What is Pump Priming?
Pump priming is the action taken to stimulate an economy, usually during a recessionary period, through government spending and interest rate and tax reductions. The term pump priming is derived from the operation of older pumps - a suction valve had to be primed with water so that the pump would function properly.
Understanding Pump Priming
Pump priming assumes that the economy must be primed to function properly once again. In this regard, government spending is assumed to stimulate private spending, which in turn should lead to economic expansion.
- Pump priming refers to the steps taken to stimulate spending in an economy during or after a recession.
- Generally, it involves pumping small amounts of government funds into a depressed economy to encourage growth.
Small Amounts of Government Funds
Pump priming involves introducing relatively small amounts of government funds into a depressed economy in order to spur growth. This is accomplished through the increase in purchasing power experienced by those affected by the injection of funds, with the goal of prompting higher demand for goods and services. The increase in demand experienced through pump priming can lead to increased profitability in the private sector, which assists with overall economic recovery.
Pump priming relates to the Keynesian economic theory, named after noted economist John Maynard Keynes, which states that government intervention within the economy, aimed at increasing aggregate demand, can result in a positive shift within the economy. This is based on the cyclic nature of money within an economy, in which one person’s spending directly relates to another person’s earnings, and that increase in earnings leads to a subsequent increase in spending.
The Use of Pump Priming in the United States
The phrase "pump priming" originated from President Herbert Hoover's creation of the Reconstruction Finance Corporation (RFC) in 1932, which was designed to make loans to banks and industry. This was taken one step further in 1933, when President Franklin Roosevelt felt that pump-priming would be the only way for the economy to recover from the Great Depression. Through the RFC and other public works organizations, billions of dollars were spent priming the pump to encourage economic growth.
The phrase was rarely used in economic policy discussions after World War II, even though programs developed and used since then, such as unemployment insurance and tax cuts, may be considered forms of automatic pump primers. However, during the financial crisis of 2007, the term came back into use, as interest rate reduction and infrastructure spending were considered the best path to economic recovery, along with tax rebates issued as part of the Economic Stimulus Act of 2008.
Pump Priming in the Japanese Economy
Similar to activities used within the United States, Japan’s prime minister, Shinzo Abe, and his associated cabinet approved a stimulus package in 2015, equivalent to $29.1 billion, in hopes of invigorating the strained economy. The goal was to increase the gross domestic product (GDP) of Japan by 0.7% by the end of the year 2016.