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February 2017 Policy Study, Number 17-1

   

The Great Recession and the "New Normal" Economy

   

The Misery Index and Today's Current Economic Crisis

   

 

Arthur Okun, an economist, an advisor to President Johnson, and a scholar at Brookings Institution, coined the term “Misery Index”.  His concept was simple. He added the inflation rate and unemployment rate, and the sum of the two was the Misery Index. A review of the data from January of 1974 to January of 2016[12] (See Appendix 1) shows that the Misery Index was at its highest in the year 1980, when it ranged from 19.29 percent to 21.98 percent. In April 2015, the Misery Index was at its lowest at 5.2 percent. At the time of writing this article (June 2016), the Misery Index is somewhere between 5 to 6 percent, and it fluctuates on a monthly basis.

 

The concept of the Misery Index was a good start by Arthur Okun. Since then, several economists have made some adjustments by including other factors to measure the Misery Index. The idea is to arrive at a better index that would reflect the real misery that the general public is facing in the economy.[13]

 

The Misery Index simply cannot be just about a few factors included in the statistical data and analysis. What is the Misery Index? I am still not sure whether there is one precise definition for this term. I would guess that most economists, when using this term, may imply the general economic condition of an average person in the country. Does this approach provide a true reflection of misery? The term “misery” may be more than just an economic condition faced by the people and calculated based on certain data. While determining the Misery Index, we may be ignoring the fact that data provided by the government may not be accurate. For example, unemployment data are certainly not a true representation of actual unemployment. Those who are left from the roll of unemployment may at times be large segment of the population. Ignoring this large segment of the population that is unemployed and calculating the unemployment rate will certainly provide a misleading rate for the Misery Index. Thus, the true Misery Index may not reflect the real misery faced by the people in this county. There may be other intangible factors that ought to be taken into account to determine the level of real happiness or misery of the people at large. This will require further study, and some thought may have to be given to the fact that other factors ought to be considered to determine the actual misery faced by the people. But for now, I will work with the data that are publicly available.

 

The current number indicates that the Misery Index is low. But if one were to conduct an informal survey, one would easily detect the high levels of anxiety, fear, concern for the safety of individuals and the family, etc., that exist in this country across the board, causing high levels of misery among the general population. These behaviors may lead to outbursts of emotion that lead to crime, at times violent crime. We ought to be thinking about other factors to determine an index that will be a true representation of misery or happiness among the population of the USA. Regardless of what economists may come up with in order to calculate the Misery Index, and even if we are able to calculate this index pretty precisely, does it help in solving the economic problems of our society that may lead to real happiness for people at large? I am afraid that the answer may not be what people may want to hear. In order to make my point, I will focus my attention on one or two aspects that we are currently facing and their consequences in the future. If nothing is done to address these burning issues, then the Misery Index will continue to rise (based on the new formula). 

 

Let us take our national debt as a percentage of our GDP, which has been rising rapidly. In 1974, the ratio of debt to GDP was 31 percent, but in 2015 it had risen to 101 percent. (See Appendix 2). The debt is projected to continue to grow in the future. What happens if the debt continues to grow, but the GDP remains stagnant? This will result in the ratio of debt to GDP becoming larger and larger. Our national debt exceeded $18 trillion on December 15, 2014. In 2016, the debt is projected to exceed $19 trillion. For my non-economist friends, any textbook on macroeconomics will tell you that, “Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a year.”[14] The best way I can explain this to a person who does not have any background in economics is to consider an individual/family’s entire gross income (receipts) for the year. This is analogous to GDP for the country. We all know that an individual or a family may borrow several times more than their annual gross income and still be economically sound. However, in the case of the individual, he or she either borrows to consume or borrows to buy assets. If the individual continues to have the ability to pay off his or her debt installments and build equity in his or her assets, then there are not a whole lot of problems. What happens to the person who is unable to pay his or her installments and continues to borrow more to pay the installments on the debt, increasing debt annually? How long can this person continue before his or her ability to meet the debt obligation comes to an end? This person may end up in bankruptcy court. How does our government function when it comes to borrowing? The borrowing keeps increasing every year, and there is no asset to back this debt against the borrowed money. Most of our borrowing is for immediate consumption (spending).

