The Henderson Misery Index
By David Henderson
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.)