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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Who will win the Copeland by-election?

Labour face a tricky task in holding onto the seat. 

What’s the Copeland by-election about? That’s the question that will decide who wins it.

The Conservatives want it to be about the nuclear industry, which is the seat’s biggest employer, and Jeremy Corbyn’s long history of opposition to nuclear power.

Labour want it to be about the difficulties of the NHS in Cumbria in general and the future of West Cumberland Hospital in particular.

Who’s winning? Neither party is confident of victory but both sides think it will be close. That Theresa May has visited is a sign of the confidence in Conservative headquarters that, win or lose, Labour will not increase its majority from the six-point lead it held over the Conservatives in May 2015. (It’s always more instructive to talk about vote share rather than raw numbers, in by-elections in particular.)

But her visit may have been counterproductive. Yes, she is the most popular politician in Britain according to all the polls, but in visiting she has added fuel to the fire of Labour’s message that the Conservatives are keeping an anxious eye on the outcome.

Labour strategists feared that “the oxygen” would come out of the campaign if May used her visit to offer a guarantee about West Cumberland Hospital. Instead, she refused to answer, merely hyping up the issue further.

The party is nervous that opposition to Corbyn is going to supress turnout among their voters, but on the Conservative side, there is considerable irritation that May’s visit has made their task harder, too.

Voters know the difference between a by-election and a general election and my hunch is that people will get they can have a free hit on the health question without risking the future of the nuclear factory. That Corbyn has U-Turned on nuclear power only helps.

I said last week that if I knew what the local paper would look like between now and then I would be able to call the outcome. Today the West Cumbria News & Star leads with Downing Street’s refusal to answer questions about West Cumberland Hospital. All the signs favour Labour. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.