The Misery Index and GDP Growth – Then and Now

There is plenty of reason to be despondent about the economy.  Unemployment remains stubbornly high at 9.1 percent, the real estate market continues to be distressed, and a Eurozone crisis threatens to spill over into the U.S.

But it is not as if the U.S. has not suffered through bad economic times before.  Yes, there was the Depression in the 30s, but the latter half of the 1970s and early 1980s were also pretty bad.  For some reason, this seems to have been erased from our collective memory.

Some charts might help jog the memories of those who were old enough then to be cognizant of the situation and remind others of what their parents experienced during the earlier period.

The first chart starting in 1965 is the monthly unemployment rate.  As can be seen, we did reach current levels and higher in the early 80s.

The second chart is the inflation rate (monthly CPIs compared to a year ago).

Inflation was a real problem in the late 1970s and early 1980s.  It is currently creeping up, but it is nowhere near the level it was back then.

This brings us to the “misery index,” which is the sum of the unemployment rate and the inflation rate.  This is an index attributed to Arthur Okun as a quick way of summarizing how bad economic conditions are, though limiting it to these two statistics and giving them equal weight seems more due to convenience than the result of any thorough analysis.

Because of the stagflation in the late 70s and early 80s, the misery index was then much higher than it is now.

Finally, here is one more graph – the annualized growth rate of quarterly real GDP.

GDP growth went further into negative territory in 2008 than it did in 1980.  Note that there was a “double dip” in the 1980s, as the Fed squeezed the inflation out of the economy.

All this is not to minimize the severity of the current situation, but the earlier rough times should not be forgotten.  We should also recall the significant economic policy changes that took place in the 1970s.  For example, among other developments, the last meaningful link of the dollar to gold was broken when President Nixon closed the gold window to foreign countries, the Bretton Woods system of fixed exchange rates ended, and there was a failed experiment with wage and price controls.  Finally, we went through a recession essentially engineered by the Fed, which finally ended the high inflation and paved the way for better economic times.