In physics hysteresis refers to the dependence of the state of a system on the history of its state. For example, the magnetization of a material such as iron depends not only on the magnetic field it is exposed to but on previous exposures to magnetic fields. This "memory" of previous exposure to magnetism is the working principle in audio tape and hard disk devices.
In
Economics it refers to (to the best of my understanding, which is always limited) the economy effectively having a memory, particularly about unemployment.
Prolonged high unemployment can cause systemic changes that build higher unemployment into the system permanently.Full employment is (in one use of the term) the maximum employment rate in a given economy that does not not trigger high inflation or be otherwise destabilizing.
A hot academic economics topic these days is how prolonged high unemployment
reduces the natural full employment rate. The system optimizes itself for higher unemployment in such a way that even if the economy recovers, the "cap" on employment is lower than before the down-turn.
This is a persuasive reason why, even if one didn't give a damn about the welfare of millions of human beings, it is unacceptable to "ride out" this mini-depression. We cannot just say that "yeah, unemployment will stay high for a long time" in the way one waits for a storm to pass... the problem is that prolonged high unemployment is a progressing trap.
Anyway, I was struck to see how casually the International Monetary Fund uses "hysteresis" in saying that
the US needs to (deficit) spend more to reduce unemployment. And the IMF is not a wild-eyed lefty think tank. It is, like all large economic organizations, pretty darn conservative.
September 14, 2010, 11:08 am
The International Monetary Fund Is Not Insane
Paul Krugman
That shouldn’t be startling; but these days it is. Given the way conventional madness has overtaken so many international institutions, the IMF’s reasonable, if much too cautious, new paper on employment (pdf) is actually a welcome surprise. “A recovery in aggregate demand is the single best cure for unemployment” — what a relief to see the Fund actually saying that.
Also, note this passage:
There is a risk of hysteresis in some countries, particularly in the United States and Spain, given the sharp increase in the duration of unemployment and the persistent nature of the shocks (e.g. to the housing sector) that lie behind the cyclical weakness in the economy and hence the increase in unemployment (see Benes et al., 2010 and Vitek, 2010). Hence to the extent that countries have fiscal space, exploiting it when there is a risk of hysteresis may create jobs in the short run without hurting the medium-run fiscal outlook.
That’s written in international organization speak, but it seems like a response to this post; and it even seems as if the IMF may be sorta kinda endorsing the view that austerity in times like these may be self-defeating, even in terms of purely fiscal concerns.
http://krugman.blogs.nytimes.com/2010/09/14/the-international-monetary-fund-is-not-insane/http://www.osloconference2010.org/discussionpaper.pdf
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