Donald Trump conducted an interview on May 4 with the Economist. Here follows the accurate transcription:
[talking about his tax plan]
But beyond that it’s OK if the tax plan increases the deficit?
It is OK, because it won’t increase it for long. You may have two years where you’ll…you understand the expression “prime the pump”?
We have to prime the pump.
It’s very Keynesian.
We’re the highest-taxed nation in the world. Have you heard that expression before, for this particular type of an event?
Priming the pump?
Yeah, have you heard it?
Have you heard that expression used before? Because I haven’t heard it. I mean, I just…I came up with it a couple of days ago and I thought it was good. It’s what you have to do.
Yeah, what you have to do is you have to put something in before you can get something out.
Actually the term “priming the pump” is a quite known phrase in the economic world: it comes from John Maynard Keynes (as the interviewer was suggesting) and means to inject liquidity (through government expenditure) in a system in order to stimulate aggregate demand.
How does it work?
If we look at how the economy works in the short run, we can point out two curves:
- The aggregate supply curve, defined as the total quantity of output firms are willing to supply at a given price level
- The aggregate demand curve, that for our analysis can be considered as the total demand of a country
Keynes analyses the short run situation: we look at the immediate consequence of this action, looking at a period that goes from 6 months to 1 year.
In this length of time the aggregate supply is taken as constant: firm are not able to change their supply in such a short term, and the prices are taken as constant as well (price stickiness and inflation). In this situation priming the pump means to increase public expenditure: graphically this shift the aggregate demand because the government component rise the total demand. Following the cycle of money, that expenditure has a positive effect on the income of someone else, that will spend more money too, in a positive chain that will lead to an increase in output.
Why could be dangerous to use this technique now?
First of all, the positive consequence is real only in the short run, taking prices as fixed. In the long run, prices will adjust automatically to the increase of liquidity and the surplus will be absorbed.
On the other hand, this measure was proposed as a way to overcome a lack of aggregate demand that is the cause (in Keynes’s opinion) of a crisis, while today the USA are in a period of economical recover. This could cause a useless increase in deficit, and the injection of liquidity could possibly evolve in an economic bubble potentially able to burst in a new crisis.