ABSTRACT
In this article, we aim to empirically evaluate the guns-and-butter argument using a panel data of OECD countries from 1988 to 2005, which provides much more complete and accurate data sources. Earlier empirical studies on the relationship between defense and social welfare expenditures tend to use single-equation models or cross-section data analysis, ignoring the potential endogeneity problem. This study adopts the panel GMM method to control for unknown country-specific heterogeneity, to overcome the simultaneity problem, and thus to reach a more reliable empirical result. Our empirical finding suggests that there is a positive crowding-out effect between
defense spending and the two types of social welfare expenditures, namely, health and education expenditures, in terms of the panel GMM estimator. This result is along the line of several previous studies (e.g. Benoit, 1973, 1978; Lindgren, 1984; Harris and Pranowo, 1988; Ram, 1995; Kollias and Paleologou, 2011), even though we employ a different dataset and different empirical method. The positive effect (or complementary effect) in our study may be due to the fact that the developed OECD countries are more supportive of the social welfare programs. Government is willing to cut from the infrastructure programs rather than sacrificing the social welfare expenditures in response to an increase of military spending. Additionally, the defense spending can be beneficial to human capital formation because defense personnel and soldiers are appropriately taken care and well trained physically, and receive good skills. Therefore, if the government increases military spending, the health and education spending may be raised as well. Since this study focuses on merely OECD countries, it is still unclear whether there is a
significantly positive crowding-out effect in non-OECD countries or other regions in the world. It is likely that the guns-and-butter argument holds in a panel of the developing or less-developed countries. However, it is out of the scope of the current article. We leave this direction to our future research.
