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

• Author: Jeff Carter,Heather L. Ondercin,Glenn Palmer
• Date: 01 March 2021
• Published date: 01 March 2021
• DOI: 10.1177/1065912919890417
• Subject Matter: Articles

https://doi.org/10.1177/1065912919890417

Political Research Quarterly

2021, Vol. 74(1) 148 –165

© 2020 University of Utah

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DOI: 10.1177/1065912919890417

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Article

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.

research-article2020

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.

Email: jtc475@gmail.com

Guns, Butter, and Growth: The

Consequences of Military

Spending Reconsidered

Jeff Carter1, Heather L. Ondercin1,

and Glenn Palmer2

Abstract

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.

Keywords

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

inferences.

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

budgets.

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