October 28, 2004

Given the simplicity and elegance of the misery index, one wonders why there has been so little mention of the misery index during the campaign. Is the misery index losing its clout? We believe the loss of popularity to be related to the capital market's development of the last thirty years. Absent capital markets, expenditures are constrained by current income. In a world with perfect capital markets people are no longer constrained by current income, they are constrained by their net worth and liquidity. Therefore their net worth determines their consumption path and their current income mostly determines whether they borrow or not. Rather than focusing on the misery index, individuals focus more on their personal P/E ratio (net worth over income) as the key determinant of their economic well-being.

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