Misery Index Definition Components History and Limitations
Contents
- 1 Misery Index: Definition, Components, History, and Limitations
- 1.1 What Is the Misery Index?
- 1.2 Understanding the Misery Index
- 1.3 Components of the Misery Index
- 1.4 History of the Misery Index
- 1.5 Limitations of the Misery Index
- 1.6 Criticisms of the Misery Index
- 1.7 Newer Versions of the Misery Index
- 1.8 Misery Index Under Different Presidents
- 1.9 What Is a Recent Misery Index?
- 1.10 Who Created the Misery Index?
- 1.11 What’s the Most Miserable Country in the World?
- 1.12 The Bottom Line
Misery Index: Definition, Components, History, and Limitations
What Is the Misery Index?
The misery index measures economic distress caused by joblessness and increasing living costs. It is calculated by adding the unemployment rate to the inflation rate.
Unemployment and inflation are detrimental to economic well-being, so their combined value is an indicator of overall economic health. Stagflation in the 1970s popularized the original misery index, which refers to the simultaneous occurrence of high inflation and unemployment.
Key Takeaways
- Arthur Okun created the first misery index in the 1970s to gauge the U.S. economy.
- The misery index combines the inflation rate and unemployment rate.
- It now includes additional economic indicators, such as bank lending rates.
- The misery index is a convenient but imprecise metric.
- Variations of the misery index are used to assess national economies.
Understanding the Misery Index
The misery index consists of the unemployment rate and inflation rate. Unemployment measures the percentage of able-bodied adults actively seeking work. Inflation reflects the rate at which money loses buying power.
The misery index is calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate.
Misery index = Seasonally Adjusted Rate of Unemployment + Annual Inflation Rate
Economists consider full employment to be an unemployment rate of 4%–5%. The Federal Reserve targets an inflation rate of 2%. A satisfactory misery index rating falls within the range of 6%–7%.
Components of the Misery Index
Seasonally Adjusted Rate of Unemployment
The unemployment rate removes seasonal employment patterns to gauge relative employment levels.
The seasonally adjusted unemployment rate is a measured percentage that excludes retirees, those who have stopped seeking work, and those working despite being retired.
The Bureau of Labor Statistics (BLS) reports monthly unemployment data.
Annual Inflation Rate
The annual inflation rate measures the percentage increase in the prices of goods and services consumed.
The BLS reports inflation data monthly in the consumer price index (CPI) release.
Misery Index as of December 2022
Misery Index = 9.95
Unemployment rate (3.5) + Inflation rate (6.45)
History of the Misery Index
Arthur Okun’s Concept
Economist Arthur Okun created the first misery index during his time at the Brookings Institution in the 1970s. Okun, previously a member of President Lyndon Johnson’s Council of Economic Advisers, combined the inflation rate and unemployment rate to provide a snapshot of the economy’s health.
The higher the index, the greater the misery experienced by citizens.
Period of Stagflation
During the 1970s, the U.S. experienced a period of stagflation, characterized by high inflation and unemployment, following President Nixon’s actions related to the U.S. dollar and gold.
Joblessness and rising living costs placed significant hardships on Americans.
At that time, the simultaneous rise in inflation and unemployment challenged prevailing macroeconomic theories.
Use in Presidential Campaigns
During the 1976 presidential campaign, candidate Jimmy Carter used Okun’s misery index to criticize incumbent Gerald Ford. At the end of Ford’s administration, the misery index reached 12.7%.
Ronald Reagan pointed out the increasing misery index under Carter during the 1980 presidential campaign.
Limitations of the Misery Index
While the misery index is a convenient measure of economic misfortune, it is not a precise metric for economic health.
The unemployment rate only includes actively job-seeking individuals, omitting those who have given up seeking employment. Low inflation can also accompany economic hardship, such as stagnant economies with rising unemployment and falling asset valuations. Additionally, a 1% increase in unemployment likely causes more distress than a 1% increase in inflation.
