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John Judis Is Wrong


New Republic senior editor John Judis takes issue with one of six statistics I presented in a New York Post article comparing how this recession stacks up, so far, against those of 1974-75 and 1981-82.

That statistic would be the misery index. Judis carefully ignores all the other cyclical indicators I presented–GDP, industrial production, unemployment, and mortgage rates:

According to Reynolds, the degree of economic crisis should be measured by the ‘misery index’ . . . You add up the rate of unemployment and the rate of inflation. The higher the total, the more trouble we are in. By this measure, Reynolds argues, the economy today is in much better shape than it was, say, in the 1970s when inflation was in double digits. . . . But there is one small problem with this argument. What has distinguished depression-like downturns–from the U.S. in the 1930s to Japan in the 1990s–is precisely the absence of inflation and the looming threat of deflation. Across this page, Joshua Rosner shows . . . why a low misery index may indicate the onset of a depression rather than a recession. That’s pretty much economics 101–but even such elementary observations elude our Republican conservatives.

But there is one large problem with Judis’s argument. It isn’t true. As the table below shows, the misery index began rising in 1929, did so continuously through 1934, and remained high through the early ’40s.

In 1927-28 the U.S. experienced mild deflation, with consumer prices falling 1-2 percent a year. Yet the economy boomed and the misery index was very low, below 3 percent (it is nearer 8 percent today). Then, the misery index rose annually–from 3.2 percent in 1929 to 25.4 percent in 1934. Prices rose in 1934-37, so those without jobs faced the added misery of paying more for less.

It is plausible that the misery index presents too rosy a picture in 1921 or 1931-32, when prices were falling by 9 to11 percent a year. But the combination of inflation and high unemployment in 1934-37 was nonetheless genuinely miserable, as it was again in 1973-75 and 1980-82.



The misery index remained high, at 15-18 percent, through 1942. At that point, wartime price controls and rationing began to cause measured inflation to be greatly understated and real income overstated. And the huge military draft lowered measured unemployment by pulling young men out of the labor force. (In other words, neither component of the misery index was meaningful during the war.)

What about Japan? I presented a paper at Keidanren in Tokyo in 1998 that attributes most of the country’s problems to (1) costly Obama-like “fiscal stimulus” packages combined with (2) suicidal tax policies aimed at depressing the prices of land and stocks while punishing consumers. An appendix to that paper explains why monetary policy was indeed deflationary, but money alone does not explain chronic stagnation. Consumer prices in Japan rose 1.5 percent last year, yet industrial production began falling in Japan before it did in the U.S., and fell more sharply. Japan’s population has been shrinking for demographic and tax-related reasons (a brain drain), which makes their unemployment rate (or misery index) uniquely uninformative.

To sum it up, the misery index was 14-25 percent from 1932 to 1942. That’s not low. So Judis is wrong to claim “the U.S. in the 1930s” shows “why a low misery index may indicate the onset of a depression.”

– Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth.