The Real Misery Index

posted on June 25th, 2008 filed under: Real Estate News

The misery index, in its popular formulation, equals the sum of the unemployment and inflation rates.  It is usually associated with the peak of about 20% that it hit in 1980.  Bad old times.

Currently, the current misery index stands at just under 10%.  Optimists highlight how much lower the misery index is now than it was in 1980, and argue times are not so bad.

One problem in making that comparison is that the methodologies for calculating unemployment and inflation have changed.  Economist John Williams at shadowstats.com has made a name for himself showing that the rates are much closer to the bad old times if the old methodologies are used.

Another problem is that the misery index does not account for wage gains, and thus does not fully account for what makes people miserable.  A real misery index would subtract the rate at which wages are increasing from the sum of unemployment and inflation.  If your wage gains outpace inflation, you’ll feel better than if they don’t.  If your wage gains fall short of inflation, you’ll feel a bit . . . miserable.

The chart below shows the popular misery index without subtracting wage gains (blue line), and the “real” misery index after subtracting wage gains (red line).  Although we are still not in as bad a position as we were in 1980, we are a lot closer in terms of a real misery index than we are in terms of the popular misery index.

Chart.MiseryIndex

Of course, the misery index is statistical nonsense.  Adding a percentage level of unemployment to a percentage rate of price inflation makes about as much sense as adding horsepower to miles per hour.  But as long as we’re creating this statistical chimera, subtracting wage gains is the least we can do to make sense of the beast.

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posted by // This entry was posted on Wednesday, June 25th, 2008 at 4:54 pm and is filed under Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed.

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