Donald Trump Wants to "Prime the Pump" – But Why?

In an interview conducted on May 4 and published Thursday, Donald Trump told editors at the Economist, "we have to prime the pump" through tax reform.

First let's get this out of the way: Trump claimed, bizarrely, to have invented the phrase, even though he was speaking to people more likely than just about anyone else to have heard it before.

Trump: "… you understand the expression 'prime the pump'?"
Economist: "Yes."
Trump: "We have to prime the pump."
Economist: "It's very Keynesian."
Trump: "We're the highest-taxed nation in the world. Have you heard that expression before, for this particular type of an event?"
Economist: "Priming the pump?"
Trump: "Yeah, have you heard it?"
Economist: "Yes."
Trump: "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."

Pump priming has been around since the 1930s, and is, as the interviewer pointed out, mostly associated with the British economist John Maynard Keynes. Trump's reference to Keynes raises questions about what exactly he hopes to accomplish, however, because Keynes' theories apply to a very different economic context.

The Economist's question had to do with forecasts that the Trump campaign's tax plan, as revised in September 2016, will raise the federal deficit, which Reagan's 1986 tax reform did not (the single-page plan the administration released on April 26 does not include sufficient detail to forecast revenue effects). According to estimates from the conservative Tax Foundation, Trump's plan would reduce federal revenues by at least $2.6 trillion by 2025. The more liberal Tax Policy Center sees the national debt rising by $20.7 trillion – that is, more than doubling – over 20 years. (See also, Trump's Tax Reform.)

Trump countered that Reagan's plan did increase the deficit, though it didn't. (Nor is the U.S. the "highest-taxed nation in the world.") Trump added that the deficit would not be higher for long – perhaps two years – and that the hit to government revenues would be worth it: "we have to prime the pump."

Depression Economics

The phrase, as it relates to economics, dates to the 1930s, when Herbert Hoover created the Reconstruction Finance Corporation to recapitalize banks and lend to important businesses such as railroads. Attempts to breathe life back into the economy gathered speed with the New Deal, which saw the introduction of the Public Works Administration and other policies aimed at fiscal stimulus. 

Keynes was the chief cheerleader for such policies, based on his theory that economic cycles corresponded to shifts in aggregate demand. When people lose their jobs and stop spending, the economy siezes up. Unlike his neoclassical peers, he was not confident that the system was self-correcting, arguing instead that stimulus was needed to revive dormant animal spirits. (See also, Giants of Finance: John Maynard Keynes.)

Stagflation

Keynes' ideas took off, as did – though he did not live to see it – the post-war global economy. It was not until stagflation took hold in the 1960s and 1970s that his theory fell out of favor. Low growth and high unemployment, the Keynesians thought, could not coexist with high inflation – until it did. Monetarists, who focused on the money supply, began to gain ground in academic economic circles, and politicians such as Ronald Reagan and Margaret Thatcher turned to the supply-side policies that Trump's tax-cutting, regulation-slashing agenda echoes. (See also, 9 Common Effects of Inflation.)

The Great Recession

Pump priming did make a comeback, however, following the 2008 financial crisis. George W. Bush signed the Economic Stimulus Act in February 2008, which provided tax rebates to stimulate demand. The American Recovery and Reinvestment Act, which Barack Obama signed a year later, pumped $800 billion of investment into the economy.

The question is, why prime the pump now? Animal spirits are anything but dormant. The University of Michigan's consumer confidence index has soared from a trough of 55.3 in November 2008 to 96.9 in March – a level that would not have looked out of place during Reagan's second term, the Clinton years or the mortgage bubble. Unemployment, at 4.4%, is the lowest it's been since May 2007. Reflation may finally be taking hold. Real median household income jumped 5% to $56,516 in 2015. (See also, Obama's Economic Legacy in 8 Charts.)

Growth is slow – just 1.6% in 2016 – and real median household income was higher in 1999 (the all-time high of $57,909), 2000, 2006 and 2007. But this is hardly the time for depression economics; the problem is not of the pump-priming variety. In fact, if that were the goal, Trump might have designed a very different tax reform proposal. As the interviewer pointed out, "the biggest winners from this tax cut, right now, look as though they will be the very wealthiest Americans." "I don't believe that," Trump countered, but according to the Tax Foundation, the Trump campaign's plan would boost the income of the top 1% by up to 19.9%, compared to 8.1% for the bottom 20%. (See also, Opinion: Trump's 'Tax Reform' Plan: The Rich Get Richer, You Get Screwed.)

The poorer you are, the more likely you are to spend an extra dollar earned (or saved through tax cuts), since you may not have the luxury of saving it for a rainy day. Trump's tax plan might have targeted the poor and middle class, if the goal was to stimulate demand, but instead it appears to be in the Reagan-Thatcher ideological mode: a supply-side tax cut aimed at the rich, who – the theory goes – will reinvest that money, increasing supply through new ventures and reinvigorating growth. Trump appeared to cite this school of thought when he said that an increase to the deficit would be short-lived; the Laffer Curve posits that increased output will generate more tax revenue for the government, despite lower tax rates. 

So which is it? Keynsian pump priming or supply-side Republican orthodoxy? Trump appears to be promising both.