Misery Index

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Misery Index

The Misery Index is a simple objective measure of the economic condition obtained by summing the unemployment rate plus the annual rate of inflation.

Misery Index = Unemployment Rate + Annual Inflation Rate

This measure, initially known as the Economic Discomfort Index, was devised by Arthur Okun, who served as President Lyndon Johnson’s chief economic adviser. As columnist Richard F. Janssen explained in

introducing the concept to readers of the Wall Street Journal in 1971:

It is derived by simply lumping together the unemployment rate and the annual rate of change in consumer prices—apples and oranges, surely, but it is those two bitter fruits which feed much of our economic condition. The higher the index the greater the discomfort—we’re less pained by inflation if the job market is jumping, and less sensitive to others’ unemployment if a placid price level is widely enjoyed … (p. 1).

The dramatic way in which the index has fluctuated since the mid-twentieth century is revealed by Figure 1 (the vertical bands indicate recessions).

Politicians, in particular, have found the index useful. George McGovern invoked the Economic Discomfort Index in scorning opponent Richard Nixon’s economic record during the 1972 presidential campaign. Jimmy Carter used it in disparaging Gerald Ford in 1976. Ronald Reagan, who renamed it the Economic Misery Index, employed it in castigating Carter in 1980. Walter Mondale invoked the index in deriding Reagan, and Bill Clinton used it in successfully unseating George H. W. Bush in 1992. Speech writers drop the term from their vocabulary when the index is low, as they did during the Clinton administration.

Although the Misery Index ignores the poverty rate, the degree of income inequality, and both the government and the balance of payments deficits, there is evidence that it captures much of the public’s feelings about the level of economic wellbeing. As Figure 2 shows, it tracks fairly closely the path of the University of Michigan’s Index of Consumer Sentiment, which is based on the answers provided by telephone respondents to several questions, including:

“Would you say that you and your family are better off or worse off financially than you were a year ago?”
“Now looking ahead-do you think that a year from now you will be better off financially, or worse off, or just about the same as now?” (University of Michigan Surveys of Consumers Questionnaire, p. 2)

Note from the graph’s right-hand scale that the Index of Consumer Sentiment is plotted inversely because a high level of the index indicates that the public is thinking positively about the economy. A casual inspection of the graph suggests a rather remarkable link between the two measures, although the survey evidence suggests that in the early 1980s and 1990s the Consumer Sentiment declined more dramatically than the Misery Index.

Okun relied on his intuition in deciding that unemployment and inflation would receive equal weight in constructing his Economic Discomfort Index. The fact that the correlation between his index and the Index of Consumer Sentiment is r = -0.74 reveals that his index does better than he had any right to expect. However, the following regression suggests that inflation deserves a somewhat higher weight than unemployment:

Consumer Sentiment = 109–2.49 Inflation Rate (1.95) (0.17)

-1.87 Unemployment Rate + e (0.35)

1953:1–2005:4 R² = 0.607

With the aid of hindsight, this regression implies that giving a 57% = 2.49/(2.49 + 1.87) weight to inflation and 42% = 1.87/(2.49 + 1.87) to unemployment might provide a slightly better measure of Economic Misery:

Economic Misery Revised = 42% Unemployment + 57% inflation

In their 2002 research Michael Lovell and Pao-Lin Tien provided more detail. It is reasonable to conclude that Okun’s decision to give equal weight to unemployment and inflation was remarkably close to matching this retrospective regression.