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.

Photo: Getty
Show Hide image

Fight: Arron Banks versus Mary Beard on the fall of Rome

On the one hand: one of Britain's most respected classicists. On the other: Nigel Farage's sugar daddy. 

Tom Lehrer once said that he would quit satire after Henry Kissinger – him of napalm strikes and the Nixon administration – received the Nobel Peace Prize.

Your mole is likewise minded to hand in hat, glasses and pen after the latest clash of the titans.

In the blue corner: Arron Banks, insurance millionaire and Nigel Farage’s sugar daddy.

In the red corner: Mary Beard, Professor of Classics, University of Cambridge, documentarian, author, historian of the ancient world.

It all started when Banks suggested that the fall of the Roman Empire was down to…you guessed it, immigration:

To which Beard responded:

Now, some might back down at this point. But not Banks, the only bank that never suffers from a loss of confidence.

Did Banks have another life as a classical scholar, perhaps? Twitter users were intrigued as to where he learnt so much about the ancient world. To which Banks revealed all:

I, Claudius is a novel. It was written in 1934, and concerns events approximately three centuries from the fall of Rome. But that wasn't the end of Banks' expertise:

Gladiator is a 2000 film. It is set 200 years before the fall of Rome.

Your mole rests. 

I'm a mole, innit.