Is It Time to Take the Misery Index Out of Mothballs?

August 7, 2008

Designed by the renowned economist, Arthur Okun, the misery index measures stagflation by adding the unemployment rate to the year-over-year change in consumer prices.  In 1976, challenger Jimmy Carter used an elevated misery index to assert why President Ford did not deserve reelection, and Ronald Reagan returned the favor even more effectively against Carter in 1980.  In June of that year, the misery index climbed to an all-time high of 22.0%.  As recently, as October 2006, it stood at only 5.7%.  It has understandably been many years since an economist or politician made a big deal of the misery index.  This being an election year and one that’s seen growth and inflation each trend worse, it’s perhaps time to have another look at the misery index.

June’s U.S. misery index (MI) stood at 10.5%, and a 2/10ths rise in the jobless rate points to a likely further increase of the index in July.  That would represent a 5-percentage point increase in the short space of just 21 months.  As in the 1970’s and 1980’s, stagflation is a global phenomenon.  The MI in Euroland is actually higher than in the United States, and both the Canadian and British indices are at 9-something.  As in golf, it’s best to have a low score.  In the table below, Japan is the best performer, but appearances are often deceiving.  Government officials are usually the last people to admit that an economy is in recession, but the Fukuda cabinet in Japan is not contesting that description in Japan’s case.  GDP almost certainly fell in 2Q08 and will probably do even worse in 3Q08.  In deflationary Japan, higher inflation has been a desired yet elusive development for many years.  Unfortunately, the 2.0% rise of consumer prices in the year to June was entirely imported.  Japanese growth continues to be fragile in a deflationary domestic price environment but an inflationary import cost landscape. 

Euroland 11.4%
United States 10.5%
Canada 9.3%
Britain 9.0%
Australia 8.7%
Japan 6.1%


A higher misery index in Euroland than the United States is not a “fundamental” that should be used to justify a dollar recovery.  For one thing, the spread between the two MI levels is narrow.  For another, the euro area has a comparatively balanced economy.  The sum of the ratios of the current account and government budget to GDP is -1.2% in Euroland but -7.3% in the United States.  Comparisons of long- and short-term interest rate levels also favor the euro over the dollar, and that advantage is unlikely to fade much, if at all, in the near term.  The best case for an enduring rise of the dollar against the euro needs to rest on the fact that the euro has simply been over-bid.  Appreciation from as low as $0.8228 in late October 2000 to as high as $1.6038 last month has been far greater than relative price movements in the U.S. and Euroland economies should warrant.  Currency market history is full of examples when appropriate exchange rate swings went way too far.  Microeconomic theory characterizes price equilibrium as a point, a single price that equates the quantity sought with the quantity supplied until some underlying basis for supply or demand gets shifted.  But all too often, currency markets behave in a way where equilibrium appears as a price direction, not a point.  Until the gestalt of all fundamental factors are perceived to have swung from favoring one currency to clearly favoring the other half of the pair, the path of least resistance is a continuing movement along a well-entrenched directional vector.

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