DP5356 | Wars, Redistribution and Civilian Federal Expenditures in the US over the Twentieth Century

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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 defence spending and civil non-defense spending, this correlation becomes negative during World War II. This may be explained by a combination of complementarities between defence 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 defence expenditures goes up. But taxes go down less and transfers go up more per unit change in defence 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 defence 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.