Revisiting the “Guns versus Butter” Argument in China (1950–2014): New Evidence from the Continuous Wavelet Analysis

Abstract: The long-lasting “guns versus butter” argument reflects the fact that China has been experiencing a difficult choice in terms of improving the defense and social welfare sectors, and thus achieving fiscal sustainability. The result, however, is controversial. The present paper therefore re-examines the relationship between defense and social welfare by employing continuous wavelet analysis during a long period of 1950–2014 in China. We focus in particular on their dynamic correlation and the lead-lag relationship across different frequency bands. Our results clearly show the inexistence of the crowding-out effect between defense expenditure and social welfare; moreover, the increase in defense (social welfare) expenditure could stimulate the expansion of social welfare (defense) spending. In addition, we find a positive relationship between defense and social welfare with defense leading during 1961–1968 in the short term, when China suffered from the economic breakdown and the social turbulence caused by the Great Famine, Sino-Soviet border conflict, etc. Notably, social welfare also led the progress in defense during 1984–1988 and 1995–1998 in the medium and long terms by the further deepening of the opening-up policy and enforcing the economic system reform.