Warning
The Okun misery index is a convenient but highly imprecise metric due to the limitations of inflation and unemployment as economic health measures.
Criticisms of the Misery Index
Economists have criticized the Okun misery index for its exclusions and focus on current data.
- Omission of key factors: Some argue that the misery index fails to include economic growth data, mistaking it as a measure of overall economic performance rather than individual suffering.
- Emphasis on current data: The index may overlook the role of expectations and uncertainty by solely considering present unemployment and inflation rates. The unemployment rate is also a lagging indicator, potentially understating perceived misery during recessions.
- Inconsistent usage: During periods of low inflation and unemployment, the misery index is used sporadically, primarily during recessions and crises. Low demand resulting from stagflation may also be masked by low inflation and unemployment rates.
Efforts have been made to modernize the misery index by incorporating additional indicators.
Newer Versions of the Misery Index
By Steve Hanke
In 2011, economist Steve Hanke modified the misery index and expanded its application to create a cross-country index. Hanke’s annual index combines unemployment, inflation, bank lending rates, and changes in real GDP per capita.
Hanke annually publishes rankings based on relevant data from reporting countries. In 2021, Libya was identified as the least miserable country, while Cuba was ranked the most miserable.
By Tom Lee
Tom Lee introduced the Bitcoin Misery Index (BMI) to measure the misery of bitcoin investors. The index considers winning trades against total trades and adds volatility. A total value below 27 is considered "at misery."
By Bloomberg
Bloomberg created a variation of the misery index. In 2020, Argentina, South Africa, and Venezuela topped the index due to high inflation and unemployment. Conversely, Thailand, Singapore, and Japan were considered the happiest countries.
However, low inflation and unemployment rates can mask low demand, as seen in Japan’s persistent stagflation.
Investors should consider building an emergency fund to mitigate economic downturns or job losses.
Misery Index Under Different Presidents
The misery index allows comparison of economic misfortunes under different U.S. presidents based on their inflation and unemployment figures.
The Great Depression witnessed the most misery, with a record index of 25.7% during Franklin Roosevelt’s first year as president (1933). The index decreased to 3.5% by 1944, likely due to full employment during World War II.
Richard Nixon and Jimmy Carter oversaw the most miserable economies post World War II, with the misery index reaching 20% under Nixon and 22% under Carter. The index significantly decreased under Ronald Reagan and continued declining during the presidencies of George H.W. Bush and Bill Clinton.
The index rose during George W. Bush’s presidency and reached a peak of 12.7% under President Obama during the Great Recession. It declined to a low of 5.06% in 2015 and remained low during most of the Trump presidency. However, the COVID-19 pandemic led to a sharp increase in unemployment, pushing the index to 15%.
Joseph Biden | 2021-present | 10.85 |
Donald Trump | 2017-2020 | 6.91 |
Barack Obama | 2009-2016 | 8.83 |
George W. Bush | 2001-2008 | 8.11 |
Bill Clinton | 1993-2000 | 7.80 |
George H. W. Bush | 1989-1992 | 10.68 |
Ronald Reagan | 1981-1988 | 12.19 |
Jimmy Carter | 1977-1980 | 16.26 |
Gerald Ford | 1974-1976 | 16.00 |
Richard Nixon | 1969-1974 | 10.57 |
Source: United States Misery Index
What Is a Recent Misery Index?
The Misery Index as of December 2022 is 9.95 (Unemployment rate of 3.5 + Inflation rate of 6.45).
Who Created the Misery Index?
The Misery Index was created by economist Arthur Okun in the 1970s and was initially called the Economic Discomfort Index.
What’s the Most Miserable Country in the World?
According to the 2021 Misery Index, Cuba was the most miserable country with a score of 1,227.6, followed by Venezuela (774.3) and Sudan (397.2).
The Bottom Line
The misery index, created by economist Arthur Okun, measures economic health and distress experienced by the average citizen. While popular due to its simplicity, it is considered an ineffective measure of macroeconomic conditions as it does not consider economic growth data.