How the Misery Index Works


To keep the Misery Index low, inflation and unemployment need to be minimized, too.
To keep the Misery Index low, inflation and unemployment need to be minimized, too.
Joe Raedle/Getty Images

Inauguration Day, January 1961: John F. Kennedy speaks of a torch passing to a new generation. It's inspirational stuff, and the country needs some hopeful words. Kennedy comes into office during a deep recession. Unemployment is going up, profits and stocks are down.

Just five years later, the U.S. economy's growth rate is 6.6 percent and unemployment has fallen to 3.8 percent.

Although he was tragically assassinated in November 1963, historians widely credit Kennedy with the policies that led to the recovery. Those policies managed to be simultaneously liberal and conservative. Kennedy convinced Congress to increase minimum wage, unemployment benefits and infrastructure spending, all while cutting personal and corporate income taxes.

The received wisdom was that if you were going to cut taxes, you also needed to cut spending, but Kennedy gambled that "a rising tide lifts all boats." And he was right — a boom duly followed [source: NPR].

Actually, even Kennedy had been initially skeptical of the idea. But some wizards on his Council of Economic Advisers (CEA) managed to convince him that the combined policies would do the trick.

One of those advisers was a brilliant economist named Arthur Okun, who discovered a direct relationship between a country's unemployment and its gross national product (GNP). Using data from 1948 to 1960, he was able to show that GNP rises 3 percent for every percentage point that unemployment falls. Okun was careful to point out that the law only seemed to hold for situations in which the unemployment rate was between 3 and 7.5 percent. This observation became known as Okun's Law, and it formed part of the CEA's argument for tax cuts during a recession [source: Yale]. The cuts would stimulate investment, which would in turn create job growth leading, according to the Law, to a strengthening economy.

But, of course, that 1960s boom didn't last, and when things slid downhill in the 70s, Okun came up with another simple, but ingenious invention — the Misery Index.

Stagflation

As you'd imagine, the gas crisis in the U.S. during the 1970s did nothing to keep the Misery Index low.
As you'd imagine, the gas crisis in the U.S. during the 1970s did nothing to keep the Misery Index low.
Smith Collection/Gado/Getty Images

Okun served as chairman of the CEA during Lyndon Johnson's presidency and then shifted over to the Brookings Institution in the 1970s. By then, something unprecedented had happened with the economy.

In 1973, Egypt and Syria led a coalition of Arab states in an invasion of Israeli territory to gain back the Sinai and Golan Heights. When the U.S. waded into the conflict by supplying arms to the Israeli forces, the Arab coalition retaliated by imposing an embargo on oil exports. The embargo included the U.S. and any other countries that supported Israel [source: U.S. Dept. of State].

At the time, the U.S. was highly dependent on foreign oil — abruptly shutting the taps was an enormous shock to the system. The resulting fuel shortages caused oil prices to increase by 37 percent [source: Resnick]. Soon cars were bumper to bumper in lines to gas up.

When demand outstrips supply you get inflation, and that's exactly what happened. What also happened, to everybody's consternation, was a rise in unemployment.

This was weird because unemployment and inflation were once deemed mutually exclusive. The phenomenon earned the name "stagflation," and it turned out to be a very thorny problem to solve. Any effort to reduce inflation would likely exacerbate unemployment.

It took years for the economy to emerge from the mess, and while it did, American society wrestled with a concept it hadn't been forced to confront since the Great Depression — widespread financial distress.

Misery was everywhere. And inflation and unemployment were the sources of collective anxiety when Arthur Okun was tinkering with a new method for measuring the state of an economy. Given the context, it's hardly surprising then that the Misery Index is calculated very simply by adding the yearly rate of inflation to the unemployment rate [source: InflationData].

