David R. Henderson  

The Henderson Misery Index

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A Friendly Amendment: Don't Forget Your Irving Fisher

During the 1976 campaign for U.S. president, candidate Jimmy Carter popularized the "Misery Index" as a way of criticizing his opponent, Jerry Ford. The misery index--equal to the sum of the inflation rate and the unemployment rate--was devised by the late Arthur Okun, who was second chairman of the Council of Economic Advisers under President Lyndon Johnson. The higher the index, the greater the misery, since both inflation and unemployment are thought of, correctly, as bads.

At the end of Ford's administration, the misery index stood at a whopping 12.66. You can understand why Carter found that a tempting target. Of course, during the 1980 campaign, Ronald Reagan pointed out that under Carter, the misery index had increased. At the end of Carter's administration, it stood at an even more whopping 19.72. At the end of Reagan's administration, by the way, it had fallen to 9.72.

The virtue of the misery index is that it takes two widely available data that matter a lot and gives a quick snapshot of them. But, of course, one other variable that matters a lot is economic growth. So in 1999, Robert Barro put together the Barro Misery Index (BMI), which included economic growth. But it also included interest rates.

Here's how Barro describes his measure:

The change in the rate of consumer price inflation (CPI) is the difference between the average for the term and the average of the last year of the previous term. The change in the unemployment rate is the difference between the average value during the term and the value from the last month of the previous term. The change in the interest rate is the change in the long-term government bond yield during the term. The GDP growth rate is the shortfall of the rate during the term from 3.1% per year (the long-term average value). The change in the misery index is the sum of the first four columns.

Using this measure to evaluate post-WWII presidents, Barro awards top place to Reagan's first term, second to the first two years of Clinton's second term (remember that Barro wrote in 1999, when Clinton had been in office for only 2 years of his second term), and third place to Reagan's second term.

Then, in 2011, came Steve Hanke, with his "modified misery index." It is, in his words, "a simple sum of interest, inflation, and unemployment rates, minus year-on-year per capita GDP growth." His latest piece on the index is here.

Both Barro and Hanke have done a service by putting in real economic growth in some form (per capita in the case of Hanke.) But both have forgotten their Irving Fisher. One of Fisher's biggest contributions was pointing out that nominal interest rates already contain the market's expectation of inflation. So to put both inflation and interest rates in the index is to double-count inflation. A better measure (the Henderson Misery Index--HMI?) would be the inflation rate plus the unemployment rate minus the growth rate of real GDP (per capita or not.)


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CATEGORIES: Macroeconomics




COMMENTS (14 to date)
Tom Nagle writes:

Why should high interest rates be treated as a driver of "misery"? A lot of problems, including the shortfall in company pension funds and retirement incomes, would be relieved by higher interest rates. As you know David, interest rates reflect more than the rate of inflation. A high real interest rate can indicate that there are good returns on investment creating a high demand for loans. I think the index should include something like the shortfall in the real rate versus some longer term index.

JLV writes:

Two things: 1) including inflation and nominal interest rates doubles counts inflation only if agents have perfect foresight. Otherwise it double counts only expected inflation.

2) These are implicitly social evaluation functions, but I don't see them as being particularly well-behaved. Is the ordering implied by any of these sensible? Is a world with 10% inflation, 0% unemployment and 10% growth really the same as a world with 10% deflation, 10% unemployment, and 0% growth?

Andrew_FL writes:

I think the concept of a misery index is fundamentally misconceived, if I correctly infer it as attempting to measure the magnitude of social dis-utility, since I don't believe there is any such thing.

Other than that, any index using "the inflation rate" and "the unemployment rate" falls to the standard value theoretic critiques of "the price level" as a concept, and the standard critiques of U-3 as a measure labor surplus.

But yes, you are correct that including interest rates double counts (expected) inflation. I suppose you could argue you could overcome the value theory critiques of "the price level" by replacing inflation with interest rates, instead of the other way around?

David R. Henderson writes:

@Tom Nagle,
Why should high interest rates be treated as a driver of "misery"? A lot of problems, including the shortfall in company pension funds and retirement incomes, would be relieved by higher interest rates. As you know David, interest rates reflect more than the rate of inflation. A high real interest rate can indicate that there are good returns on investment creating a high demand for loans.
Both good points. And both support my proposal for taking interest rates out of the index.
@JLV,
1) including inflation and nominal interest rates doubles counts inflation only if agents have perfect foresight. Otherwise it double counts only expected inflation.
You make a good point but way overstate your case. You don’t need perfect foresight, just good foresight, for nominal interest rates to double count inflation.
Is the ordering implied by any of these sensible? Is a world with 10% inflation, 0% unemployment and 10% growth really the same as a world with 10% deflation, 10% unemployment, and 0% growth?
No. Touche.

I guess the 1976 misery index might have been intended by Carter to represent something experienced by the average voter. But aggregate growth cannot be felt by an average voter, I believe. So Barro's addition of that quantity changed the meaning significantly. The BMI seems to be significant to people looking at the economies of nation states.

vikingvista writes:

Perhaps subtracting the number of new Apple products or new Internet-based services would make the index better conform to man-on-the-street experience, given the disproportionate value people today place on those things, their too low influence on inflation metrics, and their too low influence on GDP (given that such services are often free, low priced, or rapidly deflating).

