Resolving the Guns vs . Butter Tradeoff Puzzle via Full Specification

Investigations of the 'guns vs. butter' trade-off models of military spending have yielded surprisingly inauspicious results in spite of the intuitively appealing nature of the hypothesis that the more we spend on defense the less we can spend on social welfare, etc. This paper examines the standard specification of the tradeoff model and demonstrates that the lack of empirical success of this hypothesis has been largely a problem of model specification. The first part of the paper offers both mathematical proof and empirical confirmation of the nature of this misspecification. The balance of the argument then outlines how proper specification clarifies the appropriate means to describe tradeoffs. In particular, the mathematical model developed demonstrates that the classic model, as generally specified, is by definition a stochastic/variable parameter relationship. This analysis produces significant insight into the nature of patterns in budgetary decisions, and, it is believed solidly grounds the question of spending tradeoffs in the overall patterns of shifting budgetary priorities. The existence of budgetary tradeoffs with defense is categorically identified and empirically confirmed across many sectors of the budget. And, as it turns out, a dollar more for defense does indeed mean a dollar less for social or other programs, unless you go and borrow a dollar.