What is Misery Index? Misery Definition- Alpha Architect
Arthur Okun first proposed the misery Index in the early 1970s; unemployment and inflation were considered the most important determinants for consumer experience in a marketplace. When Arthur Okun created it, it was originally named the Economic Discomfort Index. Later, it was renamed the Misery Index by Ronald Reagan. Let us understand more about the Misery index in this article.
History of the Misery index
There was a period in the 1970’s which was known as ‘Stagflation.’ Generally, unemployment and inflation do not go together. When people lose their jobs, it also affects their purchasing power. Hence the market reduces the price to fight the scarce consumer presence. However, they raise the prices during the fallen unemployment rates because demand tends to exceed the supply. During Stagflation it was a rare instance when unemployment and inflation were going hand in hand. The “cost of living” had increased, but the sources of living costs had reduced.
Then, the economist Arthur Okun proposed the Economic discomfort Index, which had two main elements; Inflation rate and Unemployment rate.
Misery Definition – Alpha Architect: Misery, meaning a degree of distress experienced by people; thus, the misery index is formulated to calculate the economic distress that people across. It is defined as the sum of the current unemployment rate and the current inflation rate that is MI= U+I.
Understanding the Misery index
To understand the misery index, we must understand the two basic elements. The unemployment rate: is counted as the number of people looking for jobs in a month. Annual Inflation rate: the yearly rise in prices of products ranging from basic needs to luxury items.
The concept of misery index is abstract; it sure counts the degree of economic discomfit and its effects on the living standard. However, it tends to leave a large portion uncalculated. For example, the unemployment rate does not include the people who have given up searching for jobs or have quit their jobs.
It gives a general idea about consumer experience in the market. The higher numbers on the metric suggest that situations are not very good for the consumers out there. On the contrary, lower numbers depict that the market conditions are favourable to consumers.
The satisfactory misery score is 6%-7% which means the unemployment rate of 4%-5% and the Federal Reserve inflation rate of 2% shall mean that the people can fulfill their living costs without feeling distressed.
Limitations and Criticism of the Misery Index
The misery index is a good shorthand to analyze economic misfortune. However, there are many reasons why it should not be considered as the precise economic health metric.
To start with, both the elements: the unemployment rate and inflation rate, have an inherent blind spot. There may be many reasons for the prolonged high unemployment rate, such as people no longer looking for jobs. However, the misery index does not count that, hence, inaccurate calculation.
Additionally, low inflation, no inflation, or even deflation is a sign of a stagnant economy. However, when used in the misery index, it will result in a low misery index, which might not be the case otherwise. Also, a 1% increase in inflation will cause more misery than a 1% inflation. But the misery index counts both the elements as equal. Therefore, the idea of the misery index is abstract and cannot be used as a long-term metric for discussing economic health.
Many economists have critiqued it because it did not include economic growth data. Moreover, it even under weighed the role of expectations and uncertainty while being a calculator of personal economic distress.
Versions of the Misery Index
The Misery Index has been modified many times after its release in the 1970s. In 1999, Harvard economist Robert Barro added a lot more data in the existing misery index. He included interest rates, economic growth data, and even considered countries other than the US. Thus, it was known as the Barro’s Misery index.
Later, in 2011, economist Steve Hanke modified Barro’s misery Index and added other elements such as the sum of inflation, unemployment, bank lending rates, minus the GDP per capita change in percentage. It is known as Hanke’s Misery index and is calculated for around 100 countries every year.
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