TL;DR
Republican Presidents haven't delivered a fiscally conservative economic policy since Pres. Eisenhower.
President Trump, a Republican, and Vice-President Gore, a Democrat promised to pay down the debt if elected, but both major parties have since abandoned all rhetoric focused on economic reality.
Modern Monetary Theory is a political strategy designed to mirror Republican economic strategy and shuffle the winners and losers of monetary inflation.
The Missing Years
Deficits used to matter to Americans. In 1985 both houses of Congress and President Reagan signed the Gramm–Rudman–Hollings Balanced Budget Act, which would force automatic spending cuts when the spending exceeded revenues. The act had support from both parties and widespread popular support, but was shot down by the Supreme Court in 1986.
More recently there is evidence that Americans still support balanced budgets, at least symbolically. Vice-President Al Gore's 2000 campaign promised to pay the debt by 2012. The Obama campaign promised to cut the deficit in half by the end of his first term if elected (this promise went undelivered). President Trump promised to pay down the debt in 8 years if elected (this promise also went undelivered). Vice-President Gore won the popular vote in 2000, President Obama was elected in 2008 and President Trump won the electoral college vote in 2016, all based in part on promises they never intended to deliver.
Every recent President has achieved record deficits and record debts. At the end of President's Clinton's tenure the debt was $5.8 trillion; by the end of President Trump's tenure the debt was nearly $28 trillion. What happened? Although President Bush's campaign also promised to reduce the debt, President Bush signed tax cuts in 2001 and 2003 and an income tax rebate in 2008 that increased the debt by $4.6 trillion from 2012 to 2021 and did little change spending habits of upper-income taxpayers or stimulate economic growth.
Similarly, in 2017 President Trump signed the Tax Cuts and Jobs Act that went into effect in 2018 and added $3.5 trillion in debt prior to the COVID-19 pandemic.
Why the gap between rhetoric and reality?
No President has delivered a budget surplus since Eisenhower. One issue is the large gap between ideology in general and policy preferences in specific. Surveys over the last 50 years have consistently shown that Americans are symbolically conservative but operationally liberal. That is, Americans claim to hate big government but support specific programs. Trump's tax were popular, as are Medicare, Obamacare and Social Security.
Another factor is a structural issue in Senate rules called the filibuster. The filibuster is he practice of holding up business in the Senate by speaking for a long time. Filibusters can be brought to an end by a vote of the body, but it requires 60 out of 101 votes to do so. If the majority party doesn't hold 60 seats (which is rare), the minority party can hold up bills it doesn't like. BUT... there are a couple exceptions to the filibuster. One exception is votes on appointments, such as justices and members of the President's cabinet. The other exception is the reconciliation of spending bills. There are limits to reconciliation, but changes to taxes and spending can be brought through reconciliation to avoid the threat of a filibuster.
As it turns out, the Republican party has settled on two priorities that bypass the threat of filibuster: appointing conservative justices and passing tax cuts. The latter plays out this way: cut taxes and increase military spending, without cutting spending on social programs. Policy wonks know this as Starve the Beast, the practice of creating large deficits to force spending cuts on subsequent Democratic administrations who, until recently, have been more supportive of sound governance and constraining deficits.
The promise that tax cuts pay for themselves in the form of increased economic activity is superficially enticing even if it has never worked in practice. This last point is very important. Politicians get to take credit for their fiscal sanity in principle even as they fail to deliver it in practice. The veneer is all they require. And as we shall see shortly, the veneer appeals to Democrats as well as Republicans.
Until Recently
President's Clinton's last budget deficit in FY 2001 was $133 billion, down from $347 billion in FY 1993. President Obama's last budget deficit in FY 2017 was $671 billion, down from $1.6 trillion in FY 2009. That was then.
Even if the campaign promises of recent Presidents were made in bad faith, President Biden made no such pretense. President Biden campaigned on stimulus and COVID-19 relief for Americans and on the new notion that the debt doesn't matter.
