Wars, Redistribution and Civilian Federal Expenditures in the US over the Twentieth Century
AbstractWe provide empirical evidence on two, major war-related, regularities of U.S. fiscal policy. First, while during and around World War I there is a positive correlation between defense spending and civil non-defense spending, this correlation becomes negative during World War II. This may be explained by a combination of complementarities between defense and civilian spending that decrease with the size of government in conjunction with marginal tax distortions that increase with government's size. Second, during and around World War II there are, war-related, ratchets in transfers, veteran spending, taxes and revenues in the following sense. Invariably, the share of taxes and revenues in GDP goes up, and the share of transfers goes down, when the share of defense expenditures goes up. But taxes go down less and transfers go up more per unit change in defense expenditures when those expenditures go down at the war's conclusion than the amounts by which taxes go up and transfers go down during the buildup in defense expenditures at the beginning of the war effort. There is no evidence of such ratchets during and around World War I. Two, not necessarily mutually exclusive, explanations for these findings are: 1. The substantially higher franchise during World War II interacted with the crisis induced by the war to cause a permanent expansion of the welfare state. 2. The Great Depression permanently changed the norms of social justice and the interaction of this change with the experience of the War led to a more generous welfare state.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 057.
Date of creation: Nov 2005
Date of revision:
World War I and II; ratchet; defense spending; civilian spending transfers; taxes; revenues; franchise.;
Other versions of this item:
- Beetsma, Roel & Cukierman, Alex & Giuliodori, Massimo, 2005. "Wars, Redistribution and Civilian Federal Expenditures in the US over the Twentieth Century," CEPR Discussion Papers 5356, C.E.P.R. Discussion Papers.
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
- N11 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: Pre-1913
- N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-01 (All new papers)
- NEP-HIS-2005-12-01 (Business, Economic & Financial History)
- NEP-MAC-2005-12-01 (Macroeconomics)
- NEP-PBE-2005-12-01 (Public Economics)
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