Compound Growth and Health Care

Alex Tabarrok observes:

In my TED talk on growth and the economics of ideas I pointed out that average real world “GDP” per capita will be around $200,000 in 2100 if the world economy grows at the fairly modest rate of 3.3% per year on average. Many of the commentators at the TED website were incredulous. I think one of the reasons why is that most people have great difficulty understanding exponential processes.

That’s certainly been my observation as well. People are inclined to think that the difference between 3.3 percent and 3.1 percent must be tiny. But when you’re talking about 0.2 percent of a very big number—world output—and projecting it across a ninety-year span, you can get a big difference.

Much the same principle is illustrated by this chart from the Council on Economic Advisers illustrating the enormous gains that can be reaped through relatively small reductions in the rate of health care cost growth:


The 1.5 percent number would have big impacts, but looks it could really be achievable. Indeed, private industry at least claims that they’d be able to achieve those kind of reductions purely through voluntary measures that don’t even make key stakeholders scream and cry. That’s probably somewhat optimistic, but when you consider that a certain amount of screaming and crying could be inflicted you balance out and see that you’re looking at a quite plausible goal. The politics of getting there are difficult, but it’s really worth doing.