| STEVE H. HANKE | Steve H. HANKE |
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CONTRIBUTING EDITOR Professor of Applied Economics at the Johns Hopkins University & Columnist at Forbes magazine |
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Hu versus Sarkozy |
To evaluate these claims, an index of economic “misery” for each U.S. administration since World War II is presented in the accompanying misery index chart. The original misery index was developed by the late Arthur Okun, a distinguished economist who served as chairman of the President’s Council of Economic Advisers in the Johnson administration. Okun’s index equals the sum of the inflation and unemployment rates.
While Okun’s index measures the absolute level of misery in the economy, it tells us little about whether things are getting better, or worse. In Getting It Right (1996), Harvard professor Robert Barro amended the Okun index. Barro’s index, which measures the change in misery during a president’s term, is the sum of the following four metrics: the difference between the average inflation rate over a president’s term and the average inflation rate during the last year of the previous president’s term; the difference between the average unemployment rate over a president’s term and the unemployment rate during the last month of the previous president’s term; the change in the 30-year government bond yield during a president’s term; and the difference between the long-term, trend rate of real GDP growth (3.1%) and the real rate of growth during a president’s term. These modifications had several effects; the data were smoother and more comprehensive, painting a more accurate picture of economic conditions experienced by the majority of Americans. They also allowed Barro to measure more accurately the relative change in the economy over the four years of a presidential term.
The data in the misery index chart speak loudly. Contrary to left-wing dogma, the Reagan “free-market years,” were very good ones. And the Clinton years of Victorian fiscal virtues – when President Clinton proclaimed in his January 1996 State of the Union address: “the era of big government is over” – were also very good ones.
The misery index pours cold water on the current critique of free markets – one that has taken on the characteristics of a religion that is embraced without investigation. Indeed, it makes one wonder if the critics actually tested their ideas by comparing them with anything that actually happened. To obtain an economic reality check, the misery index concept can be applied to any country where suitable data exist. Let’s take a look at Turkey.
A modified misery index – using all four of Barro’s metrics for the last two decades in Turkey – is presented in the accompanying chart. The index is the sum of the inflation, interest, and unemployment rates, minus year-on-year GDP growth.
Several features of the chart are noteworthy. First, the level of economic misery, while still elevated, has fallen dramatically since the mid-1990s. Second, the lira devaluations of 1994 and 2001 were associated with sharp upward spikes in the misery index. And third, while governments led by the Justice and Development Party (AKP) have done a good job of pushing the misery index down since 2002, there remains quite some distance to be traveled.
As an indication of just how far, consider that Turkey ranks 59 out of the 181 countries ranked in the World Bank’s Doing Business 2009 – a report that measures the vitality of free markets and the ease of doing business.
These set the stage for a significant initial fall in New Zealand’s misery index. The second stage of the decline in the index occurred during Ruth Richardson’s tenure as Minister of Finance in 1991-93, when she pushed through a number of additional liberal economic reforms. In late 1999, the Labour Party, with Helen Clarke at the helm, took power in New Zealand, where it stayed entrenched until November 2008. During that long stretch, the dramatic economic reforms of the late-1980s and early-1990s were eroded away and New Zealand’s misery index more than doubled.
President Hu took note of the main lesson of economic history: “go for free markets” and prosperity and longevity will follow.
