that positively affect a large part of the economy. There must be a sound cost-benefit

analysis to ensure that money is not being wasted. Pet projects and paying ten million

dollars to a company to create three jobs is not going to resonate positively with the

American people. The effects of government expenditures on the economy can be seen

on the next page.

10

Long-term Economic Policy Options

In order to enhance long-term economic growth, the United States should eliminate the

                                                         10 Chow, Clifton. Class Notes. 

personal income tax. The Internal Revenue Service is a tremendously large organization

that wastes money and only collects taxes on roughly fifty-percent of the American

people as many work under-the-table for cash and never pay an income tax. According to

Fairfax, a national organization endorsed by 79 Novel and Pulitzer Prize winning

economists, “the FairTax plan is a comprehensive proposal that replaces all federal

income and payroll based taxes with an integrated approach including a progressive

national retail sales tax, a prebate to ensure no American pays federal taxes on spending

up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through

companion legislation, the repeal of the 16th Amendment.”11 The following graph

compares the fair tax to the personal income tax.

12

Mr. President, my second long term recommendation to enhance long-term economic                                                          11 FairTax.org  12 FairTax.org 

growth is that the Federal Government reduce the growth rate of government spending.

First and foremost, the increases in costs of medical care, Social Security, Medicare and

other entitlements must be kept in check. Ludicrous government spending on earmarks

and other pet projects and frivolous spending bills could bankrupt the government.

Reduce the spending on these programs and instead pay down the astronomical debt. The

debt could be the demise of the United States and running around spending money like it

is going out of style is not a sound fiscal policy. Reduce the growth rate of government

spending by minimizing spending. The importance of this policy move can be seen in the

disturbing debt to GDP chart below.

13

                                                         13 Federal Reserve