Deficits Don't Matter
The popularization of the new "deficits don't matter" mantra has a name: Modern Monetary Theory (MMT). MMT dates back to the the early 1990s and is credited to Warren Mosler, an ex-Wall Street trader, business owner and entrepreneur. MMT is founded on three principles:
Sovereign debt: The purpose of taxation is not to finance government spending. Rather, taxes create demand for the fiat currency. As long as governments issue debt in their own fiat currency, they can never go bankrupt or default on their debt, because they can always issue as much currency as they need. Similarly, bonds and debt don't matter because they don't need to exist. The bond market is a policy preference, a mechanism that allows the Federal Reserve to add and remove liquidity to the currency supply.
Functional finance: Abba Lerner's economic theory from the 1940's states the limit to how much a government can spend is not financial, but is practical, based on how much goods and services an economy can produce. As long as an economy is not at full employment, it can further increase its production via more government spending.
Employer of last resort: Zero unemployment cannot be reached because it will lead to higher inflation. However, governments can hire as many people as want to work. As long as they are paid wages that are lower than prevailing market wages, government employment will not squeeze out the private sector.
To be sure, MMT, like Austrian economics, is a heterodox economic hypothesis that isn't taken very seriously by most economists. The left-leaning economist Paul Krugman has argued that there is nothing new in MMT that goes beyond functional finance and that cannot already be explained by more orthodox Keynesian economics. Moreover, MMT ignores the role of monetary policy to combat inflation, and he claims large and sustained deficits will necessarily lead to inflation. Supporters of MMT, including Stephanie Kelton, economics professor at Stony Brook University and advisor to Senator Bernie Sanders' Presidential campaign, has argued that Krugman simply doesn't understand MMT.
There are economists on the left and right who are critical of MMT. In my MBA I took a couple courses economics and finance, so I am not inclined to argue the finer points. But I am skeptical of MMT for several reasons.
As a pro-science skeptic I am inherently skeptical of all unproven, untested claims, especially when they are ripe with political implications.
MMT is designed to scale employment up and down to take up only slack in the economy. This means various programs will need to be turned on and off to manage demand. But we know from history that little in the world is more permanent than a temporary government program. I am skeptical that bureaucrats or politicians will allow local programs to collapse if their continued existence serves a political purpose.
It's not very clear how the program will be be able to scale automatically over time. Presumably it is be accomplished by adjusting the payout levels to such a level that they take up the unemployed without crowding out the private sector. I am skeptical there is any such level. Moreover, there is definitely no such level that works across the entire nation. Regional variations will give rise to the claims (real or perceived) of political favoritism and discrimination.
The natural rate of unemployment is never zero because there will never be a perfect match between the demands for specific skills and the capabilities of those in the slack pool. Slack labor requires time to acquire new skills.
Taking up slack labor via make work programs will reduce the both the desire and the ability of individuals to learn new skills needed by the private sector. Make-work programs will necessarily crowd out the private sector, however you try to spin it.
I have a couple minor quibbles with the term: Modern Monetary Theory. MMT isn't modern. MMT is a fiscal hypothesis, not a monetary one. Finally, MMT is not a proven theory, like Einstein's Theory of Relativity, but an unproven hypothesis.
Such quibbles aside, it's clear that MMT isn't ready to be adopted as orthodox by economists. Nevertheless, the Biden Administration has adopted MMT whole-heartedly. As President after passing the American Rescue Plan, the Biden Administration unveiled two new economic plans: the American Family Plan and the American Jobs Plan.
How did MMT enter the political mainstream?
Part of this answer parallels explanations of the Republican strategy.
Democrats don't have the filibuster-proof votes in the Senate to pass gun control, judicial reform, or a variety of progressive bills they would like.
However, the Senate can use the reconciliation process to pass a bill that includes only spending and taxes with a simple majority.
The new debt will limit the ability of future Republican Presidents to cut taxes without debasing what little credibility they have left.
The other part of this answer addresses a historical trend of modern Presidencies. The President's political party almost always loses seats in the midterm. Biden's economic plan has a new name, Bidenomics, and Bidenomics is designed as a bold agenda that captures the political center and retains control of Congress.
MMT provides a veneer of economic rationale that the administration can use to explain why the deficits will not lead to inflation or crowd out the private sector. Whether or not MMT can ever work or will ever become orthodox in economics is completely beside the point. MMT serves a political purpose, not an economic one.
