I don't know about you, but I have a couple of water pumps that need to be "primed" some times before they will pump water. I am thinking about changing the name of what I am doing to "stimulating" the pump. We all know what "stimulation" does for sex, so why not for pumps or the economy? This whole business has gotten me to thinking about a new blog, so here goes.
I don't know how it happened, but back in the early 1900"s a Canadian economist came up with the concept of economic "stimulation". It is my guess that he lived on a farm some where in Ontario Canada where they had this old piston type water pump. The way the pump worked, when you "pumped" the handle up and down, it moved a piston up and down. This piston was sealed to the sides of the pipe with a disc of leather so that when the piston was raised, it sucked water up from below. When the piston went down, a check valve below prevent the water from going back down the well. When the piston came back up, this action forced the leather seals against the sides of the pipe, and lifted the water that was above the piston so that it flushed out of the mouth of the pump.
Now what does this have to do with "priming" or "stimulation"? The job of the pump was to pump water so to get the leathers inside the pump to seal, you needed to fill the chamber above the piston with water so that the pump would work. This is called "priming the pump". Now for economics. If the purpose of economics is to produce wealth that we measure in dollars, then it is just like the pump whose purpose is to pump water. It is not too big of a step to think that if you can pour water down a pump to get it to pump what, then why not pour money into the economy to get it to producing wealth? That is how simple minded all this is.
In the case of the water pump, the problem was that the leather seal to the sides of the pipe is that the leather dried out and the seal was lost. In modern times the seals are made of rubber that does not dry out----problem solved. Rather than priming the pump with water, they could have used grease to lubricate the leathers and thus restore the seal. Why don't people think this logical when it comes to economics?
Let's try another example. On this island we have just one human. With little effort, he can find all the food he needs and it is warm and he needs little shelter. There are not animals on the island that can harm him either. After a period of time, he starts getting very hungry. What has happened is that he is sleeping later and later and thus has less time to search for food. His economy is going into the toilet. An economist on another island sees what is happening and decides to "prime" the pump or to "stimulate" the economy of the island. He does this by sending a large shipment of food to the island. The person on the island now has more food than he can eat and is no longer hungry. The economist feels that he has solved the problem and is awarded the Nobel prize. After the man eats all the food, he now sleeps even more and is now more hungry than before.
How about another one? This guy lives by this river that normally has a nice even flow, but one day he notices that the flow in the river is down. He calls on his friend who is an economist to find out what to do. The economist tells him that he needs to "stimulate" the river, but how do you do that? It is easy. Take a big tank truck up stream and fill it with water and drive the truck back down stream and put the water from the truck into the river just above the guy's property. Now the flow will be back to "normal". It works and the guy is so happy that he recommends his friend for the Nobel prize. A few days later the guy notices the river is even lower than before. What the guy discovers is "pay back time".
Look at the economy like the tide in the ocean or the level of water behind a dam. It goes up and down, but there is a reason that it goes up and down. Hauling water back and forth may affect the level for a while, but it does not address any of the factors that are causing the water to go up and down. Stimulating the economy is one of the most simple minded concepts that I have ever heard of. Back in graduate school about 50 years ago, I had a professor by the name of Ted Kreps who had been teaching economics at Stanford for at least 30 years. He was part of the Roosevelt administration during the great depression. He was always talking about "economic stimulation" and how it could affect the economy, but I asked him exactly how did it "help" the economy in the long run or how it make a person sleep less and search for food more? He could not answer that. It was like it worked by magic and you know that I don't go for magic.
The way that you turn around an economic down turn like we are in now is to determine what it was that "caused" us to be in this situation and "fix" those items. I would say government spending and high taxation might be one area. Another might be the fact that we are no better than 25th in the world in education or the fact that 40% of our kids drop out of high school. How about the out of wed lock birth rate. It has gone from about 10% 50 years ago to over 50% today. How about the percentage of our kids who graduate from our colleges with technical degrees? It is the lowest since numbers have been kept and it is getting worse. How about fixing some of those things rather than "stimulating" the economy or "priming the pump"? It is like giving a person as asprin when they are choking. It will take pain to solve our problems, so let's get on with the pain.
