The Fed Doesn't Care About Your Misery

Maybe you've noticed, but supporting stock and bond markets isn't the central bank's top priority  

- Michael P. Regan

Quantifying a human emotion is a tricky endeavor, whether the effort is focused on an individual or an entire society. But one 1960s economist's effort to attach some numbers to the notion of national misery resonates especially loudly today, at the end of a truly miserable year for most rank-and-file investors.

Arthur Okun, who chaired the Council of Economic Advisers for a couple of years under President Lyndon Johnson, is known among economists for Okun's law, which establishes a relationship between unemployment and economic output.

But he may be best-remembered for creating what's called the misery index. The index's calculation is delightfully simple: Just add the rate of inflation to the unemployment rate. Each input is responsible for a sort of economic misery. With the unemployment rate, it's intense misery for the percentage of the working population who are out of work and the members of the households who depend upon them. For inflation, it's less acute economic pain, but it affects a much larger swath of the population-everyone who's confronted with that suffocating feeling when consumer prices are rising faster than paychecks.

Of course, Okun's measure isn't perfect. There are plenty of other sources of long-term national misery: Sept. 11 or the 1.1 million deaths from Covid-19, for example. And there are plenty of examples of more trivial and ephemeral miserysay, the US soccer team's loss to the Dutch in the World Cup or Seinfeld going off the air. Double-digit losses in the stock and bond markets surely count as sources of national misery.

But here's where Okun's misery index matters: The Federal Reserve these days considers those to be the soccer-andSeinfeld variety of misery, not the type that would motivate its members to change policy.