What is the Misery Index
Equal to the sum of the inflation rate and the unemployment rate, the original misery index was popularized in the 1970s as a measure of America’s economic health during a president’s term in office.
BREAKING DOWN Misery Index
The first misery index was created by economist Arthur Okun, who served as second chairman of President Lyndon B. Johnson’s Council of Economic Advisors and a professor at Yale. Okun’s misery index used the simple sum of the nation’s annual inflation rate and unemployment rate to provide President Johnson with an easily understood snapshot of the economy’s relative health. The higher the index, the greater the misery felt by the average voter. 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 pointed out that the misery index had increased under Carter.
The Okun misery index is considered a flawed gauge of the economic conditions experienced by the average American because it doesn't include economic growth data. In addition, the unemployment rate is a lagging indicator that likely understates misery early in a recession and overstates it even after the recession is over. Some critics also feel the misery index underweights the unhappiness attributable to the unemployment rate, since inflation probably has a smaller influence on unhappiness because Federal Reserve Policy has been much more effective with respect to inflation management in recent decades. Regardless, it is smart for investors to build an emergency fund in case of an economic downturn or job loss.
Newer Versions of the Misery Index
The misery index has been modified several times, first in 1999 by Harvard economist Robert Barro who created the Barro misery index, which includes interest rate and economic growth data to evaluate post-WWII presidents.
In 2011, Johns Hopkins economist Steve Hanke built upon Barro's misery index and began applying it to countries beyond the United States. Hanke’s modified 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 95+ countries that report relevant data on a timely basis. His list of the world’s most miserable and happy countries ranked Venezuela, Syria, Brazil, Argentina and Egypt among the most miserable countries. China, Malta, Japan, Netherlands and Thailand ranked as the happiest countries.