And the unemployment rate probably understates the misery, since it counts someone's misery as ended rather than increased if they go long enough without finding employment.

For today's economy with low inflation, low interest rates, GDP growth, falling unemployment metric, but low labor force participation, massive expansion of the monetary base (as an influence on interest rates) and high G contribution to GDP, I'm not sure the misery index is of any value at all. Government interventions appear to have gotten better at changing the popular metrics without improving the the economic conditions that the metrics were supposed to gauge.

Ted B. writes:

Interesting metric. I looked at the World Misery Index by Hanke and explored the data. I did some regional analysis and noticed something very interesting.

The Pacific Effect

South America can be easily split into two regions geographically, Pacific and Atlantic. The Atlantic nations are Venezuela, Suriname, Brazil, Argentina, Paraguay, and Uruguay. The Pacific nations are Colombia, Ecuador, Peru, Bolivia, and Chile. (Note: Chile and Colombia border both oceans but have the majority of their coastlines on the Pacific; Bolivia is landlocked but was once on the Pacific and most of her neighbors are, while Paraguay is landlocked as well, but all of her neighbors are on the Atlantic, thus Chile, Colombia, and Bolivia all qualify as Pacific and Paraguay is Atlantic)

When you look at the misery indices for these countries, the results are interesting. The Top Two most miserable countries in 2014 were Atlantic nations (Venezuela and Argentina). Brazil came in 6th. The least miserable Atlantic nation was Suriname, which finished 43rd in the world, and still more miserable than the most miserable Pacific nation, which was Peru at 49th. Chile was in the best situation, finishing 70th.

Here are the numbers: Atlantic Average: 48.81, Pacific Average: 17.2

If the Atlantic South American nations were one country, their economy would be the sixth worst in the world and only slightly better than Iran's.

That's a huge difference between two sides of the same continent. I'm sure Europe at one time had a similar split, but that line has blurred now and was the result of the Soviet Union. What could be the cause of the "Pacific Effect"?

Philo writes:

For twentieth- or twenty-first-century Americans to whine about their collective "misery" is pathetic. But the idea of measuring overall social utility is appealing (I am accepting Andrew_FL's assumption that a "misery index" is aimed at measuring social utility or dis-utility, while rejecting his claim that there is no such thing). Unemployment is, indeed, an indication of disutility (as are crime, divorce, terminal illness, etc., so I think the Henderson index gives too much prominence to unemployment); the growth rate is an indication not of the *level* but of the (direction and) *the rate of change* of social utility (so it pertains to the "flow" of utility, not the "stock," which is what we are trying to measure); finally, inflation seems very nearly neutral utility-wise, at least within a broad range (I suppose hyper-inflation, where you needed a wheelbarrow to carry your pocket change, would be kind of annoying).

Andrew_FL writes:

@Philo-there's no way to compare my dissatisfaction with yours or anyone else's, and it would actually be inappropriate to do so. The same with addition, since this requires a universal scale. This is what I mean when I say there is no such thing as social (dis)utility.

ChrisA writes:

@Andrew_FL - would you accept changes in happiness, along the lines of "are you more satisfied with your situation, all things being consider versus the same time last year, less satisfied or the same?". Presumably if more people were expressing falling satisfaction than increasing, that would be a bad thing?

Floccina writes:

Pretty good but we care much more about unemployment than about inflation and growth.

AND shouldn't the growth factor be some combination of per capita growth and total growth. Both are important but per capita is more important if population is not growing.

Bob Murphy writes:

Hi David,

Just a minor point here, but I can imagine scenarios where CPI inflation and interest rates go in opposite directions, at least in the short run. For example, consider the late 1970s / early 1980s. Volcker comes in and jacks up interest rates, bringing down CPI inflation. The points others brought up above are good ones; who's to say that a high interest rate is "miserable"? But I can see how the purpose for which a misery index is constructed, would be missed if Volcker gets credited for bringing down inflation without getting dinged by the high and painful (to many) interest rates needed to do so.

Andrew_FL writes:

@ChrisA-If everyone is experiencing less satisfaction, that's definitely bad. But if even one person is experiencing increasing satisfaction, well who says his increasing satisfaction doesn't outweigh the decreasing satisfaction of everyone else?

One can get out of this bind by denying that one can put his satisfaction on a scale and weigh it against the satisfaction of everyone else.

Bostonian writes:

A 1 point increase in unemployment causes 1.7 times more misery than a 1 point increase in inflation:

Quoting the Wikipedia on the misery index:

'A 2001 paper looking at large-scale surveys in Europe and the United States concluded that unemployment more heavily influences unhappiness than inflation. This implies that the basic misery index underweights the unhappiness attributable to the unemployment rate: "the estimates suggest that people would trade off a 1-percentage-point increase in the unemployment rate for a 1.7-percentage-point increase in the inflation rate."'

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