Word of the day: Hysteresis

Too long in a slump, and the slump starts to get permanent.

The Financial Times reports this morning that the Olympics don't seem to be leading to quite the tourist boom expected:

The games have attracted as many as 100,000 foreign visitors [per day] to London – more than in previous Olympics. But, on its own, that number significantly lags behind the estimated 300,000 foreign tourists [per day] who could be expected in a typical year.

As Richard Murphy points out, this means that one of the great hopes for bringing the country out of recession appears to be fading away. Which means the word of the day is hysteresis.

In general terms, hysteresis is similar to intertia; it is the concept that some things which are hard to get going may then require little input to maintain, and even more effort to reverse.

In specific economic terms, it is the theory that persistent levels of high unemployment raise the "natural" rate of unemployment, also known as NAIRU, the non-accelerating inflation rate of unemploymet. This is the level of unemployment at which, under neo-classical economics, inflation stays low and steady. (As a side-note, yes, neo-classical economics holds that a certain amount of unemployment is good. "Full employment" is thus a bad thing, because it leads to spiralling inflation)

Although it's not specifically related to GDP, it is always a fear when dealing with persistent unemployment and long periods of stagnation and recession. The cause of the phenomenon comes when layoffs in a particular sector increase the bargaining power of the remaining workers. as there are fewer of them left, they can demand higher wages, which become "sticky" in nominal terms, if the period of unemployment lasts long enough. If, at the end of the recession, the business then wants to hire new employees, they have to pay them the new, high wage. In practice, this means that either unemployment stays high permanently, or inflation goes up until the value of the high wage is back, in real tems, to where it was.

It doesn't look like we are seeing the "increased wages" part of the problem yet (since wages are very much stagnating), but that hasn't stopped Citigroup's Ajai Chopra warning everyone:

Our analysis of such hysteresis effects shows that the large and sustained output gap, the difference between what an economy could produce and what it is producing, raises the danger that a downturn reduces the economy’s productive capacity and permanently depresses potential GDP.

A street cleaner passes the Jobcentre Plus in Bath. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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The big problem for the NHS? Local government cuts

Even a U-Turn on planned cuts to the service itself will still leave the NHS under heavy pressure. 

38Degrees has uncovered a series of grisly plans for the NHS over the coming years. Among the highlights: severe cuts to frontline services at the Midland Metropolitan Hospital, including but limited to the closure of its Accident and Emergency department. Elsewhere, one of three hospitals in Leicester, Leicestershire and Rutland are to be shuttered, while there will be cuts to acute services in Suffolk and North East Essex.

These cuts come despite an additional £8bn annual cash injection into the NHS, characterised as the bare minimum needed by Simon Stevens, the head of NHS England.

The cuts are outlined in draft sustainability and transformation plans (STP) that will be approved in October before kicking off a period of wider consultation.

The problem for the NHS is twofold: although its funding remains ringfenced, healthcare inflation means that in reality, the health service requires above-inflation increases to stand still. But the second, bigger problem aren’t cuts to the NHS but to the rest of government spending, particularly local government cuts.

That has seen more pressure on hospital beds as outpatients who require further non-emergency care have nowhere to go, increasing lifestyle problems as cash-strapped councils either close or increase prices at subsidised local authority gyms, build on green space to make the best out of Britain’s booming property market, and cut other corners to manage the growing backlog of devolved cuts.

All of which means even a bigger supply of cash for the NHS than the £8bn promised at the last election – even the bonanza pledged by Vote Leave in the referendum, in fact – will still find itself disappearing down the cracks left by cuts elsewhere. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.