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The Misery Index April 2, 2009

Posted by tomflesher in Academia, Economics, US Politics.
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The Misery Index is a measure of national economic health derived by adding the unemployment rate to the rate of inflation. It was famously used by Jimmy Carter to declare that Gerald Ford, under whom the rate had risen to 12.5%, had no right to run the country, and then by Ronald Reagan to declare that Carter was unfit for the presidency after it rose to over 20%. (It’s available in real time at MiseryIndex.us.)

I haven’t had time to run the numbers, but I’m a bit dissatisfied with the Misery Index in this case. The most obvious issue is that while inflation is a bad thing, so is deflation; however, under the Index, a high deflation rate is seen to mitigate high unemployment. The second is that steady, targeted inflation is a sign that the economy is growing smoothly and under control.

Again, without crunching the numbers, I can’t say anything specific, but it seems to me that a formula with nicer properties might measure either the absolute rate of change from one period to the next (capturing volatility fairly cleanly) or, for the less mathematically inclined, the absolute value of the change. The problem of measuring a rate of change is that you’d need to correct for unemployment as well; measuring rates of change also leaves you sensitive to different lengths of time being measured, whereas the misery index as it stands can be seen as a snapshot.

So, a compromise: set a benchmark – perhaps 3% for inflation and 5% for unemployment, since those are numbers that are bandied about as “targets.” Snapshot the measure by measuring the absolute value of the rate minus the benchmark figure.

Misery Index
Accurate, but hamfisted
Plausible? Who knows?

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