I’m continually surprised that many people do not understand what I mean when I say that Medicare spending at the federal level is growing at an exponential rate. I recently discussed this issue through Twitter with Jeffery Sachs, a Harvard Ph.D. and long time advisor to the United Nations, and even he didn’t see that this growth was unsustainable and doomed to collapse.
Linear growth is easy to understand. When graphed, it moves in a straight line. If you put one penny in a jar every day, in 100 days you will have a dollar. But exponential growth is less intuitive. You probably learned about how to calculate exponents in the 5th or 6th grade. One way to use exponents is to multiply a number by itself a set number of times, represented by x^y.
Using the equation 2^100, on day 1, you would have 1 penny. After doubling on day 2, you have 2 pennies. On day 3, it doubles to 4 pennies. On day 5, it doubles again to 8 pennies, and continues like this until 100 days is reached. It’s simple, but deceptive because growth is slow at first, then suddenly it explodes. If you had exponential growth in the number of pennies, doubling every day, by day 100 you would have over $6 octillion (or $6,338,253,000,000,000,000,000,000,000). Of course, there have never been that many pennies made in the United States, or of all coins in the history of the world combined. It’s more than double the number of grains of sand on the planet.
A More Practical Example:
Lets use an example from nature with some smaller numbers so you can see how fast and deadly exponential growth is. Imagine you have a pond that is 4,000 square feet in size. There are fish in this pond and the fish need sunlight to live (the sunlight oxidizes the water through photosynthesis). There is a single lily pad on the surface that takes up exactly 1 square foot. Now imagine that every day, the number of lily pads double. (On day 2, there are 2 lily pads, on day 3, there are 4 lily pads, etc.)
Now, without doing the math in your head, guess how long will it take for the entire pond to be filled with lily pads and for all the fish to suffocate and die? 30 days? 60 days? Not even close. It would take less than 13 days for the entire pond to be filled with 4,000 lily pads. Lets go through each day.
Day 1: 1 lily pad
Day 2: 2 lily pads
Day 3: 4 lily pads
Day 4: 8 lily pads
Day 5: 16 lily pads
Day 6: 32 lily pads
Day 7: 64 lily pads
Lets stop there for a moment. On day 7, we are already more than half way toward all of the fish in our pond suffocating to death, and yet we only have 64 lily pads, meaning there is still 3,936 square feet of open pond water left; to put it another way, we still have 98.4 percent of our total resources left. Lets continue and see where the next 6 days take us.
Day 8: 128 lily pads
Day 9: 256 lily pads
Day 10: 512 lily pads
Day 11: 1024 lily pads
Day 12: 2048 lily pads
Day 13: 4096 lily pads
The day before all the fish died (Day 12), they still had plenty of sunlight. Almost half of the pond was still open to sunlight. In less than 24 hours they were all dead. Such is the threat of exponential growth. If you don’t understand what it looks like, it can catch up to you and destroy you before you even understand what is happening. Here is a chart tracking the quick demise of these imaginary fish.
What if the pond was expanded at the last minute? What if they managed to increase the size of the pond from 4,000 square feet by 4 times to 16,0000 square feet? Well, that would buy those fish exactly two additional days. The growth of the pond would need to keep up with the growth of lily pads in order for the fish to survive, but there will never be enough resources to satisfy exponential growth forever. Even if the the entire planet Earth was made of water, it would only take 53 days for it to become entirely covered in lily pads.
The US Economy is on Day 12
That is the lesson of exponential growth. No matter how many resources you think you have available, if an element of your economy is growing exponentially, you are going to have a serious crisis. Currently, US healthcare spending at the federal level is growing at 6.8 percent, doubling roughly every 10 years. This is slower than previous decades were spending increases were at 9.0 percent, but the total amount being spent is much larger now.
Regardless, our economy is not growing at 6.8 percent, something Jeffery Sachs couldn’t understand. After accounting for government spending, the real economy is virtually stagnant. All of the government’s rosy predictions on the sustainability of our public and private debts, the security of the dollar, the growth of the healthcare industry and the survivability of the entire nation is built on the false belief that we can continue to add to healthcare spending forever without consequence.
Does this graph of healthcare spending look familiar? It should, because like the lily pad example, this is an exponential growth curve and it too is unsustainable. For more on how this works, review my past essay here.
Now here’s the hard part, the part which will challenge your normalcy bias. These numbers are already so huge that today we spend slightly more on healthcare than we do on the Pentagon’s military budget. According to the projections by the Congressional Budget Office, by 2022, we will spend twice as much on healthcare than as we do on the Pentagon. I suspect this cannot and will not happen because regardless of whatever financial fictions are created on our computer monitors, our society’s real wealth will not be able to accommodate this spending growth. Yes, they can print the money to meet the demands of these charts, but not without broader consequences.
The practical effect is that the real economy will suffer. If spending continues to increase, a bond crisis and money printing become more and more likely, affecting the stability of the system. If they steady spending at current levels, (effectively cutting spending for promised beneficiaries) economic growth stagnates, debts come due and the economy collapses. If spending is actually decreased, the same thing happens even more quickly and dramatically.
Today is Day 12 for this economy. Like the fish in the pond, we are coming up against real physical limitations that impede growth and demand a return to balance: an economic trial that will spread to every sector of the economy.
Update 1/30/15: It’s worth noting that government spending operates in parallel to private spending on healthcare, which as I’m sure you are aware, is also rising dramatically. See this chart courtesy of ZeroHedge, which shows Q4 consumer spending:
