It measures the impact of change in economic conditions.
The Misery Index is an indicator meant to measure the impact of change inand the degree of economic distress felt by ordinary people in their daily lives due to the risk of unemployment and an increase in the cost of living.
This index was popular during the 1970s when the United States was experiencing- the combination of inflation and a rise in unemployment - which was used to measure economic discomfort.
It is calculated by adding theto the rate of unemployment. This index measures the economic welfare of a country during a president's term in office to determine is on the right path.
While unemployment and inflation are considered to be a loss for the economic well-being of any individual, their combined value is an overall indicator of economic health.
The higher the index, the more distress is felt, and the average citizen feels misery. It shows if the citizens are generally happy or unhappy, depending on their economic conditions.
This index is the only statistical tool that calculates a country'sand inflation outlook. It is considered to be convenient, but it is an imprecise metric. Moreover, under several circumstances, it might not be a completely accurate representation of economic distress.
Recently, it has broadened, and there are different popular variations of the index to understand the overall health of national economic policies.
Arthur Okun provided President Lyndon B. Johnson with the statistics of the country's economic welfare by using the sum of the rate of inflation and the rate of unemployment.
The value of this index is directly related to the misery of voters. Since its origin, this index has provided insights into the presidential approval rating and the election outcome.
During the presidential election in 1976, candidate Jimmy Carter adopted this index to criticize the economic policies of Gerald Ford. This index peaked at 12.7% by the end of President Ford's rule, a target for Carter, and he subsequently won the election.
This index gradually gained further significance. During the second presidential debate in 1980, the previous Governor of California, Ronald Reagan, blamed President Carter for the increase in the index in the country.
This index has two main components: inflation and unemployment. Inflation is defined as the rate at which purchasing power is loss of money due to the rise in prices of consumers.
According to the United States, unemployment is the number of non-disabled or educated people actively looking for work. In more cases, these numbers might be inversely correlated.
Arthur Okun, an economist, and member of President Jonhson's Council of Economic Advisers, created the first index in the 1970s. This first index was known as the "Economic Discomfort Index," basically the sum of inflation and the unemployment rate.
The higher the index, the greater the stress the citizens feel in their daily lives. This index was popularized during the 1970s and used by journalists and political candidates as a talking agenda in their campaigns.
During the 1970s, after President Nixon severed the final linksand gold, the United States experienced several years of elevated price inflation and unemployment, known as stagflation.
The people of America were juggling the hardships of seeking a job (unemployment) as a series of recessions hit the economy. As a result, the dollar rapidly lost its value after a rising cost of living.
This new phenomenon did not fit with the then-popular macroeconomic theories based on the Phillips Curve, which led economists to explore new possibilities and alternative ideas to explain the ongoing ideas, including Okun's misery index.
At that time, this index was considered novel as mainstream economists believed that unemployment and inflation would not rise together but tend to offset each other.
During the campaign for the President of the United States, Okun's index was popularized by candidate Jimmy Carter to criticize his incumbent, Gerald Ford. By the end of Gerald Ford's tenure, the index rose to 12.7%, which was an easy target for Carter.
During the presidential campaign of the 1980s, Ronald Reagan pointed out that the index had increased under the tenure of Jimmy Carter.
There have been several revisions to this index over the years. First, a Harvard economist, Robert Barro, created the new Barro Misery Index (BMI) in 1999.
He added two more factors: interest rates changing (based on long-term government) and the ( ) growth.
Hanke created his version of the revised index in 2011. It was later named Hanke's Annual Misery Index (HAMI), and it considers the rates of unemployment, inflation, and bank lending rates as negative values.
Hanke's Annual Misery Index (HAMI) can be applied worldwide, unlike Barro's index, and Hanke releases an annual table of scores of misery indexes for different countries.
Limitations and Criticisms of the Misery Index
We must look closely at the factors to understand how this index works. These factors are focused on Hanke's Annual Misery Index (HAMI) and are mentioned below:
1. The annual rate of unemployment:
Unemployment is defined as the measurement of the percentage of non-disabled educated citizens who are actively seeking a job but are failing to find one.
2. The annual rates of inflation:
Inflation is defined as the increase in the prices of goods and services. As there is an increase in prices, more money is required for the purchase of various goods and services, and this is why inflation leads to misery.
3. Bank lending rates:
The rates paid by the bank for short-term loans can impact the rates consumers pay on loans and lines of credit.
4. The change in Gross Domestic Product (GDP):
A country's economic output change after inflation oris measured by the real gross domestic product (GDP).
While this is a very convenient method to predict economic discomfort, several limitations exist. First, this index is not considered the precise standard for measuring economic health.
Both components of this index have distinct blind spots. Unemployment can only measure the percentage of people actively seeking jobs; it can also include people who have stopped looking for work, resulting in long-term unemployment.
