Guns, Butter, and Growth: The Consequences of Military Spending Reconsidered

AuthorJeff Carter,Heather L. Ondercin,Glenn Palmer
Date01 March 2021
Published date01 March 2021
Subject MatterArticles
Political Research Quarterly
2021, Vol. 74(1) 148 –165
© 2020 University of Utah
Article reuse guidelines:
DOI: 10.1177/1065912919890417
The political fortunes of leaders, governments, and
regimes rise and fall based on their ability to provide
national security, social benefits, and a strong economy.
Importantly, a state’s economy and spending on the mil-
itary and social spending are intimately related to one
another. A growing economy allows governments to pay
for national defense and social welfare more easily
while both military spending and social spending can
influence economic performance (e.g., Mintz and Huang
1991; Oatley 2015). Investigations of the relationships
among military spending, social spending, and eco-
nomic performance, therefore, bring together some of
the more salient aspects of international relations, for-
eign policy, and domestic politics.
Given the importance of national security, social wel-
fare states, and economic performance for politics within
and between states and research across the discipline, it is
unfortunate that there is no consensus about how military
expenditures influence patterns of social spending or the
economy. We argue that this lack of agreement is driven
by scholars’ failure to account for three important factors.
First, how governments finance military spending can
influence the consequences of military spending (Oatley
2015). Governments pay for military expenditures by
reducing other expenditures and/or increasing the budget
via higher tax revenue, and/or incurring higher levels of
debt, and/or increasing the money supply (Carter and
Palmer 2016; Rasler and Thompson 1985). Past research
tends to analyze how military spending influences social
spending or economic growth in isolation of one another
and has not given enough attention to the larger system in
which these relationships exist. Second, leaders and gov-
ernments differ in the relative importance they place on
social benefits and a growing economy as well as their
relative preferences for financing military expenditures
by reducing social spending, raising taxes, borrowing
money, and/or expansionary monetary policy (Cappella
Zielinski 2016; Carter and Palmer 2015; Oatley 2015).
Third, the effects of military spending on social expendi-
tures and economic growth are complex and often are not
immediately apparent. The interdependencies among
government spending, the economy, and methods of gov-
ernment finance imply that changes in military spending
will have indirect effects on social expenditures and the
economy through tax revenue, debt, and/or the money
supply. Importantly, the time necessary for changes in
890417PRQXXX10.1177/1065912919890417Political Research QuarterlyCarter et al.
1Appalachian State University, Boone, NC, USA
2The Pennsylvania State University, University Park, USA
Corresponding Author:
Jeff Carter, Department of Government and Justice Studies,
Appalachian State University, 353K Anne Belk Hall, Boone, NC
28608, USA.
Guns, Butter, and Growth: The
Consequences of Military
Spending Reconsidered
Jeff Carter1, Heather L. Ondercin1,
and Glenn Palmer2
How does increasing military spending affect social spending and economic growth? We argue leaders vary in their
preferences over how to pay for military spending and failing to account for interdependence among methods
of government finance, government spending, and economic performance limits scholars’ ability to identify the
consequences of military spending. We use vector autoregressive models to estimate the relationships among military
spending, social spending, economic growth, tax revenue, debt, and the money supply in the United States between
1947 and 2007. We find that increasing military spending has a nonlinear effect on economic growth that varies over
time and the existence of a guns-versus-butter trade-off is conditional on the relative importance leaders place on
protecting the social welfare state, borrowing money, and keeping taxes low when increasing military spending.
