What is priming the pump?
Priming is the action taken to stimulate an economy, usually during a recession, through public spending and cuts in interest rates and taxes. The term priming of the pump is derived from the operation of old pumps – a suction valve had to be primed with water for the pump to function properly.
Understanding the priming of the pump
Priming the pump assumes that economy must be primed to function properly again. In this regard, public spending is expected to stimulate private spending, which in turn should lead to economic expansion.
Key points to remember
- Priming refers to measures taken to stimulate spending in an economy during or after a recession.
- Typically, this involves pumping small amounts of public funds into a depressed economy to encourage growth.
Small amounts of government funds
Priming the pump involves introducing relatively small amounts of public funds into a depressed economy to stimulate growth. This is accomplished by increasing the purchasing power of those affected by the injection of funds, in order to stimulate higher demand for goods and services. The increased demand observed as a result of priming pumps can lead to increased profitability in the private sector, which contributes to the overall economic recovery.
Pump priming is linked to Keynesian economic theory, named after prominent economist John Maynard Keynes, who states that government intervention in the economy, aimed at increasing aggregate demand, can bring about positive change within the economy. This is based on the cyclical nature of money in an economy, in which one person’s expenses are directly related to another person’s income, and this increase in income leads to a further increase in expenditure.
The use of pump priming in the United States
The term “pump priming” originates from President Herbert Hoover’s creation of the Reconstruction Finance Corporation (RFC) in 1932, which was designed to provide loans to banks and industry. This was taken a step further in 1933, when President Franklin Roosevelt believed that priming the pump would be the only way for the economy to recover from the Great Depression. Billions of dollars have been spent through the RFC and other public works organizations to prime the pump to encourage economic growth.
The expression was rarely used in economic policy discussions after the Second World War, although the programs developed and used since then, such as unemployment insurance and tax cuts, can be considered forms of ” automatic primers for pumps. However, during the 2007 financial crisis, the term came back into effect, as lower interest rates and infrastructure spending were seen as the best route to economic recovery, as well as tax rebates granted under of the economic stimulation law of 2008.
Priming pumps in the Japanese economy
Similar to activities in the United States, Japanese Prime Minister Shinzo Abe and his associated cabinet approved a $ 29.1 billion stimulus package in 2020 in hopes of invigorating the tight economy. The aim was to increase Japan’s gross domestic product (GDP) by 0.7% by the end of 2020.