Taking Risks and Reaping Rewards

How Miserable Are We?

It was reported that the US lost over half a million jobs for the second month in a row in December, making 2008 the worst year for job losses since 1945. Unemployment increased to 7.2%, the highest in 16 years.

Clearly not good news, but how bad is it?

In the 1960's, economist Arthur Okun came up with a measure of overall economic performance called the Misery index. It's a simple calculation that adds the unemployment rate with the inflation rate. The higher it is, the more miserable we are. Today, with 7.2% unemployment and about 1% inflation provides a 8.2 misery index. But how bad is that?

Historically, the lowest misery index recorded was 3.74 in 1953 and the highest was 1980 at over 20. The average over the period from 1948 to 2007 is 9.42.

Wait. What's that you say? The average misery index over the last 60 years is higher than today?

Can that be right? We are below average right now in our level of economic misery?

Sure doesn't sound right based on the what's in the news.

But yes, it's right. Why? Because in the late 1970's and early 1980's, things were way more miserable. Inflation was high AND unemployment was high. Those years move the average up so today we are still below our long term average for misery.

Feel better?

The main reason we were more miserable back then was inflation. Today, inflation is very low, but back then it was over 14%. Think about that for a second. Similar job losses, but prices were rising at a rate of 14% annually. Now that's miserable.

What can we learn from this?

While clearly our economy isn't doing well, times have been far more miserable than they are today. When we see stories in the news day after day about how miserable things are, it's easy to lose context and perspective.

If we don't suffer another surprise collapse, fraud, or meltdown, if we continue to make good economic decisions about how to handle the situation, and if we don't sell out to special interests or political whims, it's possible (more than a 50% chance) that we will look back on this more like we do the dot com bust, or the 87 stock market crash, than 1929 disaster that lead to the great depression.

Things aren't good, but we have been far more miserable than this.