Inflation and Unemployment Both Make You Miserable, but Maybe Not Equally

Since the early 1990s, the Misery Index has only been higher during the 2007-09 recession and its aftermath, and for a couple of months in 2020 during the pandemic when joblessness briefly soared during the early lockdowns. 

Indeed, Republicans were widely expected to make broad gains in last week’s midterm elections as voters punished President Biden and Democrats for their economic misery. 

As it happened, the red wave didn’t materialize. In part that may be due to noneconomic factors. But it may be that the Misery Index, as commonly constructed, doesn’t adequately capture how overall economic conditions affect attitudes. 

Mr. Okun was chairman of the White House Council of Economic Advisers under President Lyndon B. Johnson in the late 1960s and later a fellow at the Brookings Institution. Michael Lovell, an economist at Wesleyan University, found the first reference to Mr. Okun’s index in (where else?) The Wall Street Journal in 1971.

That article said: “Although no Administration in power probably would publish it, Mr. Okun constructs a ‘discomfort factor’ for the economy. It is derived by simply lumping together the unemployment rate and the annual rate of change in consumer prices—apples and oranges, surely, but it is those two bitter fruits which feed much of our economic discontent.”

Mr. Lovell of Wesleyan documented that this index was a political cudgel from the start. George McGovern cited it to criticize

Richard Nixon

in the 1972 presidential race.

Jimmy Carter

used it to criticize President Gerald Ford.

Ronald Reagan

used it to criticize Mr. Carter in 1980. (Mr. Reagan is sometimes said to have coined the phrase “Misery Index” but he said that it was Mr. Carter’s coinage.) 

Mr. Okun’s friend George Perry, a senior fellow at Brookings, said he’s sure Mr. Okun discussed the idea as early as the late 1960s. It wasn’t a sophisticated economic undertaking. “It’s just an observation about a problem that had arisen and how do we deal with it,” said Mr. Perry. “You try to find a way to deal with it that isn’t ‘let’s cause a recession to cure inflation.’”

Yet despite its simplicity, researchers have found many uses for the Misery Index, from predicting crime to presidential approval ratings. 

In a 2001 paper,

Andrew Oswald,

a professor at the University of Warwick, and co-authors studied surveys covering nearly 300,000 people living in the U.S. and 12 European countries. In the U.S., the question they studied is: “Taken all together, how would you say things are these days—would you say that you are very happy, pretty happy, or not too happy?”

Note that the question doesn’t ask about the economy at all. Yet, the authors found, happiness falls significantly when inflation rises and unemployment climbs. Importantly, though, the two factors didn’t necessarily carry the same weight, as the Misery Index implies. 

A 1-percentage-point increase in the unemployment rate had an equivalent impact on happiness as a 1.97-point increase in the inflation rate. Mr. Oswald said that if he were to construct a Misery Index, he would make a simple modification: Multiply the unemployment rate by two and add it to the inflation rate.

A 2014 paper implied the weighting on unemployment should be even higher, estimating one point of unemployment hurt well-being five times as much as a one point increase in inflation. 

“People are not sanguine about inflation,” Mr. Oswald said. The evidence that it reduces people’s satisfaction is clear, he said, it’s just that one extra point of inflation doesn’t hit as hard as an extra percentage point of unemployment. 

In today’s labor force, that amounts to 1.6 million people losing a job. “It’s deeply unsettling to see unemployment rising around them even when they haven’t lost their own job,” he said. 

The traditional Misery Index is higher now than at the time of the 2010 midterms, when unemployment was 9.4% and inflation was 1.2%. Yet Democrats, the party holding the White House on both occasions, suffered far more in 2010, losing 63 seats in the House of Representatives and six in the Senate. Last week, they lost at most eight House seats, a figure that might shrink as the final races are called. They suffered no net loss of Senate seats and may, depending on the outcome of a Dec. 6 runoff in Georgia, gain one.

Using Mr. Oswald’s reformulation, these outcomes make more sense. His index was 20% in 2010 and 15.1% now. That’s still quite high. But by putting extra weight on unemployment, the index helps explain why 2010 was so much worse for Democrats.

 Steve H. Hanke, a professor of applied economics at Johns Hopkins University, produces an international version of the Misery Index. To the unemployment rate and inflation rate he adds the prime bank lending rate, which captures the cost of credit in an economy, then he subtracts growth rate of inflation-adjusted per capita gross domestic product. (This is a modified version of a variant proposed by the economist Robert Barro.) In Mr. Hanke’s latest index, for 2021, the U.S. is more miserable than 42 countries, but less miserable than 101.

Both the Hanke and Oswald variants point to risk in the years ahead. The Federal Reserve is raising rates to tame today’s inflation. If that lifts unemployment, the Oswald index soars. If interest rates and unemployment climb, the Hanke index soars, too.

It’s something that harks back to Mr. Okun’s point: Curing inflation with recessions can just swap one form of misery for another.