Okun's Misery

Although it shot up during Richard Nixon's first term as president, the Misery Index beat a hasty retreat in time for his re-election.
Although it shot up during Richard Nixon's first term as president, the Misery Index beat a hasty retreat in time for his re-election.
NBCU Photo Bank

Okun's Misery Index provides a snapshot of the economy. Combining the inflation rate with the unemployment rate also gives a sense of how people are experiencing the economic conditions on the ground. Unemployment tends to outpace inflation, especially in the post-stagflation era when authorities have used more aggressive interest rate controls to manage the country's money. Using the index, Okun was able to look back in time at previous eras and measure past economies against the present. His data, however, screeched to a halt at 1948; there are no reliable unemployment statistics before that year.

Nevertheless, looking back, economists were able to note a correlation between the Misery Index and the fortunes of the U.S.'s two rival political parties. In 1956, for instance, the Misery Index was a modest 6.53 percent. Was it just a coincidence that Dwight Eisenhower coasted to reelection that year? Many economists think the state of the economy was an important factor in his success.

By contrast, in 1968 when Johnson's presidency came to an end, the index was up to 8.13. Johnson's replacement for the Democratic candidacy, Hubert Humphrey, was duly defeated by Richard Nixon. The index rose to 11.67 during Nixon's first term but then began a steady decline, clearing the way for Tricky Dick to return to the White House in 1972. Directly afterward, misery was back with a vengeance, clawing all the way up to 17.01 by 1974 when the Watergate scandal forced Nixon's resignation.

During Gerald Ford's short-lived presidency, the index slid back down to 12.66, but he still lost to Jimmy Carter in 1976. During his campaign, Carter talked a lot about the Misery Index in his effort to showcase how badly change was needed. After all, Ford's 12.66 was better than Nixon's 17.01, but it was a far cry from the glory days of Eisenhower's 6.53. Unfortunately for Carter, the Index came back to bite him. By 1980 it had reached an all-time high of 21.98.

Reagan, canny campaigner that he was, used Carter's earlier index-citing words against him and was soon nestling into the White House. By the end of his two terms, the index had been wrestled down to 9.55 just in time to elect George Bush Sr. Then it inched up to 10.45, giving Bill Clinton the opening he needed to slide into the Oval Office in 1992. It was down even further to 7.35 in 2000, but it was climbing fast and, in a rare departure from the norm, the candidate for the rival party, Bush Jr., was able to squeak in despite a low index.

Under George W., the index pumped up to 11.40 in 2008 and then suddenly dove to 7.87 from September to November of that year when Barack Obama came into office. But this was an example of a flaw in the index. Despite the low number, people were actually quite miserable at the time because unemployment was rising fast and the stock market had crashed. And that crash had caused an abrupt deflation in the value of the U.S. dollar, throwing off the index, which relies on inflationary numbers for its measurement of wretchedness [source: InflationData.com].

In fact, for some time, economists had noted that the Misery Index needed some tweaking. Several of them had started to take on the challenge.

Misery Revised

According to economist Robert Barro's revised Misery Index, presidents Ronald Reagan and Bill Clinton (seen here on the campaign trail in 1992) oversaw the lowest misery rates during their time in the Oval Office.
According to economist Robert Barro's revised Misery Index, presidents Ronald Reagan and Bill Clinton (seen here on the campaign trail in 1992) oversaw the lowest misery rates during their time in the Oval Office.
Cynthia Johnson/Liaison/Getty Images

In his 1996 book, "Getting It Right: Markets and Choices in a Free Society," Harvard professor Robert Barro revised Okun's Misery Index by adding a few extra parameters. Arguing that Okun's index provided a glimpse of the economy but didn't reveal whether conditions were improving or worsening, Barro focused on creating an index that would measure performance over a president's term in office.

To do this, he used four measurements. First he took the inflation rate during the last year of a president's term and compared it to the average inflation rate over the course of the subsequent president's entire time in office. Second, he did the same thing with the rate of unemployment. Third, he added in the changes in the 30-year government bond yield over a presidency and, finally, he considered the difference between the long-term rate of GDP growth and the real rate of growth over the president's term in office.

