The misery index: An economic indicator that measures the financial well-being of the a country's citizens

• The misery index is a measure of a nation's financial health.
• The misery index is calculated using several economic factors, such as inflation and unemployment.
• Politicians, pundits, and academics may reference the misery index more than investors.

Money might not buy you happiness, but there's often a correlation between economic opportunity and personal wellbeing. After all, you likely won't be very happy if you can't afford basic necessities, find a job, or get a loan.

Trying to find an exact measure of happiness — or misery — can be difficult. And that's where the misery index comes in.

The misery index is an economic indicator that determines how the average person is doing financially. It uses several simple inputs to create an easy-to-understand and replicable measure of a nation's misery levels.

The factors that go into the misery index

Taking a closer look at each of the misery index factors can be important for understanding how the indexes work. Focusing on Hanke's Annual Misery Index (HAMI), which we'll cover later, these factors are:

• The annual unemployment rates. Unemployment measures the percentage of people who are actively looking for work but can't find a job.

• The annual inflation rates. Inflation is the rising costs of goods and services. As prices increase, you need more money to buy the same thing, which is why inflation could lead to misery.

• Bank lending rates. The rates that banks pay for short-term loans, which can impact the rates that consumers pay on loans and lines of credit.

• The change in gross domestic product. Real gross domestic product (GDP) measures the change in a country's economic output, after accounting for inflation or deflation.

A higher number is worse because it indicates a country is more miserable. In 2020, Venezuela (3,827.6), Zimbabwe (547), and Sudan (193.9) topped the HAMI with the highest scores. Overall, the median value of the 156 included countries was 23.4.

In the news: US consumer prices increased by 6.2% from October 2020 to October 2021. While unemployment rates are dropping, high inflation could lead to a high misery index score, especially if interest rates increase and real GDP doesn't.

How to calculate the misery index

To calculate the HAMI, add the inflation, unemployment, and lending rates. Then, subtract the GDP per capita to determine the current misery index.

HAMI = [Unemployment + Inflation + Bank‐​Lending Rate] − Real GDP Growth

For the HAMI, these figures come from several sources, including the Economist Intelligence Unit, International Monetary Fund World Economic Outlook, World Bank, and the International Labor Organization.

The history of the misery index

The misery index has undergone several revisions over the years. But the first misery index was called the Economic Discomfort Index, and it was simply the sum of the inflation and unemployment rates.

Arthur Okun, an economist and member of President Jonhson's Council of Economic Advisers, created that first index so the president could get a quick read on how the country was doing. It became popularized in the 1970s, and stuck as journalists and presidential candidates used it as a talking point during campaigns.

"For Okun, it was just inflation plus unemployment," says Steve Hanke, a professor of applied economics at Johns Hopkins University in Baltimore. "Unemployment is bad — that's misery."

Robert Barro, a Harvard economist, created a new Barro Misery Index (BMI) in 1999. He added two factors: the change in interest rates (based on long-term government bond yields) and the gross domestic product (GDP) growth rate. "He added something that subtracted from misery, which was economic growth," says Hanke.

In 2011, Hanke created his own revised misery index. Later coined Hanke's Annual Misery Index (HAMI), the index considers the unemployment, inflation, and bank‐​lending rates as negative values. "If it's harder for you to get credit and you have to pay more for it, it makes you more miserable. It makes life more difficult," explains Hanke. It then offsets the sum of these with the percentage change in real GDP per capita, a positive factor.

Unlike Barro's index, the HAMI can be applied across the world, and Hanke releases an annual table of different countries' misery index scores.

Note: Other types of misery indexes have also been created, such as Tom Lee's Bitcoin Misery Index, which is intended to measure how miserable Bitcoin holders are, the Bloomberg Misery Index, which is based on inflation and joblessness forecasts.

Misery index criticisms

While the misery index's power and popularity come from its simplicity, that also opens it up to criticism.

For instance, it doesn't include broad factors that may be important to an individual's happiness or misery, such as real-wage growth or consumer confidence. And it uses the unemployment rate, which is a lagging indicator — the economy is already doing poorly when people are losing their jobs, and may have begun recovering before unemployment rates drop.

But Hanke says that's not really the point, "the misery index is not a forecast." And while other indicators might include nuances that could help evaluate or predict misery, Hanke notes that the HAMI is popular because of — rather than in spite of — its simplicity and transparency.

"Everyone sees it and can understand it," he says. "You can measure a lot of other things, but no one understands them, so they've never gone anywhere."

The financial takeaway

A misery index can give you a hot take of a countries' current misery levels based on its inflation, unemployment, interest, and real GDP rates. "The reason that it's used, and it's really more in the political sphere and the policy world, is that it's easy to understand," says Hanke. "If the economy is tanking, your political polling is going to start tanking."

However, individual investors generally don't rely on a misery index when making investment decisions. Even if you want to use it as a factor in your decision making, say when you're deciding between several foreign funds, know that it's not intended for investors.