The misery index: definition, history, calculation
- The poverty index is a measure of a country’s financial health.
- The misery index is calculated using several economic factors, such as inflation and unemployment.
- Politicians, experts and academics may refer to the poverty index more than investors.
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Money may not buy happiness, but there is often a correlation between economic opportunity and personal well-being. After all, you probably won’t be very happy if you can’t afford the basic necessities, find a job, or get a loan.
Trying to find an exact measure of happiness – or misery – can be difficult. And that’s where the poverty index comes in.
The misery index is an economic indicator that determines the financial situation of an average person. It uses several simple inputs to create an easy-to-understand and repeatable measure of a nation’s poverty levels.
Factors that enter the misery index
It may be important to take a closer look at each of the factors in the poverty index to understand how the indices work. Focusing on the Hanke’s Annual Misery Index (HAMI), which we will discuss later, these factors are:
- Annual unemployment rates. Unemployment measures the percentage of people who are actively looking for work but cannot find it.
- Annual inflation rates. Inflation is the rising costs of goods and services. As the prices go up, you need more money to buy the same thing, which is why inflation could lead to misery.
- Bank loan rates. The rates that banks pay for short-term loans, which can affect the rates that consumers pay on loans and lines of credit.
- The evolution of gross domestic product. Real gross domestic product (GDP) measures the change in a country’s economic output, after accounting for inflation or deflation.
A higher number is worse because it indicates that a country is more miserable. In 2020, Venezuela (3,827.6), Zimbabwe (547) and Sudan (193.9) topped HAMI with the highest scores. Overall, the median of the 156 countries included was 23.4.
The history of the misery index
The misery index has undergone several revisions over the years. But the first index of misery was called the economic discomfort index, and it was simply the sum of the rates of inflation and unemployment.
Arthur Okun, economist and member of President Jonhson’s Council of Economic Advisers, created this first clue so that the president can get a quick read of the country’s situation. It became popular in the 1970s and got stuck when journalists and presidential candidates used it as a talking point during campaigns.
âFor Okun, it was just inflation plus unemployment,â says Steve Hanke, professor of applied economics at Johns Hopkins University in Baltimore. “Unemployment is bad, it’s misery.”
Robert Barro, a Harvard economist, created a new Barro Misery Index (IMC) in 1999. He added two factors: the change in interest rates (based on long-term government bond yields) and the growth rate of gross domestic product (GDP). âHe added something that removed poverty, which was economic growth,â Hanke said.
In 2011, Hanke created his own revised misery index. Later, Hanke’s Annual Misery Index (HAMI), the index considers unemployment, inflation and bank credit rates to be negative values. âIf it’s harder for you to get credit and you have to pay more, that makes you more unhappy. It makes life more difficult, âHanke explains. It then offsets the sum of these by the percentage change in real GDP per capita, a positive factor.
Unlike the Barro index, the HAMI can be applied worldwide, and Hanke publishes a annual table poverty index scores for different countries.
Criticisms of the misery index
If the power and popularity of the misery index come from its simplicity, it also opens it up to criticism.
For example, it does not include general factors that may be important to an individual’s happiness or misery, such as growth in real wages or consumer confidence. And he uses the unemployment rate, which is a lagging indicator – the economy is already doing badly when people lose their jobs and may have started to recover before unemployment rates fell.
But Hanke says that’s not really the problem, “the misery index is not a forecast.” And while other indicators may include nuances that could help gauge or predict misery, Hanke notes that HAMI is popular because – rather than despite – its simplicity and transparency.
âEveryone sees it and can understand it,â he says. “You can measure a lot of other things, but nobody understands them, so they never went anywhere.”
The financial report
A poverty index can give you a snapshot of a country’s current poverty levels based on its rates of inflation, unemployment, interest, and real GDP. âThe reason it’s used, and it’s really more in the political sphere and the political world, is that it’s easy to understand,â Hanke explains. “If the economy collapses, your political polls will start to collapse.”
However, individual investors generally do not rely on a misery index when making investment decisions. Even if you want to use it as a factor in your decision making, say when deciding between several foreign funds, be aware that it is not intended for investors.