Three basic methods of dealing with deflationary or inflationary gaps have been discussed: changes in G, changes in T, and balanced changes in both G and T. A fourth method, called pump priming, was popularized in the United States by the Roosevelt administration in the 1930s and has supporters even today.
The theory of pump priming holds that less than the whole of a deflationary gap needs to be filled by the government expenditure because the filling of only a small part of such a gap will create such favorable expectations that private investment expenditure will rise to fill the remainder. There is nothing self-contradictory about the theory; it describes a world that could exist. whether it works in the real world depends on how quickly and by how much business expectations respond to a fairly small rise in income occurring during a slump.
Unfortunately, the shifts in expectations required by the pump priming theory have not occurred quickly in practice. At least during the initial stages of an attempt to achieve a desired level of national income, it thus seems necessary to fall back on the idea of removing the whole of a deflationary gap through increases in G and/or decreases in T. Later, when a recovery is in full swing and business confidence – and with it private investment expenditure – have recovered, G can be reduced or T increased.
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