3 Cheers! The Predictive Power of the

13th October 2011

The misery index was devised by Arthur Okun and is the sum of inflation and unemployment. If both are rising, people have less money in their pockets and are therefore – the theory goes – more miserable. Of course, it is possible to debate whether money can indeed buy happiness, but that may be one for the philosophers rather than the economists.

As Schroders economists Azad Zangana and Anja May debate here – the concern is that this is part of a long-term upward trend in ‘misery'. This is not merely a theoretical concern – there has been a moderate inverse relationship between the misery index and UK consumer confidence indicators over the last 20 years. It also been shown to have an impact on crime. 

In this piece, economist David Smith shows how inflation impacts on retail sales: "One easy way of looking at its impact is on retail sales. Consumers spent 4.3% more last month than a year earlier but all this was accounted for higher prices, leaving volumes flat. Had inflation been lower, consumers might have boosted growth, rather than running to stand still."

The misery index also has some value for investors. Zangana says: "Changes in consumer confidence can be predictive of changes in economic variables such as the savings rates and household consumption, both of which are useful in predicting the performance of different asset classes. This is where the value of the Misery Index could lie from an investor's perspective."

Each country has its own misery index. Here's the Economist's view on the value of the index – and with it the scores for different countries.

Unsurprisingly, the US is also seeing its misery levels rise: In this article, Jay Hancock says that it could become an election tool with republican candidate Mitt Romney talking of the ‘Obama Misery index'. The misery index was used to good effect in the 1970s by Jimmy Carter, forming part of his campaign to unseat incumbent Gerald R Ford.

Hancock says that the misery index may not take into account the full extent of the prevailing mood because it does not factor in house prices and stagnant income. Gary C. Hufbauer, an economist with the Peterson Institute, which is based in Washington, has devised an ‘augmented' misery index, which includes these metrics. This shows misery levels as high as the early 1960s and bad news for Obama: 

The irony of the high readings for misery in the UK is that the coalition Government has been the first to place a premium on generating happiness. The French government has also been investigating measuring happiness.

While this may seem like a brave time to be assessing the nation's emotional well-being – certainly if the comments at the end of the article are a guide – Prime Minister Cameron and President Sarkozy may be relying on the research of Joseph E. Stiglitz of Columbia University and Amartya Sen of Harvard University, which showed that GDP was an inadequate measure of financial well-being. Previous research by Richard Layard (who advised the Labour government) suggested that increasing wealth did not always equal increasing happiness.

The Himalayan kingdom of Bhutan has chosen to focus on "gross national happiness," complete with the 4 pillars, the 9 domains and the 72 indicators of happiness. In this piece, Pavan K Verma, India's ambassador to Bhutan, said: "The Gross National Happiness looks at the quality of life, how much leisure time you have, what's happening in your community, and how integrated you feel with your culture."

Of course, plenty might argue that, with the longest working hours in Europe and high divorce rates, the UK scores pretty poorly on those measures as well. However, if the fate of the UK economy is largely in the hands of Eurozone politicians, it does give politicians some alternative targets to improve the nation's well-being.

More from Mindful Money:

Market crash: The secret to investment timing

Going east to prevent finances going west

Investing in Africa: How to avoid the western blues

Capitulation: Are we there yet?

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