What Is the Misery Index?
The misery index is meant to measure the degree of economic distress felt by everyday people, due to the risk of (or actual) joblessness combined with an increasing cost of living. The misery index is calculated by adding the unemployment rate to the inflation rate.
Since unemployment and inflation are both considered detrimental to one's economic well-being, their combined value is useful as an indicator of overall economic health. The original misery index was popularized in the 1970s with the development of stagflation, or simultaneously high inflation and unemployment.
- The first misery index was created by Arthur Okun and was equal to the sum of inflation and unemployment rate figures to provide a snapshot of the U.S. economy.
- The higher the index, the greater the misery felt by average citizens.
- It has broadened in recent times to include other economic indicators, such as bank lending rates.
- The misery index is considered a convenient but imprecise metric. There are several circumstances where it may not be accurately representative of economic distress.
- In recent times, variations of the original misery index have become popular as a means to gauge the overall health of a national economy.
Understanding the Misery Index
The misery index has two components: inflation and unemployment. Inflation refers to the rate at which money loses buying power, due to the rise of consumer prices. Unemployment, as measured in the U.S., is the number of able-bodied adults who are actively looking for work, as a fraction of the total workforce. In most cases, these numbers are inversely correlated: when more people are employed, prices tend to rise, and vice versa.
Economists generally consider "full employment" to mean an unemployment rate of 4%–5%, and the Federal Reserve (Fed) targets an inflation rate of 2%. Therefore, a satisfactory misery index rating would be in the range of 6%–7%.
History of the Misery Index
The first misery index was created by economist Arthur Okun, using the simple sum of the nation’s annual inflation and unemployment rates to provide an easily understood snapshot of the economy’s relative health. The higher the index, the greater the misery felt by the average citizen.
During the 1970s, after President Nixon restricted and then severed the final links between the U.S. dollar and gold, the U.S. experienced several years of simultaneously elevated price inflation and unemployment, known as stagflation. The American people were caught in a squeeze between the hardships of joblessness as the economy hit a series of recessions and a rising cost of living as the dollar rapidly lost value.
This phenomenon did not fit with dominant macroeconomic theories at the time, based on the Phillips curve, which led economists to explore alternative ideas to describe and explain what was going on, including Okun's misery index. At the time the misery index was novel because mainstream economists had previously believed that inflation and unemployment would tend to offset one another and should not both rise at the same time.
During the 1976 campaign for U.S. president, candidate Jimmy Carter popularized Okun’s misery index as a means of criticizing his opponent, incumbent Gerald Ford. By the end of Ford’s administration, the misery index was a relatively high 12.7%, creating a tempting target for Carter. During the 1980 presidential campaign, Ronald Reagan in turn pointed out that the misery index had increased under Carter.
Limitations of the Misery Index
While it is a convenient shorthand for economic misfortune, there are several reasons why the misery index should not be considered a precise metric for economic health.
For one thing, both components of the misery index have inherent blind spots. The unemployment rate only counts the unemployed who are actively looking for work; it does include those who have given up looking for work, as might be the case for long-term stretches of unemployment.
Likewise, low inflation can also be accompanied by unexpected misery. No inflation, or even deflation, can be signs of a stagnant economy, but would produce a very low misery index.
In addition, the misery index treats unemployment and inflation equally. However, a 1% increase in unemployment likely causes more misery than a 1% increase in inflation would.
The Okun misery index is considered a convenient but highly imprecise metric, due to the inherent blindspots of both inflation and unemployment as measurements of economic health.
Criticisms of the Misery Index
The Okun misery index has faced some criticism from economists. Some believe it is not a good indicator of economic performance because it doesn't include economic growth data. This mistakes the intent of the misery index for a measure of general economic performance rather than as a measure of the pain felt by the average citizen. Regardless, it is smart for investors to build an emergency fund in case of an economic downturn or job loss.
As a measure of personal economic distress, the misery index may underweight the role of expectations and uncertainty by looking only at current unemployment and inflation rates—when much of the stress and worry that people actually feel is for their future economic prospects (in addition to current conditions). In particular, the unemployment rate is generally considered to be a lagging indicator that likely understates perceived misery early in a recession and overstates it even after the recession is over.
During the Great Moderation, the prevalence of low unemployment and low inflation figures across much of the world also meant that the misery index was seldom used except during brief recessions and crises from time to time. Bad news sells, so periods of simultaneously low inflation and unemployment simply don't generate the same impetus to measure and track economic misery.
There have been several attempts to modernize the misery index by including other metrics.
Newer Versions of the Misery Index
The misery index has been modified several times, first by Harvard economist Robert Barro. In 1999, Barro created the Barro misery index, which adds in consumer lending interest rates and the gap between actual and potential gross domestic product (GDP) growth to evaluate post-WWII presidents.
In 2011, Johns Hopkins economist Steve Hanke modified Barro's misery index and broadened its application to be a cross-country index. Hanke's annual misery index is the sum of unemployment, inflation, and bank lending rates, minus the change in real GDP per capita.
Hanke publishes his global list of misery index rankings annually for the countries that report relevant data on a timely basis. In 2020, his list included 156 nations, with Guyana being identified as the world’s happiest country and Venezuela as the world's most miserable country.
The concept of a misery index has also been expanded to asset classes. For example, Tom Lee, co-founder of Fundstrat Advisors, created the Bitcoin Misery Index (BMI) to measure the average bitcoin investor's misery. The index calculates the percentage of winning trades against total trades and adds it to the cryptocurrency's overall volatility. The index is considered "at misery" when its total value is less than 27.
A variation of the original misery index is the Bloomberg misery index. Argentina, South Africa, and Venezuela, countries beset by widespread inflation and unemployment, topped the index in 2020.
On the other end, Thailand, Singapore, and Japan were considered the happiest countries according to economist estimates. But low inflation and low unemployment rates can also mask low demand, as the publication itself pointed out. Japan is a textbook case of persistently low demand due to an economy that has been in stagflation for the last two decades.
Misery Index Under Different Presidents
Although the misery index was first popularized in the 1970s, it is possible to evaluate the economic misfortunes under different presidents by comparing their inflation and unemployment figures. Unsurprisingly, the most miserable year on record was during the Great Depression; the misery index reached 25.7% in the first year of Franklin Roosevelt's presidency. The index fell to 3.5% by 1944, likely due to the full employment during the Second World War.
Richard Nixon (1969–1974) and Jimmy Carter (1977–1981) have the unenviable distinction of presiding over the most miserable economies of the post-war period, with the misery index reaching 20% under Nixon and 22% under Carter. Misery fell sharply under Ronald Reagan, and continued to trend downwards during the Bush and Clinton presidencies.
During the presidency of George W. Bush, the misery index again trended upwards, reaching a peak of 12.7% under President Obama due to the ongoing Great Recession. The index fell to a low of 5.06% by 2015 and remained low through most of the Trump presidency (2016–2020). However, the COVID-19 Pandemic caused a sharp increase in unemployment, causing the misery index to reach 15%.