Misery Index
What is the misery index?
Equal to the sum of the inflation rate and the unemployment rate, the original poverty rate was popularized in the 1970s as a measure of America's economic health during a president's term.
Key points
- The first misery index was created by Arthur Okun and was equal to the sum of the inflation and unemployment rate data to provide a snapshot of the US economy.
- The higher the index, the greater the misery experienced by average citizens.
- It has recently expanded to include other economic indicators, such as bank lending rates.
- In recent times, variations in the original misery index have become popular as a means of measuring the overall health of the global economy.
Understanding the misery index
The first misery index was created by economist Arthur Okun, who was 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 understandable snapshot of the economy’s relative health. The higher the index, the greater the misery experienced by the average voter. During the 1976 election campaign for the presidency of the United States, candidate Jimmy Carter popularized Okun's misery index as a means of criticizing his opponent, Gerald Ford in office. At the end of the Ford administration, the poverty rate was relatively high at 12.7%, creating an attractive target for Carter. During the presidential campaign of 1980, Ronald Reagan pointed out that the poverty rate had risen under Carter.
The Okun Misery Index is considered a flawed indicator of the economic conditions experienced by the average American because it does not include data on economic growth. In recent times, the prevalence of low unemployment and low inflation figures in much of the world also means that the usefulness of the Okun index is limited.
Furthermore, the unemployment rate is a lagging indicator that probably underestimates misery at the start of a recession and overestimates it even after the end of the recession. Some critics also believe that the misery index underweights the unhappiness attributable to the unemployment rate, as inflation is likely to have less influence on unhappiness because Federal Reserve policy has been much more effective than managing inflation. in the last decades. Regardless, it's smart for investors to set up an emergency fund in the event of an economic downturn or job loss.
More recent versions of the misery index
The Misery Index has been changed 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 assess presidents of the second after war.
In 2011, Johns Hopkins economist Steve Hanke based on the Barro Misery Index and began applying it to countries outside the United States. Hanke's modified annual poverty rate is the sum of unemployment, inflation and bank lending rates minus the change in real GDP per capita.
Hanke annually publishes its global list of misery index rankings for 95 countries that promptly report relevant data. Its list of the most miserable and happy countries in the world ranked Venezuela, Syria, Brazil, Argentina and Egypt among the most miserable countries. China, Malta, Japan, the Netherlands, Hungary and Thailand were ranked as the happiest countries.
The concept of the poverty index has also been extended to the asset classes. For example, Tom Lee, co-founder of Fundstrat Advisors, created the Bitcoin Misery Index (BML) to measure the misery of the average bitcoin investor. The index calculates the percentage of winning trades compared to total trades and adds it to the overall volatility of the cryptocurrency. The index is considered "in misery" when its total value is less than 27.
Example of a misery index
A variation of the original misery index is the Bloomberg misery index, developed by the online publication. Venezuela, a country hit by widespread inflation and unemployment, outperformed the latest version of the index. Argentina and South Africa, both economies with similar problems, completed the top three.
On the other hand, Thailand, Singapore and Japan were considered the happiest countries according to economists' 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 past two decades.