 

Other factors of concern are our receipts, outlays, and surpluses and deficits (Appendix 3). This chart shows that our deficit has risen from $6.1 billion in 1974 to $438.4 billion in 2015. It is estimated that the deficit is likely to grow in excess of $600 billion in 2016. Let us take a closer look at our annual budget deficit and its relationship with the national debt. In order to maintain high level of debt, the cost is high. From 2008 to 2015, interest payments on debt have ranged from $400 billion to $455 billion (See Appendix 3). Thus, in order to maintain this debt, about 13 to 20 percent of our receipts go to service the debt. If you compare the interest payments on debt with the amount of budget deficit, then with few exceptions, in certain years the amount is close to the amount of our budget deficit. Therefore, one major reason for our budget deficit is the huge interest payment on our debt. The interest payment on debt is likely to increase tremendously in the future. A blog in the Wall Street Journal[15] stated that interest costs to service such debt may reach $800 billion a year by the end of the decade. In fact, the blog also pointed out that interest cost will surpass defense discretionary spending in 2021 and discretionary spending for nondefense in 2022. More or less rising cost of interest payment has also been highlighted by the Washington Post.[16]

 

So, a major portion of our receipts will go toward servicing the debt. This means there will remain less money to work with for the benefit of the people, and this will lead to a higher Misery Index. The higher Misery Index will lead to certain political consequences, which may be worse than the economic woes we are facing.

 

The stark conclusion is that a large percentage (anywhere between 20 to 25 percent) of our receipts will go toward interest payment for the next few years, and this percentage may rise in the long run. This certainly puts a squeeze on our ability to do other things. So, what is the solution? Do we even have a solution for this crisis? The answer is that we most likely still have time to fix the problems, provided there is a political will to do so. In the absence of exercising the political will and making hard choices to fix the problems, our solutions may be limited. If we do nothing, in order to meet the current level of public service, the government may have to adopt one of the measures pointed out below:

 

  • Raise Taxes:  By raising taxes, the government may try to increase its receipts to provide the same level of services. This option is a bad idea.  In fact, it is a very bad idea.  This will put a squeeze on businesses as well as wage earners. The direct impact on the economy will be adverse, which will further shrink the economy, and the opportunity to increase receipts would not be likely. There is data that shows that higher taxes should be a short-term measure and cannot be used as a long-term solution to correct the problem of fiscal inefficiency in the system. I believe this will not solve our problem in the long run.


  • Cut Spending:  While this may have some merit, a larger question remains:  what should be cut? When politicians talk about cutting across the board, then it is not a good idea. You cannot throw the baby out with the bathwater. Both Republicans and Democrats toe the ideological line, and they try to protect their turf in this battle. I do not intend to discuss what should be cut, but regardless of where the cuts take place, they will have some adverse economic effects in certain sectors of the economy. Government spending plays a very big role in keeping the economy going. Severe cuts may lead to recession. However, if this path is taken, then it should be done in a manner that will be beneficial to this country over a period of 10 years or so. Cuts should be managed in such a way that will have the least adverse consequences to the economy and not substantially increase the Misery Index. Doing nothing is not an option.

 

  • Borrow More Money:  This solution does NOT solve the problem. In fact, it makes it worse. This is the problem we are trying to rein in and solve.
  1. Print More Money:  This is also a disaster because it may cause inflation, or worse, a stagflation much more severe than what we faced in the seventies.

As a nation, we should be thinking about the structural problems we currently face in our political structure and our economic structure. We have no choice but to address these issues immediately.

 

Highlighting just these two factors (i.e., national debt and the service cost of this debt), brings us to the conclusion that with the economy going south, the misery of the people is likely to increase dramatically, and no statistical data will be able to correctly calculate the level of misery of the people. In the end, if the misery level of the people goes beyond a certain point, then it will lead to political crisis which may be beyond our control. Before we reach that climactic point, it is very important to think through the structural problems we face in our politics and the political will that is needed to fix the problem and avert the disaster that may soon be upon us. Let us not forget that it is the businesses, working-class people, and the agricultural community in this country who contribute toward economic development and growth. With the right fix, economic growth will take place at a pace at which the misery of the people can be managed, and we may be able to avert the disasters that other nations in history had to endure. 

 

   

 

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