U.S. Shouldn't Let Europe's Debt Crisis Go to Waste

White House Chief of Staff Rahm Emanuel (pictured) is known for his quote on the political and public policy opportunities that present themselves when things go haywire: "Never let a crisis go to waste."

I don't entirely agree with Emanuel's philosophical stance, but his words have more than an element of truth, and his modus operandi has virtue, particularly as it relates to Europe's debt crisis. Specifically, the U.S. shouldn't let the eurozone's mess go waste: We should use it as a prod to get our own fiscal house in order.

About a week ago, institutional investors, concerned that Europe's leaders wouldn't put together an adequate package to help its debt-plagued countries transition to sustainable fiscal policies, started to attack the bonds of Greece, Spain, Portugal and other European countries.

For awhile it looked like Financial Crisis -- The Sequel was about to start playing all across Europe. Key bond interest rates rose. Credit markets started to freeze. Banker-to-banker mistrust increased. And there was talk of contagion.

Doing the Right Thing

What does all that sound like? If you answered, the beginning of the Lehman Bros. failure-induced acute stage of the financial crisis in the fall of 2008, you're correct.

Fortunately for Europe, and for all others who really don't want to see the reemergence of the barter system, Europe did the rational, enlightened thing and came up with an $1 trillion stabilization package for aid, loans and loan guarantees that will give the debt-laden governments of Greece, Spain, Portugal, Italy and Ireland more time to cut their budgets.

The package, when combined with the European Central Bank's decision to enter the secondary market and buy government debt, reliquefied credit markets and calmed bankers' and institutional investors' jittery nerves. Contagion had been checked. The sharks, or lions, or whatever one calls them, had been turned back. Or so it seemed.

It Can't Happen Here?

However, not three days after the stabilization package was announced, new doubts emerged -- this time in the form of speculation that Europe may need to increase the plan's size or pass a second one to fully address the sovereign debt issue. Investors also expressed concern about the long-term impact of the debt crisis on the European, U.S. and global economic recoveries.

Still, even though the situation has already roiled stock, bond and currency markets, some argue that a shark-like attack on the debt-laden U.S. isn't likely to occur. But I'm not so certain about that.

To be sure, there's an element of truth in the "it can't happen here" argument. America's productive capacity, its relatively free and mostly fair capital markets, the attractiveness of U.S. investments, its rule of law and the dollar's role as the world's primary reserve currency all argue against a similar type of attack and panic playing out in U.S. markets. These are the major reasons the U.S., despite its national debt being a very high 84% of GDP, is in a magnitude-different place, financially, than Greece, Spain, Portugal et al.

Capital "Has a Life of Its Own"

Still, I'm not so sure of this country's ultimate immunity. The size, speed and power of institutional investors on the international stage are enough to give one pause. "Money, capital -- it has a life of it's own. It's a force of nature. Like gravity," as Maxwell Emery (Hume Cronyn) said in the film Rollover. I have no doubt the subject has kept U.S. Federal Reserve Chairman Ben Bernanke up late at night. It's not likely, but what if institutional investors suddenly decide that the U.S.'s probable, back-to-back trillion-dollar budget deficits represent too much debt? Or if they suddenly lose their appetite for dollar-denominated investments?

The view from here argues the U.S. shouldn't take that chance, and that's why now is a really good time to implement a plan to cut the deficit. But economic conservatives and other "supply side" economics supporters shouldn't misunderstand: Most will probably not like the tonic.

Cutting the budget deficit is going to involve a lot heavy lifting by Congress and the president, and a lot of sacrifices by the American people, particularly by upper-income Americans. Entitlements like Social Security and other social spending will have to be cut, along with defense spending, but a large tax increase on upper-income Americans will also be necessary. To help balance the budget, I'd raise the top federal income tax rate to 41%.

That's serious medicine, but the alternative -- doing nothing -- is far worse. That would be the public policy equivalent of sitting around and hoping that institutional investors won't take the U.S. to task for its incorrect fiscal policy and high debt levels. That's a risk the nation shouldn't take, which is why Emanuel's philosophy about crises applies to this one, too.