Low rates of inflation can also be associated with unexpected misery. Of course, neither inflation nor deflation is a sign of a stagnant economy, but these are considered catalysts for a low index.
Additionally, the index of misery treats unemployment and inflation rates equally. However, a 1% increase in unemployment is likely to cause more misery than a 1% increase in inflation.
While the power and popularity of Arthur Okun's index of misery came from its simplicity, it was also open to criticism from economists. According to some economists, it is a bad indicator of economic health as it does not include data on.
Hence, we mistake the intent of this index to measure economic health rather than as a measure to feel the degree of stress felt by the citizens in their daily lives. However, it is smart for investors to build anin an economic loss.
The unemployment rate is generally considered a lagging indicator that likely undermines misery too early in ait even after it is over. According to some economists, this index does not capture the entire discontent resulting from unemployment.
The notion is based on the idea that inflation has a small impact on dissatisfaction because, in recent decades, the Federal Reserve has effectively managed inflation.
At first glance, this index appears too simplistic; by only considering two aspects of a country's economic performance. Regardless, this index remains a useful and essential tool for two reasons.
One such reason is that it provides a valid approximation of the economic conditions on the well-being of Americans. The second reason is that this index is an insightful idea, and economic scholars have attempted to improve it by.
Thus, investors can use it to build an emergency fund during a job loss or an economic downturn.
During the Great Moderation, the index of misery was seldom used during brief recession periods from time to time to measure the prevalence of unemployment and inflation rates across the world.
Newer Versions of The Index
Arthur Okun's misery index has been modified multiple times in the past few decades.
Harvard economist Robert Barro made the first modification. In 1999, Barro created the Barro misery index to evaluate post-world war II presidents by adding more consumer lending interest rates and the gap between actual and potential gross domestic product (GDP) growth.
In 2011, economist Steve Hanke from John Hopkins modified Barro's version of the index and widened its application to be a cross-country index.
Hanke's Annual Misery Index (HAMI) is the sum of unemployment, bank lending rates, and inflation subtracted by the real gross domestic product (GDP) per capita change.
An annual publication from Hanke contains a global list of the indexes for the countries that report relevant data on a timely basis. The index measures the economic misery of various countries and the distress caused by it.
In 2020, his list included 156 nations. Switzerland, Netherlands, Japan, Thailand, Malta, China, and Hungary were ranked as the world's happiest countries, and Venezuela, Argentina, Syria, Egypt, and Brazil were the world's most miserable and unhappy countries.
Another variation of the original index is known as the Bloomberg misery index. Argentina, South Africa, and Venezuela topped the index in 2020, beset by widespread inflation and unemployment.
The concept of this index was eventually expanded to asset classes. Let us take an example, Bitcoin Misery Index (BMI) was created by Tom Lee, co-founder of Fundstrat Advisors, to measure the average bitcoin investor's misery.
This index calculates the percentage of winning trades against total trades and adds it to the overall volatility of cryptocurrencies. When its total value is less than 27, then the index is considered "in misery."
According to the estimates by economists, Thailand, Singapore, and Japan were considered the happiest countries. Nevertheless, low inflation and low unemployment rates can mask low demand.
Index Under Different Presidents
The index was first popularized during the 1970s. As a result, it is possible to calculate the economic distress under the tenure of different presidents by comparing the rate of their inflation and unemployment.
The index declined to 3.5% by 1944, most probably due to the chances of employment during the Second World War.
According to the index, the worst performance was by President Hoover. During his presidential tenure, the index rose from 3.8% to 13.35% due to the market crash in 1929 and the Dust Bowl droughts. The misery was increased by implementing the Smoot-Hawley tariffs.
The best performance was by President Roosevelt. The index of misery declined from 25.7% to 3.5%. The Great Depression ended with FDR's New Deal, the Dust Bowl, and the start of World War II.
In 1944, the world's leaders signed the Bretton Woods agreement. As a result, the U.S. dollar replaced the gold standard. Hence, the demand for the dollar and inflation increased.
The presidential tenures of Richard Nixon (1969–1974) and Jimmy Carter (1977–1981) were the most miserable economic periods to occur post-war, with the index rising to 20% under Nixon and 22% under Carter.
However, there was a sharp decline in misery under Ronald Reagan, and it continued to proceed downward during the presidencies of Bush and Clinton.
During the presidential tenure of George W. Bush, misery again rose to a peak of 12.7% under President Obama due to the ongoing Great Recession. As a result, the index hit a low of 5.06% in 2015 and remained nearly the same through most of the Trump presidency (2016–2020).
However, due to the COVID-19 Pandemic, there was a sharp increase in unemployment rates, causing the index of misery to climb to 15%.