One of the most common words in the economic jargon of 2022 is stagflation – economic deterioration along with rising prices of living – two phenomena that should make it very difficult for the household public. This is especially so if the economic recession weakens the labor market: it is more difficult to find work and many remain unemployed, or worse, despair and are thrown out of the employment cycle.
The talk of stagflation is surprising, because we were supposed to be in another year of growth with the disintegration of the corona, and also because we did not know what Putin was planning. In addition, stagflation is rare: the last time it was discussed in the economic discourse was in the 1970s, which were characterized by high inflation and high unemployment – even then against the background of the oil crises that befell the decade.
But is there any stagflation at all today? This is not just a question. Because if so, it puts the world’s central banks at a disadvantage: it is very difficult to deal with the usual tools – if they raise interest rates quickly to curb inflation, they will cause a recession. If they keep interest rates low to help the economy, inflation will worsen.
To answer this question, one can use one of the oldest indices, the “The Misery Index”. The index was created by American economist Arthur Melvin Okon, who was a member of the Economic Advisory Council to President Johnson in the 1960s. Okon went for a simple principle: linking the unemployment rate with the inflation rate. The higher the index (because unemployment has risen, or inflation, or both), the worse for the consumer public, and if inflation falls but unemployment rises, as in a “classic” recession, the direction of the index will show whether overall their situation has improved or worsened.
True, this is a rough index – after all, inflation has several definitions: general, basic (without food and energy) and more. The unemployment rate is also misleading – it could be falling because fewer people are looking for work – in which case the index has fallen and will not flood it. Still, over time the index is a good indication of the well-being of the individual and is used to this day.
Professor Steve Hanka, Professor of Applied Economics at Johns Hopkins University in Waltimore, recently published his version of the index, which links the unemployment rate, inflation and bank interest rates – the “bad” factors, and subtracts the GDP growth rate per capita (the “good” factor).
And what did his data show for the summary of 2021 (“Pre-Putin”)? He ranked 156 countries in descending order, and we are in 130th place with a score of 6.7. moment! 165 is the best (lowest index), so we are definitely in excellent shape.
There are also some big surprises in the index that you probably did not think of. According to Hanka, the most “happy” country for its citizens in the world last year was Libya (!). How? The country’s civil war has diminished, and as a result its revenues from oil sales, which in 2020 suffered from blockages and closures on ports, increased 3.7 times in 2021. As a result, its GDP per capita increased by 62.6%, propelling it to first place in the “happiness” index (or last in the “unhappiness” index). Cuba, Venezuela and Sudan received the highest index, and their citizens are very, very unhappy. Well, that’s less surprising.
The US, for example, has an index of 10.8, in 102nd place. In May this year, its index of misery was 12.2, but in April 2020, with the outbreak of the corona, it jumped to 15.3. Especially, but when the plague broke out they were sadder.
Bottom line, stagflation cannot be indicated in the world. In many countries the misery index is still low and does not correspond with such an economic situation. However, since the index can be calculated – with its various definitions – on a monthly basis, it can and should serve as a dynamic tool in the hands of decision makers, in terms of the restraint measures they choose to take – their choice, timing and intensity.
Ronen Menachem is the chief economist at Mizrahi Tefahot Bank