The Misery Index: A Reality Check

This article appeared in the September 2009 issue of Globe Asia.

In the wake of the panic of 2008, fingerpointing has become fashionable. According tosome left‐​wing elements in the chattering classes, thefree‐​market, entrepreneurial capitalist system causedthe economic crisis. In the United States, politicianshave jumped on this bandwagon. Representative BarneyFrank, the colorful chairman of the powerful House FinancialServices Committee, put it this way: “This is theend of the era of extreme laissez‐​faire, of ‘Don’t tax it, don’tregulate it.’ That has now been totally evaporated.” Punditshave also swung into action. For example, New YorkTimes columnist Paul Krugman wrote: “For the more onelooks into the origins of the current disaster, the clearer itbecomes that the key wrong turn — the turn that made crisis inevitable — took place in the early 1980s, duringthe Reagan years.”

To get a handle on these claims, a misery indexreading for each U.S. administration since World WarII is presented in the accompanying chart. The originalmisery index was developed by the late Arthur Okun, adistinguished economist who served as chairman of thePresident’s Council of Economic Advisers in the Johnsonadministration. Okun’s index equals the sum of the inflationand unemployment rates.

While Okun’s index measures the absolute level of “misery“in the economy, it tells us little about whether thingsare getting better, or worse. In Getting It Right (1996), Harvardprofessor Robert Barro amended the Okun index. Barro’s index, which measures the change in misery during a president’sterm, is the sum of the following four metrics: the differencebetween the average inflation rate over a president’s term and theaverage inflation rate during the last year of the previous president’sterm; the difference between the average unemployment rate over apresident’s term and the unemployment rate during the last monthof the previous president’s term; the change in the 30‐​year governmentbond yield during a president’s term; and the difference betweenthe long‐​term, trend rate of real GDP growth (3.1%) and thereal rate of growth during a president’s term.

Misery Index (United States)

click on chart for larger view

These modifications had several effects; the data were smootherand more comprehensive, painting a more accurate picture ofeconomic conditions experienced by the majority of Americans.They also allowed Barro to measure more accurately the relativechange in the economy over the four years of a presidential term.

The data in the misery index chart speak loudly. Contrary toleft‐​wing dogma, the Reagan “free‐​market years,” were very goodones. And the Clinton years of Victorian fiscal virtues – whenPresident Clinton proclaimed in his January 1996 State of theUnion address: “the era of big government is over” – were alsovery good ones.

Misery Index (United States)

click on chart for larger view

The misery index pours cold water on the current critique offree markets – one that has taken on the characteristics of a religionthat is embraced without investigation. Indeed, it makes onewonder if the critics tested their ideas by comparing them withanything that actually happened. To obtain an economic realitycheck, the misery index concept can be applied to any countrywhere suitable data exist. Let’s take a look at Indonesia.

A modified misery index – using all four of Barro’s metrics forthe last two decades in Indonesia – is presented in the accompanyingchart. The index is a simple sum of interest, inflation, andunemployment rates, minus year‐​on‐​year GDP growth. Most apparentin the chart is a large jump during the Asian financial crisisof 1997 and 1998. The index normalizes quickly by 1999, however.Indeed, it made new lows during the next decade. While Indonesia’seconomy follows the rhythms of the world economy, it isevident that Indonesia has experienced little improvement in basiclevels of economic “misery” during the past twenty years. Successiveadministrations have failed to significantly bring miseryrates down to the levels of Western economies, as many of theirregional peers have done. There remains quite some distance tobe traveled.

As an indication of just how far, consider that Indonesia ranks129 out of the 181 countries ranked in the World Bank’s DoingBusiness 2009 – a report that measures the vitality of free marketsand the ease of doing business.