S9 Ep29: Guns and Butter

Episode Summary

Executive Summary: Christophe Trebesch discusses a 150-year study of military spending showing that rearmament usually expands, rather than shrinks, the state: wars are debt-financed, peacetime buildups use a mix of debt and taxes, and social spending is rarely cut. The long-run legacy is higher broad-based taxation and a larger fiscal state, a pattern that appears to be repeating in Europe today.

Main Topics: The guns-versus-butter trade-off (Priority: 5/5): Defines the classic fiscal trade-off between military spending and civilian social spending, and explains why the study set out to test whether rearmament really crowds out welfare spending. How the study measures military booms (Priority: 5/5): Explains the methodology for identifying military spending booms using budget-to-GDP growth thresholds, then validating cases with historical narratives to avoid false positives. Building a new historical dataset (Priority: 5/5): Describes the four-year effort to collect primary-source budget archives for 20 countries back to 1870, including purpose-based spending categories and realized rather than planned expenditures. War finance versus peacetime rearmament (Priority: 4/5): Distinguishes between wartime spending spikes, usually financed by debt, and peacetime military buildups, which are financed by both debt and taxes and are more persistent. Social spending and budget reprioritization (Priority: 5/5): Finds that military booms rarely produce large cuts to social programs; instead, social spending usually keeps pace with inflation, undermining the usual assumption of zero-sum budgeting. Taxation as the long-run legacy (Priority: 5/5): Shows that military buildups often lead to higher taxes over time, especially broad-based taxes such as income tax and VAT, with notable rises in top marginal rates. Relevance to current European rearmament (Priority: 4/5): Connects the historical findings to contemporary NATO rearmament, noting that current financing patterns are already resembling the historical mix of more debt and, increasingly, higher taxes.

Key Arguments: The guns-and-butter metaphor usually assumes military spending crowds out social spending, but the historical evidence shows that this is often not what governments actually do. War spending is typically extraordinary and temporary, so it is mostly debt-financed; peacetime military buildups are more mixed and involve both debt and taxation. The main surprise is that social spending is not usually cut sharply during rearmament; instead, it often rises or at least keeps up with inflation. The fiscal legacy of military booms is a larger state and higher taxation, especially through broad-based taxes rather than narrowly targeted levies. Existing historical data have often understated true military spending because they relied on secondary sources, planned expenditures, or missed off-budget items. A primary-source, cross-country, long-run dataset is necessary to understand fiscal consequences because individual-country studies or short modern samples miss the larger historical pattern. Current European rearmament appears to be following the same historical logic, with early reliance on debt and growing discussion of tax increases.

Data Points: Historical coverage: 20 countries - New budget database compiled from primary sources Time span: Back to 1870 - Annual budgetary coverage using historical archives Project duration: 4 years - Time spent building and validating the dataset Boom threshold: 6.5% increase in military spending-to-GDP over two consecutive years - Algorithm used to identify military buildup onsets Identified cases: 116 cases - Military buildup episodes validated by data and historical record Military spending in advanced countries today: 2% to 3% of GDP - Typical peacetime share of GDP mentioned in the discussion Social spending in advanced countries today: 30% to 40% of GDP - Used to illustrate the modern size of welfare-state budgets Military spending during wars: 50% to 70% of GDP - Historical wartime spending levels described as extraordinary Swiss wartime military spending: 2% of GDP to 10% of GDP - Example showing off-budget items caused major undermeasurement in prior data Top income tax rate increase: 10 to 15 percentage points - Average post-boom fiscal legacy described in the study Military buildup pace: Double or triple - Current European rearmament described as a rapid increase in outlays

Pivotal Quotes: "We do not find many cases in which social spending is cut. It's just very rare to find that the military crowds out social spending on a large scale." — Christophe Trebesch: Summarizing the paper’s central empirical surprise about guns versus butter "The long-run legacy of these choices of going up with military spending and social spending is indeed higher taxation." — Christophe Trebesch: Explaining the fiscal consequence of simultaneous increases in defense and social budgets "This time, it turns out, is not different." — Christophe Trebesch: Reflecting on current European rearmament and the apparent repetition of historical financing patterns

Implications: Rearmament is unlikely to be funded by simple spending cuts alone. History suggests governments will rely on more debt first, then higher broad-based taxes, while preserving most social spending. For Europe, the fiscal bill of rearmament may be larger and more politically durable than expected.