pump-priming

or pump priming (pŭmp'prī'mĭng)
n.
Government action taken to stimulate the economy, as spending money in the commercial sector, cutting taxes, or reducing interest rates.

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Economic policy of increasing government expenditures and/or reducing taxes in order to stimulate the economy to higher levels of output. Pump priming measures are supposed to be temporary, existing only until the economy spontaneously develops and sustains growth on its own.

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Pump-Priming is government spending during a recessionary period in an attempt to stimulate private spending and the expansion of business and industry. The phrase derives from the operation of an old-fashioned pump, in which a small leather suction valve must be moistened, or primed, with water so that it will function properly.

President Herbert Hoover began using the policy of economic pump-priming in 1932, when he passed a bill creating the Reconstruction Finance Corporation to make loans to banks, railroads, and other industries. During the Great Depression, President Franklin D. Roosevelt became convinced by the fall of 1933 that pump-priming was necessary to achieve economic recovery. Thereafter, through the Reconstruction Finance Corporation, the work-relief agencies, the Public Works Administration, and other organizations, the government spent billions of dollars to prime the pump. These expenditures averaged $250 million per month in 1934 and 1935 and about $330 million per month in 1936, but only about $50 million per month at the end of 1937. The recession of 1937 caused the Roosevelt administration to again resort to extensive pump-priming in 1938.

In the post–World War II period, the term "pumppriming" is rare in discussions of government economic policy, though the federal government intervenes in the economy in various ways. Some government programs, such as unemployment insurance, automatically act as pump-primers, since government expenditures must increase as people lose jobs during a recession. In the 1960s President Lyndon Johnson's War on Poverty increased such social programs. Since the 1960s administrations have leaned toward putting more disposable income into the economy by cutting taxes (as an alternative or supplement to raising government expenditures). In the 1980s President Ronald Reagan cut taxes to corporations and wealthy Americans, arguing that benefits would "trickle down" to the middle class and working class; nevertheless, the income gap between the richest and poorest Americans widened significantly.

Bibliography

Nichols, Egbert Ray, ed. Pump Priming Theory of Government Spending. New York: H.W. Wilson, 1939.

Informally, government spending to increase purchasing power and stimulate the economy.

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. As with these pumps, 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.

Investopedia Says:
The phrase originated with President 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 by 1933, when President 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, are automatic pump primers of sorts. However, during the financial crisis of 2007/2008 the term came back into use, as interest rate lowering and infrastructure spending was thought to be the best path to economic recovery.

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