Imagine an alternate timeline where Clinton had a beard.

My comment at Economist's View.
Summary/Genealogy

December 22, 2012
Maya and the Vigilantes by Krugman

[O]ne way to tell what’s driving interest rates over any given period is to look at what was happening to other asset prices…. If rates have risen because investors fear default and fiscal chaos, stock prices should plunge. Did this happen during the supposed vigilante attack of the 1990s?

Well, no.

What really happened in 1994? The economy was starting to recover (it was actually adding 300,000 jobs a month for a while),and investors expected the Fed to tighten a lot. Clearly, they overreacted. But the events don’t bear the “signature” of an attack driven by debt fears.

BACK WHEN I FEARED THE BOND-MARKET VIGILANTES: MAUNDERING OLD-TIMER REMINISCENCE WEBLOGGING by DeLong

The right policy, we thought--and I think the evidence is pretty clear that we were 100% right--was to aggressively move to reduce the budget deficit in 1993 even thought the recovery was weak in order to eliminate any market expectations that high deficits would lead to higher inflation, and--more importantly--to eliminate any belief on the part of the [Alan Greenspan] that [he] need to raise rates rapidly and far to create a low-investment jobless recovery in order to guard against any possibility of a renewed inflationary spiral. 

That was not an attack but a horizon-sighting of bond-market vigilantes--or perhaps only the market thinking [Alan Greenspan] thought [he] was about to get a horizon-sighting of bond market vigilantes. 

I think we were right then to fear and take steps to ward off the bond-market vigilantes--or perhaps only right to fear and take steps to ward off any [Alan Greenspan] decision that i[he] needed to fear and take steps to deal with bond-market vigilantes. In any event, our policies were right. [changed "Federal Reserve" to "Alan Greenspan"].

December 24, 2012
Bond Vigilantes and the Power of Three by Krugman

Matthew Yglesias picks up on a point I’ve tried to make at some length recently: the popular story about how an attack by bond vigilantes can cause an interest rate spike and turn America into Greece, Greece I tell you, is incoherent. (Here’s a 2010 example from Alan Greenspan — the piece in which he declares it “regrettable” that the vigilantes haven’t yet attacked, but grudgingly concedes that low rates might persist “well into next year”, that is, into 2011. So what has he learned from the failure of his prophecy? Nothing, of course).

February 15, 2013
The best reason to worry about the deficit by Ezra Klein

The theory was correct. By the end of Clinton’s term, the interest rate on 10-year Treasurys had fallen to 5.26 percent — lower than it had been in 30 years. And the economy was, indeed, booming. “The deficit reduction increased confidence, helped bring interest rates down, and that, in turn, helped generate and sustain the economic recovery, which, in turn, reduced the deficit further,” Treasury Secretary Robert Rubin said in 1998.

February 16, 2013
Can We Cut the Crap on Robert Rubin and Deficit Reduction by Dean Baker

So we are supposed to believe that the difference between the 2.5 percent real interest rate in the high deficit pre-Clinton years and the 2.2 percent real interest rate at the end of the Clinton years is the difference between the road to hell and the path to prosperity? This is the sort of nonsense that you tell to children. It might past muster with DC pundits, but serious people need not waste their time. 

The story of the boom of the Clinton years was an unsustainable stock bubble. This led to a surge in junk investment like Pets.com. It led to an even larger surge in consumption. People spent based on their stock wealth, pushing the saving rate to a then record low of 2.0 percent (compared to an average of 8.0 percent in the pre-bubble decades). 

Robert Rubin acolytes may not like it, but the deficit reduction was a minor actor in the growth of the 1990s. The bubble was the real story. That may not be a smart thing to say if you're looking for a job in the Obama administration, but it happens to be the truth. You have to really torture the data to get a different conclusion.

February 19, 2013
CROWDING-IN AND RAPID GROWTH IN THE 1990S: DEAN BAKER GETS ONE WRONG, I THINK by DeLong

The actual inflation rate in 1991 was 5%/year, but the expected inflation rate over the next decade was more like 3%/year. We are not talking about an 0.3 percentage-point decline in real interest rates, but rather about a 2.3 percentage-point decline in real interest rates. Moreover, back in 1992 when we unwound the yield curve and projected interest rates in the future we saw nominal interest rates has highly likely to rise unless the deficit was substantially reduced. The 2000 we were looking forward at had forecast nominal interest rates of not 7.86%/year but 10%/year or so--a real interest rate of 7%/year. 

The counterfactual for 2010 is thus different not by 0.3 percentage-points but by 4.8 percentage-points. That is a much bigger deal. 

How big a deal? Enough to boost the growth rate of potential output by between 0.5 and 1.0 percentage points per year, in my estimation…

 Andy Harless comments:

Empirically I have to call this for Dean. Take the real 10-year yield at the end of the last quarter before the election, using the Philadelphia Fed Survey of Professional Forecasters 10-year expected inflation rate. In 1992, the real yield was 2.6% (6.4-3.8). In 2000, it was 3.3% (5.8-2.5). Obviously, you could choose the dates differently and get a different answer, but it's hard to imagine that there's strong evidence of declining real yields when my first cut shows them increasing. And I don't think you can use projections if those projections are based on models in which crowding out has large effects on interest rates. 

However, (1) everyone should realize that interest rates are endogenous, and I'm not sure the long run elasticity of investment demand with respect to the interest rate is very large, (2) it's obvious if you remember the late 1990's that there is dynamic, multiple equilibrium kind of stuff going on here, and I think interest rate comparisons are missing the important part of the story.

February 21, 2013
DeLong responds:

(i) At least as we saw it, much of the effect of Clinton fiscal policy was baked into the interest-rate cake by the fall of 1992, (ii) we did have a large unexpected increase in desired high-tech investment spending in the 1990s, and (iii) we at least had no doubt that without deficit reduction on a large scale Greenspan was going to push interest rates up far and fast...

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I have to call this for Krugman/Baker/Harless against DeLong/Klein. I guess the counterfactual would be that if Clinton hadn't done deficit reduction on a large scale, Greenspan would have pushed interst rates up far and fast. No doubt DeLong agrees with Krugman and views Greenspan's current views on bond vigilantes as wrong. So Greenspan would have been wrong to send the economy into recession in the 90s. What would have followed?