Dear Mr. President

To recover, however, we need more; investments in infrastructure and technology. Green investments on alternative-energy sources and public-transport systems can help wean us off our oil dependence. But recovery is not enough: we need to prevent a recurrence. We need new regulations and a new regulatory framework—one that can not only protect us against risks of bad lending, but against the risk of a president who doesn't understand the role of regulation in a modern economy.

To get the resources to attack these daunting problems means that we will have to raise taxes, at least on upper-income Americans, and use all of our resources wisely. There are two major sources of waste in our economy: the first is in the military, where spending has been unbridled—including on weapons that don't work designed to fight enemies that don't exist. We could have more security with a smaller military budget. The second is in health care. We have been aware of the problems for years, but vested interests have resisted change. Matters have become worse in the last eight years—the paradox of more uninsured and more spending. Reforming the health care system is essential to the health of our society, but also to the health of our economy.

This is, admittedly, an ambitious agenda. But we have no choice, if we wish to preserve and enhance our standard of living. Such a program will both increase output in the short run and help growth in the long run.

Edward C. Prescott is a senior monetary adviser at the Federal Reserve Bank of Minneapolis and a professor of economics at the W.P. Carey School of Business at Arizona State University. He was awarded the Nobel Prize in 2004 for his work on dynamic macroeconomics.
No matter who wins office, the temptation will be to change as many rules as possible, as quickly as possible. This is usually the inclination of an incoming president, but this will be especially true given the current financial turmoil and the perceived urgency to "do something!" However, I would remind the next president that changing the rules of the game too dramatically can have unintended consequences, which are often suboptimal. Indeed, even hinting that rules will be changed can alter expectations and change behavior.

This is especially true on the issue of taxes. There is no more important issue on which a president can affect the economy than the question of taxation. Recent research has revealed that tax rates are the key factor in determining the economic health of developed nations. Ingenuity, risk-taking and productivity are the engines of economic growth, and all are dependent on properly aligned incentives. High tax rates are the surest way to squash those incentives and stall that engine.

Another key issue that the next president will face is the call for health-care reform. Again, I would caution the next president to consider measures that will help unleash Americans' creativity and make the system more efficient. We've already developed less expensive walk-in clinics, and a market is developing for cheaper and better home health care for the elderly. And we've done these things without government directives. More regulations, price controls and too much government oversight will result in less efficient outcomes.