Thursday, January 22, 2009

How bad is it? - Part 2

The other day in an effort to understand just how bad the economy is currently, I looked at historical unemployment rates, and compared them to the current unemployment rate. Based on that analysis, I concluded that things were not great, but they are not as bad as it has been in the past, or even in Europe.

Today I want to spend a little more time on the topic of the economy, and how bad it is relative to past economic troubles.

In the 70's, a new economic indicator was introduced to track just how bad the economy was at the time. This indicator was called the "Misery Index". The name alone should clue you into how bad things were. The Misery Index was created by economist Arthur Okun, and is derived by adding the unemployment rate to the inflation rate. The thought was that the more people who are out of work, and the more the prices of things are rising, then the more miserable everybody will feel.

So how does the misery index of today, compare with misery indexes from the past? If you take December 2008's unemployment rate of 7.2 and add it to the December 2008 inflation rate of .09 you get a misery index of 7.29, or 7.3 if you round to nearest tenth. The 5 worst Misery Index numbers since 1970 are listed in the table below:



Misery Index











So why does any of this matter? Because right now the media and politicians are convincing everyone that the United States is on the verge of an economic collapse. They are telling us that the government has to intervene in order to save the economy. Not just intervene, but spend trillions of dollars, and maybe even start to take over businesses and implement more government controls.

Things have been worse, and were worse in 1981 when Ronald Reagan became President. The economy goes through cycles. The economy is also strongly affected by public sentiment. The more people panic, and believe that the end is near, the worse the economy will get. The conspiracy theory side of me wonders if there isn't more to all the negative news and political talk. Hopefully not.

My message is to not give up on capitalism, and let the government take over the economy. It may not be perfect, but it is better than the alternatives. If you want to see how government run economies worked, look at Cuba or the Soviet Union.

Data from and

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