A Twist on the Misery Index

The Misery Index, which is simply the sum of the inflation rate and the unemployment rate, was first created by economist Arthur Okun in the 1960’s while he was an adviser to President Lyndon Johnson. The index is intended to measure the economic well being of people in a country during a given period of time.

When I first came across the Misery Index, I was intrigued by the idea, but thought that it could use some tweaking to more accurately measure how poorly an economy was performing. After doing some research, I think I’ve come up with a superior method of measurement. As always, the hope is that if we provide our policymakers with better data about the state of the US economy, they will be able to make better decisions going forward. In that vein, here is what the Stapp Misery Index looks like:

Instead of just summing the inflation rate and the U3 unemployment rate, like Arthur Okun, I summed the U6 unemployment rate and the inflation rate, and then subtracted the percent change in real GDP from the previous year. I plan on doing a full length post on the differences between the different measurements of unemployment in the future, but a quick description here will suffice. In essence, U6 is just a broader measurement of unemployment than U3. U3 is the percentage of the labor force that is unemployed and has looked for work in the past 4 weeks. U6 is equal to U3 plus discouraged workers (those who want a job but aren’t currently looking because there aren’t many available), marginally attached workers (those who would like a job, aren’t currently looking, but have looked within the past 12 months), and part-time workers (those who are working part-time because they can’t find a full-time job).

I decided to use the broader measure of unemployment because recent research has shown that unemployment has a bigger effect on people’s happiness than the inflation rate. Rafeil Di Tella, Robert J. MacCulloch, and Andrew J. Oswald published a paper in 2001 called Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness, in which they estimated “people would trade off a 1-percentage-point increase in the unemployment rate for a 1.7-percentage-point increase in the inflation rate.”

Lastly, I decided to subtract out the percent change in real GDP because it is the most commonly cited indicator of economic growth. Consequently, a positive value for real GDP should lower, not raise, the Misery Index. The main conclusion I would draw from looking at this index is that we are still very far from reaching our pre-recession trough of roughly 8.5. The current value of about 14 implies that economic policymakers should keep the pedal to the metal on both fiscal and monetary stimulus. There is still too much misery out there to pull back now.

P.S. I plan on revisiting this index again at a later date. I think it still could be improved and I’m not done tweaking it yet. One additional change I am considering would be to measure inflation as the deviation from 2%. Most economists agree that in the long-run a 2% rate of inflation is optimal and therefore any deviation from that rate would add to economic misery. On a technical note, I would add the absolute value of the deviation to the index because deflation is at least as grave as concern as excessive inflation when it comes to impacting economic well being.

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