Write to Josh Zumbrun at [email protected]

Since the early 1990s, the Misery Index has only been higher during the 2007-09 recession and its aftermath, and for a couple of months in 2020 during the pandemic when joblessness briefly soared during the early lockdowns. 

Indeed, Republicans were widely expected to make broad gains in last week’s midterm elections as voters punished President Biden and Democrats for their economic misery. 

As it happened, the red wave didn’t materialize. In part that may be due to noneconomic factors. But it may be that the Misery Index, as commonly constructed, doesn’t adequately capture how overall economic conditions affect attitudes. 

Mr. Okun was chairman of the White House Council of Economic Advisers under President Lyndon B. Johnson in the late 1960s and later a fellow at the Brookings Institution. Michael Lovell, an economist at Wesleyan University, found the first reference to Mr. Okun’s index in (where else?) The Wall Street Journal in 1971.

That article said: “Although no Administration in power probably would publish it, Mr. Okun constructs a ‘discomfort factor’ for the economy. It is derived by simply lumping together the unemployment rate and the annual rate of change in consumer prices—apples and oranges, surely, but it is those two bitter fruits which feed much of our economic discontent.”

Mr. Lovell of Wesleyan documented that this index was a political cudgel from the start. George McGovern cited it to criticize

Richard Nixon

in the 1972 presidential race.

Jimmy Carter

used it to criticize President Gerald Ford.

Ronald Reagan

used it to criticize Mr. Carter in 1980. (Mr. Reagan is sometimes said to have coined the phrase “Misery Index” but he said that it was Mr. Carter’s coinage.) 

Mr. Okun’s friend George Perry, a senior fellow at Brookings, said he’s sure Mr. Okun discussed the idea as early as the late 1960s. It wasn’t a sophisticated economic undertaking. “It’s just an observation about a problem that had arisen and how do we deal with it,” said Mr. Perry. “You try to find a way to deal with it that isn’t ‘let’s cause a recession to cure inflation.’”

Yet despite its simplicity, researchers have found many uses for the Misery Index, from predicting crime to presidential approval ratings. 

In a 2001 paper,

Andrew Oswald,

a professor at the University of Warwick, and co-authors studied surveys covering nearly 300,000 people living in the U.S. and 12 European countries. In the U.S., the question they studied is: “Taken all together, how would you say things are these days—would you say that you are very happy, pretty happy, or not too happy?”

Note that the question doesn’t ask about the economy at all. Yet, the authors found, happiness falls significantly when inflation rises and unemployment climbs. Importantly, though, the two factors didn’t necessarily carry the same weight, as the Misery Index implies. 

A 1-percentage-point increase in the unemployment rate had an equivalent impact on happiness as a 1.97-point increase in the inflation rate. Mr. Oswald said that if he were to construct a Misery Index, he would make a simple modification: Multiply the unemployment rate by two and add it to the inflation rate.

A 2014 paper implied the weighting on unemployment should be even higher, estimating one point of unemployment hurt well-being five times as much as a one point increase in inflation. 

“People are not sanguine about inflation,” Mr. Oswald said. The evidence that it reduces people’s satisfaction is clear, he said, it’s just that one extra point of inflation doesn’t hit as hard as an extra percentage point of unemployment. 

In today’s labor force, that amounts to 1.6 million people losing a job. “It’s deeply unsettling to see unemployment rising around them even when they haven’t lost their own job,” he said. 

The traditional Misery Index is higher now than at the time of the 2010 midterms, when unemployment was 9.4% and inflation was 1.2%. Yet Democrats, the party holding the White House on both occasions, suffered far more in 2010, losing 63 seats in the House of Representatives and six in the Senate. Last week, they lost at most eight House seats, a figure that might shrink as the final races are called. They suffered no net loss of Senate seats and may, depending on the outcome of a Dec. 6 runoff in Georgia, gain one.

Using Mr. Oswald’s reformulation, these outcomes make more sense. His index was 20% in 2010 and 15.1% now. That’s still quite high. But by putting extra weight on unemployment, the index helps explain why 2010 was so much worse for Democrats.

 Steve H. Hanke, a professor of applied economics at Johns Hopkins University, produces an international version of the Misery Index. To the unemployment rate and inflation rate he adds the prime bank lending rate, which captures the cost of credit in an economy, then he subtracts growth rate of inflation-adjusted per capita gross domestic product. (This is a modified version of a variant proposed by the economist Robert Barro.) In Mr. Hanke’s latest index, for 2021, the U.S. is more miserable than 42 countries, but less miserable than 101.

Both the Hanke and Oswald variants point to risk in the years ahead. The Federal Reserve is raising rates to tame today’s inflation. If that lifts unemployment, the Oswald index soars. If interest rates and unemployment climb, the Hanke index soars, too.

It’s something that harks back to Mr. Okun’s point: Curing inflation with recessions can just swap one form of misery for another.

Write to Josh Zumbrun at [email protected]