The misery index was created by Arthur Okun, a top economic adviser to President Lyndon Johnson. It became more widely known in the 1970s and early 1980s. It adds together two measures of economic pain — the unemployment rate and the CPI’s measure of inflation — to create a single number. The lower the number, the happier consumers — and voters — were likely to be. The higher, the more unhappy.
Right now the measure stands at a level Americans haven’t consistently seen since the Great Recession and the years that followed.
It was in the teens — or higher — for about a decade from late 1973 to mid-1983, climbing above 20 for most of 1980.
A good ‘rule of thumb’
Economists agree the misery index is not a particularly sophisticated measure. Other economists since the 1980s have come up with more precise measures. But, in its original form, the misery index is useful nonetheless.
“It’s short-hand, it’s a rule of thumb,” said David Wessel, director of the Hutchins Center on Fiscal & Monetary Policy at Brookings Institution. “The average person can understand it. You don’t need a PhD in economics to add together two numbers.”
The reason people are upset about high prices — beyond the squeeze on their budgets — is that it’s a factor that they confront on a continuing basis. Even during periods of high unemployment, more than 85% of Americans will keep working. But nearly 100% of people are paying higher prices during periods of high inflation.
“High unemployment and inflation, either one is upsetting,” said Wessel. “If you’re out of work you’re more worried about unemployment. If you have a job, you’re more worried about inflation.”
Economic worries despite low unemployment
The Conference Board’s survey found Americans generally positive about the state of the economy, especially compared to during the depths of the Great Recession.
But other surveys cast a more negative outlook.
In some ways, the misery index does a better job of predicting political reaction to the economy than explaining the economic reality, noted Steve Hanke, professor of applied economics at the Johns Hopkins University and a member of President Ronald Reagan’s Council of Economic Advisers.
“It’s not a pain gauge. It’s a polling gauge,” said Hanke, who has come up with a revised version of the index to compare economies in different countries. “That was the whole purpose of the thing. The bottom line is the original one gives politicians what they need to know.”
A misery index close to these readings is typically bad news for political leaders. Presidents Gerald Ford, Jimmy Carter and George H.W. Bush all became one-term presidents with a misery index in double-digits in the run-up to the election.
The good news for Biden is there is time for the economy to improve in the eyes of voters. Many economists believe current prices are a temporary condition caused by the pandemic and that the inflation rate could come down between now and the 2022 midterm elections, let alone the next presidential election in 2024. Hanke said what is most important for politicians is that people have a sense that things are improving — that’s more important than the misery index reading itself.
For proof, the misery index stood near the current reading in the fall of 1984, but that was down nearly 50% from four years earlier. It allowed Reagan to base his campaign on an improving economy, with his ads proclaiming “It’s morning in America.”
But if economists are wrong and inflation remains persistent, or if efforts to curb it cause a strong labor market to sour and unemployment to rise, history suggests it will be very bad news for Biden and Democrats.
“It would be inconvenient for Biden if we were running the election now,” said Wessel.