military spending, social spending, economic growth
Carter et al. 149
one factor to work through the system is an empirical
issue and imposing an inappropriate lag structure on an
empirical model can lead to incorrect substantive
With these challenges in mind, this paper seeks to
establish that the variables in what we call the guns–
butter–growth system (or “GBG system”) are related to
one another and that the existence of these interdepen-
dent relationships and variation in leaders’ preferences
over methods of government finance can influence the
consequences of increasing military spending. Our
focus, then, is not on testing explicit hypotheses about
the directional effect(s) of military spending on social
spending or economic growth. Rather, it is on identify-
ing the larger system in which government expendi-
tures, methods of government finance, and the economy
exist and demonstrating that political actors’ prefer-
ences and decisions can shape the consequences of these
relationships. Doing so provides a conceptual and
empirical framework in which scholars can develop and
assess explicit claims about relationships among mili-
tary spending, social spending, and economic growth
while accounting for decision-makers’ preferences and
interdependencies among these variables and the most
common methods governments use to increase their
To accomplish our task, we estimate the relationships
among government spending, economic growth, and
government finance methods on quarterly data from the
United States for the period from 1947 to 2007 using
reduced-form vector autoregressive (VAR) models.
Importantly, VAR models are able to account for each of
the three issues common among analyses of the relation-
ships within the GBG System. First, VAR models esti-
mate each variable as a function of its past values and the
past values of every other variable included in the system
of equations and place no a priori assumptions about the
endogenous or exogenous nature of the relationships
between variables (Box-Steffensmeier et al. 2015; Enders
2004). Our estimation technique therefore allows the data
to tell us how the variables are related and captures direct
and indirect relationships among government spending,
economic growth, and methods of government finance.
This allows us to identify relationships among elements
in the GBG system without assuming the existence or
nature of these relationships, which would increase the
chances one mischaracterizes the system and draws faulty
statistical and substantive inferences.
A second useful feature of VAR models is that they
allow us assess our claim that leaders’ preferences can
influence the effect of military spending on social spend-
ing and economic growth. The directional and substantive
effects of variables in a VAR model are identified using
impulse response functions (IRFs) and forecast error
variance decompositions (FEVDs). With reduced-form
VARs, calculating IRFs and FEVDs requires one to spec-
ify the order in which contemporaneous changes in the
variables can influence one another. If the results of IRFs
and FEVDs are sensitive to the orderings one specifies,
the relationships between and among variables are condi-
tional on how changes in variables move through the sys-
tem of equations. We exploit these features of the VAR
and use the relative importance leaders place on protect-
ing the social welfare state, avoiding tax increases, keep-
ing the debt down, or not engaging in expansionary
monetary policy to motivate the contemporaneous order-
ing of the variables in a set of IRFs and FEVDs. Analyzing
the IRFs and FEVDs under various counterfactual situa-
tions allows us to understand how prioritizing one method
of finance over another shapes the effects of increasing
military spending on the economy and social spending. A
third advantageous feature of VAR models is that because
variables are modeled as a function of their previous val-
ues and the values of all other variables in the system of
equations, we are able to estimate how relationships
between and among variables play out over time. This
paper therefore makes an important contribution by iden-
tifying how military spending influences economic per-
formance and social spending over time when one
accounts for variation in leaders’ preferences regarding
how to pay for national security and interdependence
among government spending, the economy, and govern-
ment finance methods.
Our analyses directly yield three results. First, military
expenditures, social spending, the economy, tax revenue,
debt, and the money supply are all related to one another.
Thus, analyses of the guns-versus-butter trade-off or the
relationship between military spending and economic
growth that do not consider how governments finance
their expenditures are misspecified. Second, we find that
changes in military spending have a non-linear effect on
gross domestic product (GDP) growth that varies over
time. This suggests analysts’ findings regarding the effect
of military spending on economic performance will be
sensitive to whether and how they consider short-term
and long-term dynamics. Third, our analyses suggest
whether a “guns-versus-butter” trade-off exists is condi-
tional on decision-makers’ relative preferences for pro-
tecting social spending compared to reducing taxes, the
debt, or the money supply. Specifically, we find that the
guns-versus-butter trade-off exists when decision-makers
place a higher priority on reducing taxes and/or keeping
the debt low than protecting the social welfare state; and
that military and social spending are complementary
when decision-makers are motivated to protect or expand
the social welfare state while increasing defense spend-
ing. Taken together, our results provide insight into a set
of issues important to scholars of international relations

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