Loading
WHEN JIMMY CarterCPIGDPCPIYour browser does not support the element., the Democratic candidate for American president in 1976, wanted to criticise the record of the incumbent Gerald Ford, he reached for a number invented by the economist Arthur Okun. A rough-and-ready indicator of the state of the economy, what Okun called the economic discomfort index added together the unemployment rate with the level of inflation. Four years later Ronald Reagan, the Republican candidate, renamed the indicator to the pithier misery index and used it against Mr Carter, who had presided over rising inflation and unemployment. Reagan went on to win the election and the subsequent one, in 1984, as the index fell on his watch.Taken at face value the misery index pointed to a victory for Kamala Harris, the Democratic candidate in America’s latest presidential election. Over the course of President Joe Biden’s term, in which Ms Harris served as vice-president, the index fell from 7.8 to 6.7. Many of the biggest moves came in recent months, as inflation dropped and the labour market stayed strong. America was, according to this measure at least, far less miserable than when Reagan declared “It’s morning again in America” in 1984, when Bill Clinton won re-election with the New Economy in 1996 and when Barack Obama won his second term in 2012. America was, supposedly, less miserable than had been typical for the past 40 years. Ms Harris still lost.Misery loves company. Electorates representing roughly half the world’s population have voted so far in 2024 and incumbents have performed poorly nearly everywhere. From Emmanuel Macron in France (misery index of 10.9 on the eve of the polls) to the Liberal Democratic Party in Japan (4.9), governing parties have been rebuked by angry voters. That is worrying many economists, who think such results will lead policymakers to take the wrong lesson from the post-pandemic era. The combination of fiscal and monetary stimulus has allowed for a rapid and job-rich recovery, avoiding the decade of stagnation that followed the financial crisis of 2007-09. That things could have been worse, however, does not seem to have spurred voters to reward their leaders.Economists appear to be missing something fundamental about how people experience the economy. There have been previous attempts to better outline the contours of misery. In 1999 Robert Barro, then a macroeconomist at Harvard, suggested augmenting the index with long-term interest rates and the estimated gap between economic growth and its potential. He also suggested that cumulative change over the course of a term, rather than the index’s absolute level, would better predict elections. It did not. Al Gore, the Democratic candidate in 2000, lost despite an improvement in Barro’s index during Mr Clinton’s second term.Still, Mr Barro made two good observations that economists are relearning. The first is that the starting-point matters. Much of the improvement in the misery index over Mr Biden’s term came from falling unemployment, which was at 6% when he took office With incomes supported by loan forbearance and stimulus cheques, however, voters felt less pain than they had done in previous recessions. Then the cheques stopped and inflation soared; real disposable personal income is still lower for many Americans today than in 2021, despite a red-hot jobs market. Many voters would have compared Mr Biden’s economic record with Donald Trump’s before the pandemic, when the misery index hovered around its lowest since the second world war.The second lesson is that interest rates matter. Including both rates and inflation in a misery index may look like double-counting: according to Irving Fisher, an economist, interest rates incorporate expectations of future inflation. Consumer-price indices () do not include interest rates even though most non-economists regard them as one of the most important prices for their standard of living. Yet a recent working paper by Marijn Bolhuis, Judd Cramer, Karl Schulz and Larry Summers investigating why surveys of consumer confidence across rich countries have diverged from “hard” indicators of the state of the economy—such as growth and joblessness—concludes it is entirely explained by increases in interest rates. Including payments for mortgages and car loans in corrects the anomaly.Post-pandemic stimulus has helped America’s economy outpace its peers, reduced inequality and shrunk the racial employment gap—all of which are welcome. In trying to explain why voters rejected these gains on election day, fans of the policy are now pointing fingers. The media, they say, were too negative. The Democrats did not do enough to trumpet their successes. Conservative central bankers, more concerned with their own legacy, overreacted to inflation, much of which would have gone away on its own. A better approach would be to think about what can be done next time to keep miserable side-effects to a minimum.That could mean finding alternative ways to control inflation shocks without resorting to tight monetary policy. But here, too, unworkable ideas prevail. Isabella Weber, an economist, has argued (incorrectly, in this newspaper’s view) that companies used the post-pandemic inflation surge as an excuse to disproportionately raise prices. She has advocated buffer stocks and price controls to keep inflation down. To temper post-pandemic inflation, though, the buffer stocks would have had to be colossal; price controls, meanwhile, can provoke shortages. Getting support policies right, thereby avoiding an inflationary shock altogether, is a surer bet. The reality is that Mr Biden’s second stimulus package, passed in 2021, boosted demand when the economy was struggling to produce. That exacerbated inflation, which left voters feeling poorer. Misery may be the result of an unforced error.
