WEBVTT NOTE The Distress Index 1 00:00:00.000 --> 00:00:04.000 This is much more than the six people I was anticipating yesterday. 2 00:00:04.000 --> 00:00:05.520 Nice. 3 00:00:05.520 --> 00:00:07.280 Okay, 4 00:00:07.280 --> 00:00:13.600 unlike these two previous papers which were serious in, you know, getting in there, 5 00:00:13.600 --> 00:00:17.720 this is really just a bit of fun. 6 00:00:17.720 --> 00:00:19.440 I 7 00:00:19.440 --> 00:00:24.120 put together this thing called the Distress Index. Now, why 8 00:00:24.120 --> 00:00:28.040 in the world would I do something like that? Well, we've all heard of the Misery 9 00:00:28.040 --> 00:00:34.880 index, right? And that's just simply inflation plus unemployment. And it was used as a political 10 00:00:34.880 --> 00:00:41.160 tool to say, aren't the Carter years just horrible and awful? And last fall, Mike Van 11 00:00:41.160 --> 00:00:47.320 Winkel of Fee, Foundation for Economic Education, said, hey, what we need is a new index, you 12 00:00:47.320 --> 00:00:55.320 know, something to update the misery index. And he said, well, it should be simple, it 13 00:00:55.320 --> 00:00:57.880 should be using existing data, 14 00:00:57.880 --> 00:01:00.240 and we want something that anyone 15 00:01:00.240 --> 00:01:02.440 could basically put together, 16 00:01:02.440 --> 00:01:04.240 so it shouldn't be heavily manipulated 17 00:01:04.240 --> 00:01:06.920 by all that econometric type stuff, right? 18 00:01:06.920 --> 00:01:08.840 Because look, the misery index was just 19 00:01:08.840 --> 00:01:11.500 inflation plus unemployment, okay? 20 00:01:11.500 --> 00:01:14.240 So, since this is business cycle theory, too, 21 00:01:14.240 --> 00:01:18.080 I figure I should show what a business cycle is, 22 00:01:18.080 --> 00:01:19.800 and we see that we've got our peaks, 23 00:01:19.800 --> 00:01:21.920 and recessions, and recovery, and peak, 24 00:01:21.920 --> 00:01:24.600 and the Austrian cycle theory is really, 25 00:01:24.600 --> 00:01:30.600 It's an explanation of this guy right here. It's an explanation of the upper turning point. 26 00:01:30.600 --> 00:01:39.600 And so when I put together the index here, I noticed that there was some strong correlation. 27 00:01:39.600 --> 00:01:46.600 But if you look at the data, I'm sorry, if you look at the newspapers, they're only talking about recession, right? 28 00:01:46.600 --> 00:01:52.600 Well, are we in a recession? Well, December 2007 was the beginning of the recession. 29 00:01:52.600 --> 00:01:59.000 Okay, fine. And then, well, June of 2009, we're out of the recession. Well, what does that mean? 30 00:01:59.000 --> 00:02:05.600 Well, that means we're here. That's what it means. If we've hit rock bottom and we're starting to come up, 31 00:02:05.600 --> 00:02:12.800 well, that's still bad, right? So, I want to talk about the bad, right? I want to talk about this, right? 32 00:02:12.800 --> 00:02:20.700 The stuff underneath, the under the trend part. So, the distress index isn't really trying to say, 33 00:02:20.700 --> 00:02:50.700 Are we in a recession? It's, are economic times bad? Are we in distress? So, the goal is to make it simple. The distress index uses no more than a handful of statistics, and they're chosen because they're widely known, widely recognized, and pretty uncontroversial. And all the data is collected from the normal places, from the federal government. 34 00:02:50.700 --> 00:02:56.820 If you go online, you'll see a little thing like this, and you can get that widget, and 35 00:02:56.820 --> 00:03:00.620 then you can put it in your own webpage and popularize it. 36 00:03:00.620 --> 00:03:07.220 And basically, it's important to emphasize that no statistic will ever fully articulate 37 00:03:07.220 --> 00:03:08.740 what's happening in the real economy. 38 00:03:08.740 --> 00:03:13.660 The real economy is made up of living, breathing, planning, acting individuals. 