John McDonnell is doing us all a favour here as he’s proving why Keynesianism doesn’t in fact work as a method of managing the public finances. Not for any reason that the equations don’t work but because politics doesn’t work that way:
The shadow chancellor, John McDonnell, has said Labour would reverse cuts made by the government since 2010 as Labour highlighted more than £108bn needed to “end austerity”.
Labour’s pre-budget review said it would take £42bn to reverse departmental spending cuts. The Institute for Fiscal Studies (IFS) had already highlighted another £19bn needed to stop further cuts to government.
Some £33.5bn would be required to reverse cuts to social security and social care, Labour said.
Recall what the basic theory is. Prices and quantities do not automatically - and certainly not immediately - respond, therefore it’s possible to the economy to be too long in a recession, even to permanently be below productive capacity. Therefore, in such recessions, government spending - hopefully debt financed not monetary expansion but if needs must - should rise in order to jolt the economy back to full output and employment.
Once this has happened spending, the deficit, should return to normality. Even, perhaps, shrink a little in order to take some of that induced heat out of the economy.
True, that description’s not going to get an A* in an exam but it’s a useful enough pencil sketch.
So, why won’t it work? Because politics doesn’t work that way. Look at what McDonnell is arguing. He’s starting from the peak of that deficit and spending blowout in the last recession and claiming that any reduction in either is cuts, austerity, that must be reversed. Rather than the entirely normal second half of that Keynesian theory. That is, the theory doesn’t work as no one is willing to implement it all, only the spending and fun half of it.
Now it’s true that we shouldn’t blame McDonnell for this, he’s just doing his job. Arguing that all freedom, liberty and all effort by everyone should be absorbed into the state. That being the long term effect of this Keynesian ratchet. But there’s no reason why the rest of us should agree with him either, blame or not.