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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Is anyone prepared to solve the NHS funding crisis?

As long as the political taboo on raising taxes endures, the service will be in financial peril. 

It has long been clear that the NHS is in financial ill-health. But today's figures, conveniently delayed until after the Conservative conference, are still stunningly bad. The service ran a deficit of £930m between April and June (greater than the £820m recorded for the whole of the 2014/15 financial year) and is on course for a shortfall of at least £2bn this year - its worst position for a generation. 

Though often described as having been shielded from austerity, owing to its ring-fenced budget, the NHS is enduring the toughest spending settlement in its history. Since 1950, health spending has grown at an average annual rate of 4 per cent, but over the last parliament it rose by just 0.5 per cent. An ageing population, rising treatment costs and the social care crisis all mean that the NHS has to run merely to stand still. The Tories have pledged to provide £10bn more for the service but this still leaves £20bn of efficiency savings required. 

Speculation is now turning to whether George Osborne will provide an emergency injection of funds in the Autumn Statement on 25 November. But the long-term question is whether anyone is prepared to offer a sustainable solution to the crisis. Health experts argue that only a rise in general taxation (income tax, VAT, national insurance), patient charges or a hypothecated "health tax" will secure the future of a universal, high-quality service. But the political taboo against increasing taxes on all but the richest means no politician has ventured into this territory. Shadow health secretary Heidi Alexander has today called for the government to "find money urgently to get through the coming winter months". But the bigger question is whether, under Jeremy Corbyn, Labour is prepared to go beyond sticking-plaster solutions. 

George Eaton is political editor of the New Statesman.