Inflation versus unemployment: Which misery will it be?

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The most recent inflation and unemployment data tell us that economist Arthur Okun’s famous “Misery Index” is again riding high, leaving most of us a little lower in the saddle.

The index is based on the percentages found in the Consumer Price Index and the unemployment rate. Added together, the two measures hit 12.2 for May, following 11.9 and 12.1 for March and April. Now, it seems the Federal Reserve is attempting to quench the flames of inflation by allowing the unemployment rate to head north. If successful, one form of misery will be exchanged for another. Okun invented the index in the 1970s after serving in the Lyndon Johnson White House and later observing the stagflation that followed President Richard Nixon’s 1971 decision to sever the linkage between the dollar and gold. Since first becoming a popular measure of well-being, improvements or reversals in the index have come to be seen as an indicator of a president’s political prospects.

When President Joe Biden came into office, the index stood at 7.7%. Prior to that, it had hit 15.0% in March 2020 in association with the COVID-19 shutdown and then began falling. It is now headed north again, up by 4.5 percentage points since Biden took office. At this point, the increase under Biden’s watch ranks fourth among all White House occupants since 1948. The index went up 9.2 points when Nixon was in office, 7.0 points during the Carter administration, and 5.7 points during the Eisenhower years. As for recent comparisons, it fell during the Clinton, George W. Bush, and Obama years and hardly budged during the Trump administration.

Of course, there are different underlying situations and stories associated with each presidential period, and these should be considered. For example, some had to cope with past periods of high inflation and high unemployment followed by disruptions caused by Arab oil embargoes and policies taken to ease the associated pain. In some cases, the inflation component of the index was energized by central bank decisions to increase the supply of money in the economy — something the Federal Reserve has done recently to cover Congress and the president’s stimulus spending.

There are other parallels today. For example, rising oil prices are again causing trouble. But with the current 3.6% unemployment rate, almost all of the index increase is coming from the inflation component, and that includes far more than oil prices. Even our unusually low unemployment rate is creating some forms of misery. Consider the thousands of flight cancellations stemming from the inability to staff airports and planes, or the unhappiness that comes when restaurant owners must close dining rooms for lack of servers.

Some scholars argue that, based on empirical studies, if given a choice, consumers would rather have more inflation than higher unemployment. Clearly, the pain from unemployment is concentrated among the jobless, while inflation tends to spread the misery across a vast number of people (while hitting lower-income people the hardest). This trade-off lies at the foundation of the consternation over the Fed’s efforts to hammer down inflation by slowing the economy, which will inevitably increase unemployment.

Ultimately, the misery index reminds us of the importance of avoiding inflation in the first place. After all, inflation is fundamentally a monetary phenomenon, and humans control the flow of money into the economy and, therefore, the flow of misery.

Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, a dean emeritus of the Clemson College of Business and Behavioral Sciences, and a former executive director of the Federal Trade Commission.

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