39 00:03:13.660 --> 00:03:18.860 Statistics are simply an abstraction as such, imperfect, nevertheless, this index can have 40 00:03:18.860 --> 00:03:19.860 some value. 41 00:03:19.860 --> 00:03:24.260 Why? Well, first it gives us a tool to help us interpret what the media and the government 42 00:03:24.260 --> 00:03:30.580 are telling us about the economy, right? If we have a high distress number, you know, 43 00:03:30.580 --> 00:03:35.220 well, we're out of the recession, yeah, but we're really hurting still. I think that's 44 00:03:35.220 --> 00:03:41.500 more significant. And then secondly, and Mike and I say, we hope it'll give us a voice to 45 00:03:41.500 --> 00:03:47.420 the taxpayer and the frustrating conditions he is enduring these days, the hope is that 46 00:03:47.420 --> 00:03:51.720 The Index will keep pressure on policy makers and opinion leaders to make decisions that 47 00:03:51.720 --> 00:03:55.580 improve the economy rather than distressing it further. 48 00:03:55.580 --> 00:03:58.020 And that's a big hope, right? 49 00:03:58.020 --> 00:03:59.620 Are politicians really going to listen? 50 00:03:59.620 --> 00:04:01.260 Oh yeah, no, probably not. 51 00:04:01.260 --> 00:04:02.940 But maybe, we'll see. 52 00:04:02.940 --> 00:04:04.660 Okay, so here it is. 53 00:04:04.660 --> 00:04:06.380 Here's what the Distress Index looks like. 54 00:04:06.380 --> 00:04:09.060 We'll get to the guts in a little bit. 55 00:04:09.060 --> 00:04:16.700 So after a cursory historical analysis on the index, we see that the results were fairly 56 00:04:16.700 --> 00:04:29.180 These are the yellow lines. The chart shows that the index from 1967 with the recessions 57 00:04:29.180 --> 00:04:34.060 being highlighted. There seems to be at least a superficial correlation of the index breaking 58 00:04:34.060 --> 00:04:44.260 above 47 that says, yep, we're in deep trouble. In most cases, the index appears to lead the 59 00:04:44.260 --> 00:04:54.260 New recessions beginning and end, which would seem to indicate that the index actually has a little bit of predictive power, but that's not really what it's supposed to be doing. 60 00:04:54.260 --> 00:05:00.260 Okay, so let's focus in on more modern times. 61 00:05:00.260 --> 00:05:06.260 And so here's 1996, and here's the recession. 62 00:05:06.260 --> 00:05:32.260 So, that brings me to some distressingly fun facts. First of all, the overall average is just under 44 when we're in a recession and when we're not in a recession. So, there's a swing there. 63 00:05:32.260 --> 00:06:02.260 by President, by time period, we can see that Carter was averaging about 46 and the 70s was about 44, Reagan, not much better, not much better, I mean if you remember under Reagan, unemployment was 7% consistently, 6 and 7%, under George Herbert Walker Bush, it's coming down, things are improving, and you can see the 90s, the 90s, 64 00:06:02.260 --> 00:06:07.700 were actually quite a great time, and I would attribute this to the technological revolution, 65 00:06:07.700 --> 00:06:14.820 the invention of, well, the unleashing of the internet and all of the costs coming down 66 00:06:14.820 --> 00:06:16.820 as a result of it. 67 00:06:16.820 --> 00:06:28.700 And then George W. Bush, we're back up at 46, and Obama's at 59.1, so, well, they're 68 00:06:28.700 --> 00:06:30.660 just distressingly fun facts. 69 00:06:30.660 --> 00:06:44.660 Okay, so what are the components? What makes this up? Well, there are five things. First, unemployment, CPI, and we'll just get that from the Bureau of Labor Statistics. 70 00:06:44.660 --> 00:06:55.660 Then we have gross domestic product, and people can argue, oh, should we use GDP? But what we're going for is something that people tend to recognize. 