21 reasons why Rachel Reeves should listen to Prof John Hearn

Why Aggregate Demand Management Has Failed—and What Sound Economics Demands

Introduction: A Crisis of Misguided Policy

The FT reports that Reeves is in trouble.  It comes as no surprise. Rachel Reeves, as a leading Keynesian voice, has championed aggregate demand management as the cornerstone of her economic strategy. Yet the results—stagnant growth, persistent inflation, and fiscal strain—reveal the limits of this approach. Professor John Hearn, a staunch monetarist and fiscal realist, has long warned that manipulating demand does not create sustainable prosperity. His teachings emphasize productive investment, monetary discipline, and structural reform—not short-term stimulus.

This keynote outlines 21 macroeconomic reasons why Reeves should have heeded Hearn’s wisdom, each grounded in empirical logic and economic history.

1️⃣ Demand Management Ignores Supply Constraints

Stimulating demand in an economy with rigid supply leads to inflation, not growth. Hearn emphasizes that long-run output is determined by supply-side factors—labor, capital, and productivity. Reeves’ policies pumped money into a system already at capacity, driving prices up. Without expanding productive capacity, demand stimulus is self-defeating. Supply-side reform—not demand manipulation—is the path to real growth. Ignoring this has led to stagflation.

2️⃣ Fiscal Stimulus Crowds Out Private Investment

Government spending financed by borrowing absorbs capital that could fund private enterprise. Hearn warns that excessive deficits distort interest rates and reduce investment efficiency. Reeves’ expansionary budgets have led to rising yields and falling business confidence. The private sector is the engine of innovation—crowding it out stifles progress. Public sector dominance breeds inefficiency and dependency. Hearn’s model favors lean government and vibrant markets.

3️⃣ Short-Term Boosts Create Long-Term Imbalances

Demand management often delivers temporary relief at the cost of structural imbalance. Reeves’ stimulus packages inflated consumption but failed to raise productivity. Hearn teaches that sustainable growth requires investment that yields future returns. When spending outpaces output, deficits balloon and inflation accelerates. The economy becomes addicted to stimulus, losing resilience. Hearn’s approach builds long-term strength—not short-term sugar highs.

4️⃣ Inflation Is Always a Monetary Phenomenon

Reeves underestimated the inflationary impact of loose fiscal and monetary coordination. Hearn, echoing Friedman, insists that inflation stems from excess money chasing limited goods. Stimulus without monetary restraint fuels price instability. Central banks cannot offset reckless fiscal expansion indefinitely. Inflation erodes real incomes and undermines trust in institutions. Hearn’s discipline would have prevented this spiral.

5️⃣ Employment Gains Are Superficial Without Productivity

Reeves touted job creation, but many new roles were low-productivity or public sector dependent. Hearn argues that employment must be tied to output and efficiency. Artificial demand creates jobs that vanish when stimulus fades. True employment growth comes from entrepreneurship and capital formation. Reeves’ model inflates payrolls but not prosperity. Hearn’s framework builds durable labor markets.

6️⃣ Government Cannot Accurately Time the Cycle

Fiscal policy suffers from implementation lags—by the time stimulus arrives, conditions have changed. Hearn teaches that markets adjust faster than governments can respond. Reeves’ interventions often hit too late, amplifying volatility. Policy must be rule-based, not reactive. Trying to fine-tune the cycle is a fool’s errand. Hearn’s approach favors stability over improvisation.

7️⃣ Consumption-Led Growth Is Unsustainable

Reeves focused on boosting household spending, ignoring investment and exports. Hearn warns that consumption without production leads to trade deficits and inflation. Growth must be rooted in value creation, not redistribution. Stimulating demand without expanding supply is economically hollow. Reeves’ model inflated demand but drained competitiveness. Hearn’s vision prioritizes productive capacity.

8️⃣ Debt-Fueled Stimulus Is a Fiscal Trap

Reeves expanded borrowing to fund stimulus, assuming growth would offset the cost. Hearn cautions that debt must be matched by future returns—not hope. When stimulus fails to deliver, debt becomes a drag. Interest payments crowd out essential services and investment. Fiscal space shrinks, leaving no room for future crises. Hearn’s discipline avoids this trap.

9️⃣ Monetary and Fiscal Policy Must Be Aligned

Reeves pursued fiscal expansion while the central bank tightened—creating policy conflict. Hearn teaches that macroeconomic tools must work in harmony. Loose fiscal policy undermines monetary restraint, fueling inflation. Mixed signals confuse markets and weaken credibility. Coordination—not contradiction—is essential. Hearn’s model ensures coherence.

