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A New Definition of Misery

Floyd Norris 2009-12-18 The New York Times lotura

These Days, Countries in Misery Have Lots of Company

Grafikoa

That is one lesson from the history of a new “misery index,” created by Pierre Cailleteau, an economist and sovereign risk analyst at Moody’s.

The index adds together a country’s budget deficit, as a percentage of gross domestic product, and its unemployment rate. It captures the current conundrum for many countries: their economies need stimulus, but their budgets may not be able to afford it.

The unfortunate leader in that misery index among the countries cited by Moody’s is Spain, with an index of 30, thanks to an unemployment rate of 20 percent and a deficit of 10 percent of G.D.P. The figures are Moody’s estimates for 2010.

While Spain is extreme, the indexes are high for many countries, with the United States and Britain both expected to score over 20 next year.

In 2005, as can be seen in the accompanying graphic featuring 13 European countries and the United States and Iceland, the two countries with the highest misery indexes were Hungary and Greece, at 15.1, or just more than half Spain’s current figure. In 2010, only three countries are expected to be lower than 15.1 — the Czech Republic, Germany and Italy.

In the glory days for the world economy, when no one would have thought to put together this index, two countries managed to have negative figures, which can happen if budget surpluses are large and unemployment rates are minuscule.

Iceland, whose economy was once viewed as a testament to the strength that could come if a country cultivated a strong and expanding financial industry, had a negative misery index in 2000 and again from 2005 through 2007.

Ireland, which also had a growing banking system and seemed to have positioned itself as the economic star of the euro zone, had an index reading of less than 5 for nine consecutive years, from 1999 to 2007, including a negative reading in 2000.

Those countries have been among the worst hit by the financial crisis. Both had property booms that left prices dangerously overextended, and both have been forced to sharply cut government spending despite rising unemployment.

The original misery index, created by the economist Arthur M. Okun, added together a country’s unemployment rate and its inflation rate. That index came to symbolize stagflation, a significant problem of the 1970s, when consumer prices continued to rise even as economies stagnated and unemployment rose.

The new index could prove to be an indicator of the dilemma facing many developed countries in coming years. If economies do not recover quickly, there will a strong case for fiscal stimulus to bring down unemployment. But there are limits to the budget deficits that some countries can run, providing a counterargument against such stimulus.

A lesson of the stagflation era — one taught by Paul A. Volcker in the United States — was that countries sometimes had to get inflation under control even if it did prolong economic pain and raise unemployment. It would have been much better, in the long run, if inflation had been attacked earlier.

This new misery index serves to highlight the risks the world took by not being afraid of the inflation of recent years — inflation not in consumer prices but in real estate and financial assets. Instead, gains in those areas were taken as proof of excellent economic policies. Now, the world is paying for that excess, and finding the price to be high.

Floyd Norris comments on finance and economics in his blog at nytimes.com/norris.

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abendua 21, 2009 - Posted by | Ekonomia | , ,

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