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

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.