Word of the day: Hysteresis

Those with a scientific background might recall this term from their high school physics classes. In that context, it refers to a property of ferromagnetic materials (like iron, steel, nickel, etc). If you wind coils of wire around a piece of steel and run electricity through it, the device becomes attractive to other magnetic materials. When the power is cut, the magnetism drops considerably... but not to zero. The tendency for the magnetism to not drop to the old baseline but a new, higher one is known as hysteresis.

What some folks, like Paul Krugman (h/t Eschaton), are saying is that something like this applies to other things, such as unemployment rates:

Right now, I’m reading Larry Ball on hysteresis in unemployment (pdf) — the tendency of high unemployment to become permanent. Ball provides compelling evidence that weak policy responses to high unemployment tend to raise the level of structural unemployment, so that inflation tends to rise at much higher unemployment rates than before. And the kind of unemployment we’re experiencing now, with many workers jobless for very long periods, is precisely the kind of unemployment likely to leave workers permanently unemployable.

And this is precisely what is happening in the US. Check out this graph of the median duration of unemployment in that country:


There seems to be a sort of "ratchet effect", where even after the recessions (shown in grey) have ended, the median duration of unemployment increases. And what's happened in the last couple of years is something else again. The effect of this on a society cannot be good...

How long will the recovery last?

So far, the world economy seems to be on an upswing from the depths of the last couple of years. The participants in the G20 meeting have, in fact, agreed to slash their deficits by half. But is it really time for this? Paul Krugman thinks not:

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

From the New York Times (h/t flintlock at iTulip). Despite the dismissive attitude taken by flintlock and other iTulipers in that thread, I don't think Krugman's warnings should be ignored.