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Misery Index

A single statistical tool that tallies a country’s unemployment and inflation outlook

What is the Misery Index?

The misery index is an indicator that measures the impact of changing economic conditions. The index was popular in the 1970s when the United States was experiencing stagflation – a combination of increasing unemployment and inflation – and it was used to measure the level of economic discomfort. The index measured the country’s economic welfare during a president’s term in office to determine whether the economy was on the right path.

 

Misery Index

 

Summary

  • The misery index is a single statistical tool that tallies a country’s unemployment and inflation outlook. 
  • The misery index was developed by Arthur Okun, who used it to provide President Lyndon B. Johnson with the economic welfare statistics of the U.S.
  • The misery index shows if people are generally happy or unhappy, depending on their economic conditions.

 

Understanding the Misery Index

The misery index was first introduced as a “discomfort index” in the early 1970s by economist Arthur Okun. He served as a senior fellow at the Brookings Institution and chairman of the Council of Economic Advisors under President Lyndon B. Johnson. Okun provided the president with the country’s economic welfare statistics by using the simple sum of the national inflation rate and the unemployment rate.

The trend of the misery index reflected an equivalent weight attached to unemployment and inflation. Simply put, the value of the index was directly proportional to the voter’s misery.

Since its formulation, the misery index was used to provide insights about the presidential approval rating and to presage the election outcome. Notably, in the 1976 presidential election, candidate Jimmy Carter adopted the misery index to criticize economic policies under the incumbent Gerald Ford. The misery index clicked 12.7% by the end of President Ford’s tenure, which created a tempting target for Carter, who subsequently won the election.

The index continued to gain further significance, and during the second 1980 presidential debate, then-California Governor Ronald Reagan blamed President Carter for the increased misery index in the country.

 

Criticism of the Misery Index

The Okun’s misery index does not use economic growth data and is regarded as an ineffective measure of the macroeconomic conditions. The utility of Okun’s misery index is limited across the world where, in recent times, low unemployment and low inflation rates have prevailed.

In addition, the misery index uses the unemployment rate, which is a lagging indicator that understates macroeconomic welfare early in a recession and overstates it long after the end of the recession. Some critics posit that the misery index does not entirely capture the discontent resulting from the unemployment rate.

The notion is based on the idea that inflation exerts a small influence on dissatisfaction because, in recent decades, the Federal Reserve’s been effective in managing inflation.

At first glance, the misery index seems overly simplistic; it only considers two aspects of a country’s economic performance. Regardless, the misery index remains a useful essential tool for two reasons.

One of such reasons is that it provides a useful approximation of the economic conditions on the well-being of Americans. The second reason is that the misery index is an insightful idea, and economic scholars have attempted to improve it by including more economic indicators. Thus, it can be used by investors to build an emergency fund in the event of job loss or economic downturn.

 

Newer Versions of the Economic Index

Okun’s misery index underwent multiple modifications over several decades. The first modification was suggested in 1999 by Harvard economist Robert Barro. Barro created a Barro misery index to evaluate post-WWII heads of states by adding more aspects of economic performance – namely economic growth data and interest rate.

In 2011, Barro’s misery index was built upon by Johns Hopkins economist Steve Hanke and extended its use beyond the U.S. The new version is equivalent to the change in real GDP per capita subtracted from the sum of unemployment, inflation, and the interest rates.

Hanke’s annual publication contains a global list of misery index for 95 countries. The index measures different countries’ economic misery and the resulting general discontent. People living under strenuous economic conditions are generally less happy.

Hanke’s global list of misery index ranked Switzerland, Netherlands, Japan, Thailand, Malta, China, and Hungary as some of the happiest countries. On the contrary, countries like Venezuela, Argentina, Syria, Egypt, and Brazil rank as some of the most miserable and less happy countries. Exceptions abound – Scandinavians are said to be more comfortable and happier than their values suggest, and eastern Europeans are less so.

 

Other Applications of Misery Index and Examples

The misery index concept is also applicable in asset classes, where it measures the perceived investor’s misery. For example, the famous Tom Lee’s Bitcoin Misery Index (BML) measures bitcoin investors’ distress. BML calculates the overall misery index by finding the trades’ winning percentage against total trades and adds the global volatility of cryptocurrency. A total index value of less than 27 is considered “at misery.”

Online publications also use the misery index, alongside the Bloomberg misery index, to reflect citizens’ macroeconomic health. Top on the list of the latest Bloomberg misery index list are countries beset by high levels of unemployment and inflation, such as Venezuela, South Africa, and Argentina. As economists estimate, Bloomberg misery index listed Japan, Thailand, and Singapore as some of the happiest countries.

 

Additional Resources

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Bitcoin
  • Economic Indicators
  • Gross Domestic Product (GDP)
  • Stagflation

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