I ran across the “Distress Index” today. It’s put out by the Foundation for Economic Education, an outfit I’ve never heard of before. They even have a nice chart showing how their index has performed over time.

I’m not a fan of indices. (Indices is preferred over indexes. Indexes proper usage is as a verb, its use as a noun being barbaric.) The problem with indices is that you can collect a set of statistics, put them together in a way that suits you, and you can create an index to support just about anything you want to say. The most egregious examples are the indices put out by various groups to identify the “Ten best places in America to live.” Of course, they are all crap. I could create an index that would show that Trona, California, is the best place in America to live.

For those who have never been to Trona, it is a small mining community located on one of the less convenient routes to Death Valley. It is nowhere, hot, dry, ugly, and covered with the white stuff they mine from nearby Searles Lake, a lake which hasn’t had standing water for at least 10,000 years. The white stuff is probably toxic. I figure living there must shorten your life expectancy by decades, but then if you are living in Trona, what’s to live for?

The point is that if you prefer Trona to almost anyplace else, your preferences qualify you as a certifiable nut, or you are a scorpion. Still, I could create an index that would rate it high. That index would have a high positive weighting for temperature and negative weightings for rainfall and population density.

In spite of my aversion to indices, I’m always drawn to them. I’m compelled to see how they are constructed. So, I followed a link to the Distress Index, and I saw how it is constructed. It turns out they have a problem with their index, and I offer my advice for free.

The Distress Index positively weights the Consumer Price Index (CPI), and high is bad here. This is just fine when we are having inflation. High inflation does lead to distress. The problem comes when the CPI is declining, as it is now. The result is that deflation is improving the index. Well, if inflation is bad, and it is, deflation is worse. As currently constructed, the index could report no distress in a highly deflationary environment. This is no good.

The correction is simple. Take the absolute value of the CPI and add it to the other indicators. The current index would then be 60.98, up from the reported 58.38. The index would still be below the high of 63.9 in 1975Q1 but it might help the Foundation for Economic Education people tell the story they are trying to tell.