Pump Priming | StudyUseful

Pump Priming

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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.

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How is it accomplished?

• 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.

Case Study from USA

• 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 organization's, billions of dollars were spent priming the pump to encourage economic growth.

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Evolution of the Term

• 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 2007-08, 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.

• Even in current COVID situation, economics are using the same technique from a fiscal perspective to boost the Aggregate Demand in their nations and get the economies back in track.