The Unassuming Economist

From a paper by Ullrich Heilemann and Roland Schuhr:

“Okun’s misery index (MI), the sum of unemployment rate and inflation rate, is a popular measure of the state of the economy and thus of (macro) ” Economic Discomfort” as well as of government per-formance. We calculate the MI and some augmentations for Germany (until 1990: West Germany) for the period 1951–2021 and test them against a survey-based indicator of government performance (“ZDF-Politbarometer-Index”). The results support Okun’s choice of variables, but reject its augmenta-tion by the growth rate and the deficit ratio. Just as importantly, the effect of unemployment is almost twice as large as that of inflation, and both change considerably over time, as stability tests show. In assessing the performance of governments, MI rankings differ from those of their augmentations. Since the mid-1970s, however, the differences are limited. Barro’s Misery Index, a comparative ap-proach to assessing governments that is an alternative to MI, reaches opposite judgments than MI, but lacks empirical support. The implications for policymakers are both sobering and reassuring: as policy simulations and implied Phillips type trade-offs reveal, the sensitivity of MIs to macroeconomic policy is very low. This may not only hold for Germany given similar international evidence on MIs. The fact that the MI covers the two main macroeconomic objectives, is based on the latest official data, easy to calculate and internationally comparable makes Okun’s Misery Index a useful indicator of Economic Discomfort for Germany as well.”