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Wars, Redistribution and Civilian Federal Expenditures in the US over the Twentieth Century

  • Roel Beetsma
  • Alex Cukierman
  • Massimo Giuliodori

We 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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File URL: http://www.dnb.nl/binaries/Working%20Paper%2057_tcm46-146714.pdf
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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 057.

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Date of creation: Nov 2005
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Handle: RePEc:dnb:dnbwpp:057
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Web page: http://www.dnb.nl/en/

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  1. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  2. Hugh Rockoff, 2004. "Until it's Over, Over There: The U.S. Economy in World War I," NBER Working Papers 10580, National Bureau of Economic Research, Inc.
  3. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
  4. Rockoff, Hugh, 1999. "World War II and the growth of the U.S. federal government," Japan and the World Economy, Elsevier, vol. 11(2), pages 245-262, April.
  5. Husted, Thomas A & Kenny, Lawrence W, 1997. "The Effect of the Expansion of the Voting Franchise on the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 54-82, February.
  6. John R. Lott & Jr. & Lawrence W. Kenny, 1999. "Did Women's Suffrage Change the Size and Scope of Government?," Journal of Political Economy, University of Chicago Press, vol. 107(6), pages 1163-1198, December.
  7. Perotti, Roberto, 1996. " Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-87, June.
  8. Zvi Hercowitz & Michel Strawczynski, 2004. "Cyclical Ratcheting in Government Spending: Evidence from the OECD," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 353-361, February.
  9. Henning Bohn, 2005. "The Sustainability of Fiscal Policy in the United States," CESifo Working Paper Series 1446, CESifo Group Munich.
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