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The Misery Index: A Legitimate Economic Indicator?

By Edited Jun 21, 2016 1 2

There are so many economic indicators out there, that sometimes investors and professional money managers become frustrated. Which ones are legitimate and which ones really tell the story? Most economists look at statistics such as unemployment, job growth, government spending, and inflation. 

There is another economic indicator out there that does not get much attention. It is called the “Misery Index”. It was created by an economist named Arthur Okun. Okun came up with the idea after adding the unemployment rate with the inflation rate. The main theory behind this economic indicator is that both high unemployment and high inflation would lead to a disastrous situation for a nation.

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The Misery Index is mentioned a few times in Mike Maloney's book entitled “Hidden Secrets of Money”. The book specifically talks about high inflation and how it will ultimately destroy a nation's economy over the long-term. Furthermore, it explains how the nation's currency itself could become so weak that a person wouldn't be able to purchase necessities.

According to the U.S. Department of Labor and the Financial Trend Forecaster, the U.S. currently has a Misery Index of 11. The lowest it has ever been for the U.S. was back in the mid 1960s, under President Lyndon B. Johnson, when the rate was 7. The rate was at its highest point in the late 1970s, under President Jimmy Carter, when it reached an unprecedented 16.

The lowest index number today is held by Japan, which is at 5. Some nations with the worst index number are Venezuela at 79, Iran at 61, Greece at 38, Palestine at 32, and Ukraine at 25.

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Over time, there have been some modified versions of this economic indicator . One was created by Harvard Economist Robert Barro. His index was created in 1999 and is called the “Barro Misery Index” (BMI).

The BMI takes the sum of the inflation and unemployment rate. It then adds the interest rate, plus the shortfall between the actual and trend rate of the nation's GDP growth.

The BMI was later taken and modified further by Steve Hanke, an economist from Johns Hopkins University. It was later used to calculate the BMI in every nation in the world and it still used by many economists today.

One study concluded that the economic indicator directly correlates with the crime rate of a country. Data from 1965 to 2005 concluded that the index and the crime rate of a nation both have a strong correlation.[1]

There is no doubt that there are dozens of economic indicators out there, and many of them are reliable. The Misery Index is just another way to calculate the overall economic performance of a nation. Critics of the economic indicator believe that natural resources, national debt and GDP all impact a nation's economy differently, and feel that the index is a poor economic indicator. 

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There have been many debates and even arguments over the future of the Misery Index in the United States. Many economists are divided on which future Presidential candidate will improve the country's overall Misery Index rate.

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The Misery Index will continue to be used by economists to find out what damage both inflation and unemployment really could do to an economy. Some economists point out that many socialist and underdeveloped nations will continue to have a high index number as long as they keep the same policies in place. They also believe that nations with strong manufacturing capabilities and low unemployment (primarily the Four Asian Tigers) will continue to keep the index number low.

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Comments

Aug 1, 2015 10:34am
HLesley
I find it interesting that there seems to be a correlation between the misery index and crime.
Feb 5, 2016 6:22am
pgiblett
There is another aspect to add to this and which is that for many low income families their earnings potential is going down as jobs are on offer at lower and lower rates of pay.
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Bibliography

  1. James Rickards Currency Wars: The Making of the Next Global Crisis . New York City: Portfolio, 2012.

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