11/06/09 — MOC economist: New metric measures economic distress

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MOC economist: New metric measures economic distress

By Catharin Shepard
Published in News on November 6, 2009 1:46 PM

Mount Olive College economist and associate professor Dr. Paul Cwik, working in conjunction with the Foundation for Economic Education, has developed a new tool for measuring America's financial troubles.

The Distress Index, which launched last week, is a new take on a Carter administration-era economic indicator known as the Misery Index. The Misery Index examined unemployment rates and inflation during the recession in the 1970s.

Cwik's goal in creating the new index was to come up with a straightforward number that the public could easily understand, while taking multiple indicators of economic health into account. So far, the index has "performed really well," he said.

According to the numbers, the news is not good, Cwik said.

"Has the economy improved? Yeah. A lot? No. Are we in some trouble? Definitely," he said.

The index that was generated using data from the month of September 2009 sits at 58.4, more than 10 points over the benchmark that indicates economic problems.

"If we look at the graph and the numbers, we basically see we're in trouble when we're at 47," Cwik said.

The Distress Index examines five figures, including the gross domestic product, total capacity utilization and the debt/income ratio in addition to the two measures of the Misery Index. While many people are familiar with the GDP, the market value of all final goods and services in the country, total capacity utilization and the debt/income ratio are often more confusing, Cwik said.

Total capacity utilization measures the idle capacity of producers, the time that goods or services are not being produced.

"It (total capacity utilization) basically says if we're running 24-7, full guns, we're at 100 percent capacity," Cwik said. "We want to get the opposite of that, the idleness."

And the debt/income ratio measures household debt obligations as a percent of disposable personal income -- for example, the amount of money people have to spend on paying credit card bills each month, he said.

All of the numbers used to create the index are taken from data collected and published as public information by the U.S. government, and the data is not altered or number-crunched, Cwik said.

Based on data input, the current economic climate calculated by the Distress Index is comparable to the recession of the 1970s and early 1980s. The highest amount of economic distress Cwik charted, 63.9, occurred in March of 1975, just two years after the historical low, 29.5, in February of 1973.

The peak point of the current recession registered on the Distress Index at 61.7 in June of this year, just short of the historical high. Reliable data is not available for the Great Depression era, so that period of economic distress is not included in the historical analysis, Cwik said.

His own suggestions for solving the economic crisis are twofold: Stop the bailouts to encourage liquidation of failing businesses, and make it easier for people to put more money into savings. While it may be a painful process that could lead to higher unemployment, like an unpleasant trip to the dentist's office, it's necessary, Cwik said.

"If you don't take care of the cavity, it's just going to get worse," he said.

Cwik is an associate professor of economics for the department of management resources in the Tillman School of Business at MOC. He teaches courses in micro- and macroeconomics, corporate finance and environmental economics.

The Foundation for Economic Education, founded in 1946, is a non-profit educational foundation that does not accept taxpayer money.