Instead of a series of snapshots, Barro was able to create a continuous record of economic performance, term by term. The POTUSes (POTI?) who came out on top in the revised index were Reagan and Clinton [source: Hanke].

Roughly a decade later, Steve Hanke took Barro's index a step further. To the measurements of inflation and unemployment, he added interest rates and subtracted annual percentage changes in GDP [source: InflationData.com]. He then used the new index to gauge economic performance outside the U.S.

This isn't always easy because some countries, such as Venezuela, use price controls to keep inflation in check. Hanke argues that the resulting official inflation rates are inaccurate, and he uses some creative methods (such as identifying black-market exchange rates) to calculate what he considers to be the true rate of inflation. In Hanke's 2014 index, Venezuela topped the gloominess chart at 79.4.

With a whopper of a number like that, the U.S.'s 11.0 looked pretty good, but it wasn't much to boast about considering that 18 countries were less miserable, including the usual suspects like Canada, Germany and Norway, but also Latvia, Panama and Thailand. And while South Korea, Singapore and Taiwan were in the top (or rather bottom) five, none of them could touch Japan, which, at 5.41, barely registered any misery at all [source: Hanke].

The New Misery

The true measure of Americans' misery goes beyond how many people are lined up at the unemployment office.
The true measure of Americans' misery goes beyond how many people are lined up at the unemployment office.
Spencer Platt/Getty Images

Critics of the misery indexes discussed so far opine that the numbers rendered are deeply flawed. For starters, they say, the two main sources, standard unemployment statistics and the annual consumer price index (for inflation) are considered inaccurate by some. Unemployment stats, for instance, don't typically include people who are working part-time or, for that matter, those who have abandoned the job hunt. The consumer price index, for its part, might not give adequate weight to essentials like fuel and food.

But say you do give gas prices their due — that has no bearing on people who don't have cars. And when we're talking about misery, shouldn't we also factor in things like house foreclosures, evictions, bankruptcy, loan defaults and loss of health coverage?

Accordingly, efforts have been made to create yet more accurate measurements of population-wide misery. In 2009, for instance, The Huffington Post created a metric it calls the Real Misery Index.

Traditionally, the various misery indexes have used something called U3 unemployment statistics. The U.S. Bureau of Labor Statistics (BLS) actually has six different statistical measurements of unemployment (U1 through U6). U3 is the official one you hear in news reports, but it only measures the number of people who are officially unemployed. U4, U5 and U6 increasingly broaden the scope of who is considered truly unemployed. U6, the broadest of the metrics, includes people who've become so discouraged they've given up trying to find work, as well as those who are employed part-time because there's no full-time work available [source: Investopedia].

HuffPost's Real Misery Index uses the U6 statistic. It then averages out seven other stats: the inflation rate of food/drink, fuel and healthcare; the rate of credit card delinquency; the cost of housing; how many people are using food stamps; and home equity loan deficiencies. With the average of those seven numbers added to the U6 stat, the Real Misery Index had a wildly different result from traditional indices. The Okun Misery Index for 2009 was 8.1. But HuffPost's Real Misery Index registered a stunning 29.9 [source: Parks]. By March 2010 it was all the way up to 33. Happily, that was the peak. That summer, it dropped back down to 24, hinting at the slow but steady recovery to come. Too bad the Post hasn't kept up their index; it would be interesting to see where we stand now.

Author's Note: How the Misery Index Works

I'm old enough to remember the 70s very well. What I remember is a lot of long feathered hair, big old rusty cars, hand-me-down bell-bottoms, super-wide collars and a general atmosphere of DIY scrappiness. But what I don't recall is any overall sense of misery. When the 80s came, suddenly the cars were smaller and shinier, everybody's hair was shorter, collars were narrow, pant-legs tapered and people bought stuff new instead of making it themselves. Were we better off? I'm not so sure.

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Sources

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