71 00:06:55.660 --> 00:07:04.460 Okay, now here we have total capacity utilization. Now, usually what this is doing is it's calculating 72 00:07:04.460 --> 00:07:11.020 the percentage of how much capacity is being utilized. And what we want to do is we want 73 00:07:11.020 --> 00:07:17.340 to take the reverse of that. So we subtract one. So if there's total capacity utilization 74 00:07:17.340 --> 00:07:23.540 that's 70 percent, then what we're doing is we're using 30 percent. That's what our 75 00:07:23.540 --> 00:07:53.540 Household Financial Obligations as a Percent of Disposable Personal Income 76 00:07:53.540 --> 00:08:04.380 Also, we're doing the negative of GDP, because if GDP is going up, then we're less distressed. 77 00:08:04.380 --> 00:08:10.380 So we flipped that around. 78 00:08:10.380 --> 00:08:16.780 And people then asked, well, shouldn't you use maybe some other things? 79 00:08:16.780 --> 00:08:22.640 And why not use PCE, Personal Consumption Expenditure, instead of CPI? 80 00:08:22.640 --> 00:08:27.560 So I looked into that, and the result was not much difference. 81 00:08:27.560 --> 00:08:34.200 And then they said, well, maybe you should use monthly GDP numbers from eforecasting.com. 82 00:08:34.200 --> 00:08:39.040 And so I plugged that in, and basically all it did was just create a whole bunch of extra 83 00:08:39.040 --> 00:08:40.040 noise. 84 00:08:40.040 --> 00:08:43.560 It didn't add anything extra. 85 00:08:43.560 --> 00:08:47.840 They said, well, maybe you should use real private fixed investment instead of GDP, right? 86 00:08:47.840 --> 00:08:51.920 Because that's what you Austrians care about, is capital structures, so maybe we should 87 00:09:21.920 --> 00:09:29.820 Statistical improvements, but the loss was in the simplicity of the index or the recognition of the statistics. 88 00:09:31.160 --> 00:09:33.040 Okay, so 89 00:09:33.040 --> 00:09:40.040 Here's all the different modifications that I threw in and basically they're all moving basically the same. 90 00:09:40.880 --> 00:09:48.160 The one that I do want to focus in on is this yellow one here, which is where I use real private fixed investment. 91 00:09:48.160 --> 00:09:51.180 And it looks like this. This is instead of GDP. 92 00:09:51.180 --> 00:10:01.460 What do we get? We get much larger swings, much bigger amplitudes, but basically attracts 93 00:10:01.460 --> 00:10:08.180 the same. So, what would be more appealing to the average guy on the street, real private 94 00:10:08.180 --> 00:10:19.220 fixed investment or GDP? We stuck with GDP. So, here's Distressingly Fun Facts Part 2. 95 00:10:19.220 --> 00:10:25.600 And the ones in red, these guys over here, are the numbers if we put real private fixed 96 00:10:25.600 --> 00:10:31.420 investment instead of GDP. And you can see it tracks about the same, right? I mean you 97 00:10:31.420 --> 00:10:38.680 just have larger amplitudes, but basically the numbers line up. Although in this one 98 00:10:38.680 --> 00:10:47.680 we see that Carter is actually better than Reagan and George Herbert Walker Bush here, 99 00:10:47.680 --> 00:11:05.520 The 70s were actually better than the 80s, which I found interesting as well. 100 00:11:05.520 --> 00:11:11.200 Is this something that people are going to be able to run huge econometrics, maybe, if 101 00:11:11.200 --> 00:11:12.200 you want. 102 00:11:12.200 --> 00:11:18.200 So, where can you get more of this? You're like, yeah, I've got to get this distress index stuff. 103 00:11:18.200 --> 00:11:28.200 Well, the fee website has this at distress-index and there's a data sheet that we put together. 104 00:11:28.200 --> 00:11:36.200 So, if you want all of the data, you can just download it and run your own regressions and do your own checking and such. 105 00:11:36.200 --> 00:11:44.280 and you can get the widget from fee.org and you can email me and if you want to do something 106 00:11:44.280 --> 00:11:50.800 or if you use it as part of your forecasting tool, let me know and if you have improvements 107 00:11:50.800 --> 00:11:55.680 or suggestions, email me and it will be extra super fun. 108 00:11:55.680 --> 00:11:58.920 So that's my index.