Friday, 9 May 2008

Hysteresis - why Labour may not bounce back

The concept of hysteresis is one of the most interesting in economics. It is also one of the most complex. To give a flavour of it in a brief blog post, you will excuse me for simplifying a little.

The economic cycle acts on individuals, firms and on the public sector. During recession, firms may downsize staff and rationalise costs and stay in business. When recession ends, their trading activity may return to previous levels, but their use of human resources probably won't; they'll be making and selling the same number of widgets as before but with fewer staff. IT, technology, flexible working, outsourcing some elements of production will all have been exploited to maintain competitiveness. This effect tends to erode during the boom phase as the firm becomes less efficient and then is repeated at the next down phase of the economic cycle.

The public sector reacts much more sluggishly, if at all, during the down cycle but will tend to expand during periods of growth. Over time, the tendency of the public sector is to employ more and more people because it never fully sheds load during recession. The key to managing the process is to maintain tight constraints on public sector growth during boom periods, or privatise large sectors of the public sector. Right. So how does this affect Labour, you ask?

Well actually, it affects the Tories just as much. And the Lib Dems.

Labour's voting membership - members less than six months in arrears with their subs - was probably at or under about 150,000 before the May elections. They have been losing about 20,000 members a year. The 10p tax debacle and other voter anger will no doubt have caused a further haemorrhage in membership. Now suppose Labour recovers in the opinion polls, that they launch a slew of populist policies, dismantle the worst excesses of Zanu Labour control freakery. Will those members come back? Nope. All the parties are losing members rapidly, and even the Tories' current high standing in the polls isn't reflected in hordes of people queuing up to join. Each swing of the political cycle sees the parties with fewer and fewer members. That's hysteresis.

But whereas a firm that continually adapts through innovation can succeed with fewer and fewer people making the same number of widgets (to a point where they will merge, takeover other firms, expand into other areas, vertically or horizontally integrate and so on) a political party can't survive without members. Or rather, can only survive the hysteresis by cushioning against the effects of the political cycle in the same way as the public sector cushions against the economic cycle - by subventing public funds.

Don't expect the State Funding issue to go away this summer - it will be high on Gordon Brown's agenda.

No comments: