Problems with Kerry's misery index

Kennedys trailing him wherever he goes, John Kerry is working hard to emulate the successful Democrats who preceded him. He utters so many Kennedyesque declaratives and imperatives that the listener half expects him to run out and deploy some old ones. ("Ask not what your country can do for you; ask what you can do for your country.")

Mr Kerry has also developed a few presidential-style data points. His latest is a "Misery Index"; an update of the Misery Index deployed by Jimmy Carter in his successful 1976 campaign against Gerald Ford.

The Kerry version tracks seven factors to evaluate the quality of middle-class life. Three relate to prices: healthcare costs, petrol costs and university costs. Others are more general: median wage, the home ownership rate, the bankruptcy rate and private-sector job growth. Up is good. Down is bad. Under President Bill Clinton things were up spectacularly; George W. Bush's rating shows him erasing Mr Clinton's gains.

But it is worthwhile to go back to that original index, if only as a reminder of how miserable an economy can get.

It was devised by the late economist Arthur Okun, who added the inflation rate to the unemployment rate to arrive at his number. A high figure was bad (the opposite of the Kerry system). In 1975, the Misery Index hit 16, the highest rate in a quarter of a century. In 1980, it hit 20.

In fact, the 1970s and the early 1980s together were purgatory. US unemployment was in the range of 7 or 8 per cent, so far above Japan's and Germany's that the difference looked permanent. Inflation made any business that relied on inventories a challenge; chief financial officers spent months debating the relative merits of "Lifo" and "Fifo" accounting rather than concentrating on expansion. Inflation combined with high taxes to scare the American innovator, so that many good ideas stayed on the shelf. Borrowing became a challenge, especially when Paul Volcker, then Federal Reserve chairman, pushed interest rates up to record levels; retailers by the thousand keeled over for want of credit. It no longer seemed so sure generally that enterprise would be rewarded. Looking at the US, the world saw decline.

Against that backdrop, Mr Kerry's decision to speak of "misery" seems a bit of a stretch. As, a non-partisan website, points out, today the original Misery Index stands at 7.4; less than half its level in Mr Carter's last year (Ronald Reagan hoist Mr Carter by his own index). The measure is only an increment worse than where it stood during Mr Clinton's second term. This despite a recession and September 11 2001. Citizens today may be dissatisfied but they are not generally miserable.

But to turn to Mr Kerry's own index, which shows Mr Bush failing on six of seven counts, here we find three general problems.

The first is with the choice of the individual measures, which seem contrived. Instead of using straightforward unemployment, the Kerry team has used a much more amorphous notion: new job creation. (Face it: if unemployment is heading south, do those from a party affiliated with organised labour really care whether the jobs are old jobs or new ones?) The Kerry index measures university fee increases; as notes, Mr Kerry uses only the increases at public universities, because including private ones would yield a less drastic number. Wages: when you include those infamous Bush tax cuts, the slight decline Mr Kerry finds erodes to the point of near-insignificance. It has been said before: if you torture numbers enough, they will confess to anything.

The second quibble is with what the Kerry index leaves out. If you are going to have variables, why not include America's crazy rate of litigation, which slows growth considerably? But the graver omission is Social Security, the US pension system.

Payroll taxes are now at their highest in history; they represent the largest tax for the majority of households. Mr Kerry knows this; it is, after all, the only thing that lends truth to his argument that the rich are paying "less" in taxes. "Payroll tax burden" would therefore be a valuable component to include in the index - and one, by the way, of which many US leaders are unaware. When they were young, payroll taxes were much lower. Today, this crowd are big earners but only have to pay Social Security on the first $90,000 or so of their income. So their effective average payroll tax rate is lower than what workers pay and they do not know what a high rate "feels" like.

The last problem with the Kerry index is subtle but, in its way, the worst of all.

The old index had only two components. They were, one could argue, about freedom and individual responsibility; the freedom to work and to trade in a relatively stable currency. Petrol prices, for example, were not included, even though they were the great shock of the decade. The new index has seven components. This is a proliferation of wants. Its message is essentially: "It used to take two things to make me happy but now it takes seven." It also suggests government should have a role in satisfying those wants. What is more, many of the items in the Kerry index are about affordability, which is not the same as entitlement but close to it. In short, the new JFK is saying that government owes the people more. "Ask not what your country can do for you" indeed.

© Copyright 2004 Financial Times

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