Dusting Off the Misery Index from the 1970sSubmitted by Reed Financial Group on May 7th, 2020
How can China be considered a happier country versus the United States?
The past couple of months has brought untold misery to hundreds of countries around the world. Millions of COVID-19 infections, with hundreds of thousands of them fatal, 30 million plus unemployed in the U.S., rising levels of anxiety, depression and substance abuse. Maybe now is a good time to talk about the Misery Index.
Understanding the Misery Index
The Misery Index was popularized in the 1970s as an easy to understand measure of America’s economic health. Equal to the sum of inflation and the unemployment rate, the original Misery Index was created by Yale economics professor Arthur Okun.
In the 1960s, professor Okun researched the relationship between unemployment and production and his findings became known as Okun’s law, which states that when the U.S. unemployment falls by 1%, our Gross National Product will increase by 3% (this was apparently only true for the U.S. economy and only when unemployment was between 3% and 7.5%).
Professor Okun also served on President Lyndon Johnson’s Council of Economic Advisors and he coined the Misery Index as a way for President Johnson to easily communicate the relative health of the U.S. economy. The higher the Index, the greater the misery felt by the average American. Simple.
During the presidential campaigns of 1976 and 1980, the Misery Index became more popular. In 1976, then-candidate Jimmy Carter criticized President Ford and in 1980, then-candidate Ronald Reagan pointed out that the Misery Index increased under President Carter. It will be interesting to see if the Misery Index gets reintroduced during the 2020 presidential race.
The Misery Index Has Flaws
While the Misery Index is a simple measure, most economists are quick to point out its many flaws.
- First, economists point out that it doesn’t include economic growth data at all, an important data set to measure economic health.
- Second, it only (sort of) works in the U.S. as there are lots of places globally that have experienced low inflation and low unemployment, but intuitively one would suggest the Misery Index is really higher than the simple number might suggest. China, for example, has unemployment of less than 4% and inflation of about 2% - more on this later.
- Third, the unemployment rate is a lagging indicator and as such, doesn’t capture economic health at a particular point in time – it probably understates misery early in a recession and overstates it once a recession ends.
Finally, and this is probably the largest flaw: which defines misery more: the unhappiness associated with unemployment or the unhappiness associated with inflation? Most would argue that unemployment brings much more misery versus the rising costs of a basket of goods and services.
And while the percentage of unemployed, current inflation and the resulting Misery number for the average American might be useful somehow, how useful is it if you’re unemployed?
A More Complete Misery Index?
Since the 1970s, the original Misery Index has been modified several times, including by Harvard economist Robert Barro in 1999 and in 2011 by John Hopkins economist Steve Hanke.
Barro included much more data – and called it Barro’s Misery Index – and he included interest rates and economic growth and looked at countries other than the United States. Hanke took Barro’s Misery Index and added more data, including “the sum of the unemployment, inflation and bank lending rates, minus the percentage change in real GDP per capita.” And yes, he called it Hanke’s Misery Index and updates it yearly for close to 100 countries.
In case you’re wondering, the most recent Hanke Misery Rankings show the following:
- Japan is the happiest country in the world (because it is the least miserable country in the world);
- Hungary is the second happiest country in the world (it was the second happiest the year before too);
- Thailand is the third happiest country in the world (it was the happiest the year before);
- Venezuela is the most miserable country in the world (it held the same title for the previous four years too);
- Argentina is the second most miserable country in the world; and
- Iran is the third most miserable country in the world.
Something to Think About
But while Hanke’s findings are undoubtedly rooted in mathematical precision, one could argue that his conclusions – the rankings – are a bit of a head-scratcher.
The United States is the 33rd happiest country in the world;
China is the 27th happiest country in the world
While maybe the model dictates those rankings, it’s a reminder that:
“Happiness is a direction, not a place.” ~Sydney J. Harris, American Journalist