🔟 Stimulus Undermines Market Signals

Reeves’ interventions distorted prices, wages, and investment decisions. Hearn emphasizes that markets must allocate resources freely. Artificial demand masks inefficiencies and misleads entrepreneurs. Price signals are essential for innovation and adaptation. Government manipulation breeds fragility. Hearn’s approach restores clarity.

1️⃣1️⃣ Public Spending Crowds Out Innovation

Reeves expanded public programs while neglecting private sector incentives. Hearn argues that innovation thrives in competitive, profit-driven environments. Subsidies and transfers dull the edge of entrepreneurship. The state cannot replicate market dynamism. Reeves’ model breeds dependency, not discovery. Hearn’s vision unleashes creativity.

1️⃣2️⃣ Aggregate Demand Is Not the Growth Engine

Reeves treated demand as the driver of GDP, ignoring supply-side fundamentals. Hearn teaches that long-run growth depends on productivity, not spending. Stimulus inflates numbers but not capacity. True growth requires investment, education, and infrastructure. Demand management is a short-term patch—not a strategy. Hearn’s framework builds real prosperity.

1️⃣3️⃣ Redistribution Does Not Create Wealth

Reeves emphasized equity through transfers, assuming it would boost demand. Hearn warns that redistribution reallocates—not expands—the economic pie. Wealth must be created before it can be shared. Transfers without productivity gains are inflationary. Equity must be earned through opportunity, not subsidy. Hearn’s model empowers individuals.

1️⃣4️⃣ Stimulus Breeds Inflation Expectations

Reeves’ repeated interventions led consumers and firms to expect ongoing inflation. Hearn emphasizes the role of expectations in price stability. Once inflation psychology sets in, it’s hard to reverse. Stimulus must be rare and targeted—not routine. Credibility is key to anchoring expectations. Hearn’s discipline preserves trust.

1️⃣5️⃣ Political Cycles Distort Economic Policy

Reeves’ policies were often timed to electoral needs, not economic logic. Hearn teaches that rule-based policy avoids politicization. Stimulus tied to votes undermines credibility and efficiency. Markets respond to consistency—not campaign promises. Economic leadership must transcend politics. Hearn’s model is institutionally grounded.

1️⃣6️⃣ Subsidies Create Moral Hazard

Reeves’ support programs reduced incentives to work, invest, and adapt. Hearn warns that excessive support breeds complacency. Economic agents must face real risks to innovate. Subsidies distort behavior and reduce resilience. Support must be conditional and temporary. Hearn’s framework rewards effort.

1️⃣7️⃣ Inflated Demand Worsens Trade Deficits

Reeves’ consumption-driven model increased imports, widening the trade gap. Hearn emphasizes balanced growth through exports and investment. Demand stimulus without domestic production leaks abroad. Trade deficits weaken currency and competitiveness. Reeves ignored external balances. Hearn’s model restores equilibrium.

1️⃣8️⃣ Stimulus Is Not a Substitute for Reform

Reeves used stimulus to mask structural weaknesses—regulation, taxation, labor rigidity. Hearn teaches that reform—not spending—is the key to resilience. Temporary boosts cannot fix long-term flaws. Avoiding reform delays recovery and deepens fragility. Reeves postponed the inevitable. Hearn’s model confronts reality.

1️⃣9️⃣ Inflation Hurts the Vulnerable Most

Reeves’ policies led to price instability, eroding real incomes. Hearn warns that inflation is a hidden tax on the poor. Stimulus that fuels inflation undermines equity. Stable prices are the foundation of inclusive growth. Reeves’ model betrayed its own goals. Hearn’s discipline protects the vulnerable.

2️⃣0️⃣ Confidence Is Built on Credibility

Reeves’ shifting targets and reactive policies weakened market confidence. Hearn teaches that credibility is earned through consistency and restraint. Investors and consumers need stable expectations. Policy must be predictable and principled. Reeves’ improvisation bred uncertainty. Hearn’s model inspires trust.

2️⃣1️⃣ Leadership Requires Economic Courage

Reeves followed popular Keynesian prescriptions despite mounting evidence of failure. Hearn has long advocated unpopular but necessary reforms. Leadership means confronting hard truths—not chasing applause. Economic courage is choosing discipline over expedience. Reeves missed the moment. Hearn’s legacy is one of principled leadership.