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Pump-Priming

PUMP-PRIMING

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.

Erik McKinleyErikssonn/d. b.

See alsoCouncil of Economic Advisors ; Economics ; Keynesianism ; New Deal ; Supply-Side Economics ; Trickle-Down Economics .

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