Oh the misery


Good news folks – the worst is over in the US! So it’s a bit strange that no-one seems to be very happy about it…

Why am I claiming that the worst is over? Simply because the US misery index has reached its lowest level in over 50 years! Misery? Does someone really measure that? Are there honestly folk that go round knocking on doors asking people how miserable they’ve been over the last few months? Cat died – more miserable? And, apparently, misery levels have fallen to 5.07%… but how do we know that it’s not 5.08%?

Today’s graph raises many questions, as the word misery is one heck of an open-ended concept. Poverty, debt, unemployment, illness: all issues relating to the idea of misery, but how does one bring all these loose strands together?

You don’t. Or at least, as far as I understand, it was never the intention of the Misery Index creator (Arthur Okun) to provide a clear picture of the misery levels in a country. He simply identified two criteria that worried the average employee – better known in those days as a ‘worker’: unemployment and inflation. Unemployment in this case indicates how many people are looking for a job (but can’t find one). Inflation shows how much you can buy with your fixed (nominal) wage. High inflation negatively affects your purchasing power, basically limiting how much you can buy relative to the hours you work.

Add these together and, hey presto, you’ve got a Misery Index – a sort of indicator for the health of the economy. And that also explains how the index can be measured so accurately, as it’s not constrained by dead pets or looming flu epidemics. And the most recent figure of 5.07% means the US economy is at its lowest ‘misery’ level since the fifties.

So why is everyone so unhappy then?
Less misery than in the bullish nineties? More positive even than in the sixties, when the US economy was growing at an average rate of 4.5%? So why exactly are all these Americans moaning that things were much better in the good old days?

The answer is of course easy: I seriously doubt that the Misery Index provides an accurate picture of the underlying misery. And that’s all down to the two data series upon which the Misery Index is based. For clarity’s sake, I’ve repeated the index again below, but this time included its two sub-indices.


And immediately, you notice something strange. Check out in particular the abrupt (albeit temporary) decline the index shows in the period 2008-2009. The global economy was in chaos, unemployment was rising fast, the financial system was teetering on the brink, and yet the index declined a full four points in a year. The cause is simple enough: in that period US inflation (5.7% in July 2008) turned into deflation in just one year (-2.1% in July 2009). But it’s unlikely – and that’s an understatement – that workers were rejoicing in the streets about this sudden increase in their purchasing power. Although inflation is clearly unfavorable, deflation can also be seen as negative. And now, too, inflation – or its absence – is the key reason why we have managed to reach such an historic low in the Misery Index: although unemployment was lower in the late nineties, inflation was then still at more normal levels.

But the other variable – unemployment – also raises questions. Yes, US unemployment has fallen in recent years, but that is primarily down to the fact that many Americans have left the job market. Demoralized workers who are acutely aware of what little chance they have of ever finding a job. And you’d be right to question just how happy they are right now. This is why these days many people think you’d be better off avoiding official unemployment (known as U3) and focusing on the alternative indicator: the “U6”. This indicator factors in not only those demoralized workers, but also people working part-time who would rather be working full-time. According to this indicator, unemployment is currently 9.8%… The only disadvantage of this figure is that it has only been published since 1994, so it’s not possible to compare it with the sixties.



And so I have arrived at an alternative Misery Index. Not that I’m claiming to accurately demonstrate real misery levels – that’s as good as impossible using just two variables. No, I’m just trying to improve a little on the shortcomings of the old model. I’m not looking here at the absolute level of inflation, but the degree to which inflation deviates from the target value, which I have arbitrarily decided to set at 2%. You could of course have endless discussions about whether 4% inflation is worse than or just as bad as 0% inflation, but yeah, whatever. The second change is the use of U6. But this is debatable too, simply because this indicator doesn’t go back far enough. Anyway, the result looks like this:


I’m not sure whether it accurately shows underlying misery levels. But one thing is abundantly clear: the black Misery line more closely reflects the grumbling about the US economy’s weak performance.

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