Now let's talk about causation: Why were the Clinton surpluses associated with an increase in household leverage? It basically comes down to the fact that a surplus basically represents the government sucking money out of the economy through some combination of higher taxes (which Clinton hiked, and which the government got via bubblicious capital gains) and lower spending (welfare reform, etc.). Sure, spending grew under Clinton, but a switch from deficit to surplus by definition means a net decrease in government spending.
Thus for the private sector to keep on growing, it needs to find some way to offset the government drag, and that was done via more leverage.
There is one alternative: You can have private and public sector deleveraging and ongoing growth if you improve your balance of trade, like the US used to have, and which countries like Germany, Japan, Switzerland, and China continue to run. But that only got worse under Clinton, who accelerated the boom in free trade deals that saw more and more advantages given to foreign manufacturing nations.
Bottom line though: The Clinton surpluses didn't protect us from any calamity, and the attendant boom in private sector leverage is what ultimately smashed the US economy. Why do we want to go back to that?
This story originally appeared on Business Insider
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