It is well-known by now that government spending has typically been countercyclical in industrial countries and procyclical in developing economies. Most of this literature has focused on analyzing aggregate government spending or discretionary spending categories such as government consumption and government investment. Little is known about the cyclical behavior of automatic government spending which emerges from laws, or even constitutions, benefiting people who meet certain eligibility criteria and comprises unemployment insurance, family programs and benefits, and social security transfers. In principle, the main categories of automatic government spending are expected to be either countercyclical (especially unemployment insurance and other shock absorber programs) or acyclical (especially social security and other structural programs). We find that while automatic government spending is, as expected, countercyclical in industrial countries, it is, surprisingly, procyclical in the developing world. We track the source of this puzzling procyclical behavior to (i) the effective lack of automatic stabilizers like unemployment insurance and (ii) more intriguingly, to the existence of perverse automatic destabilizing mechanisms in social security spending (especially when lacking indexation mechanisms). We also show that the presence and nature of these two social programs are crucial new determinants of government spending cyclicality as well as macroeconomic volatility, even after controlling for other well-known determinants and addressing potential endogeneity concerns.
