The phenomenon known as the Ratchet Effect demonstrates why reducing expenditure and organizational bloat proves far more challenging than allowing them to expand. This principle manifests across various scales, from individual households to major institutions.
Consider a typical household scenario: A couple begins with modest living expenses, but as their income grows, their spending habits expand correspondingly. Eventually, even with a substantial income of $300,000 annually, they find themselves struggling with significant debt, unable to scale back their lifestyle.
Institutional settings present even greater challenges in reversing this pattern. A telling example comes from higher education, where one major public university saw its administrative staff increase dramatically from 3.2 administrators per 100 students in 1993 to 13.5 by 2007, coinciding with the rise of student loan debt.
This expansion creates deeply entrenched interests resistant to change. Organizations develop an implicit mission of maintaining the status quo, while continually finding new ways to justify increased spending under the guise of improvements.
The human element plays a crucial role, as individuals naturally resist downsizing and sacrifice while embracing visible symbols of status and success. Financial aspects compound this problem, as taking on debt proves far easier than making the sacrifices necessary to eliminate it.
A particularly concerning aspect is how extreme conditions become normalized over time. For instance, student loan debt has grown from negligible levels in early 1993 to $1.8 trillion by the end of 2024, yet this massive increase has become accepted as normal due to its gradual progression.
The path to potential collapse becomes increasingly difficult to reverse. Organizations become rigid and brittle, making it virtually impossible to reduce expenses without threatening their entire structure. This creates what can be termed a Rising Wedge Model of Breakdown, where attempted reforms often lead to counterproductive outcomes.
Typically, when organizations attempt to “cut fat,” they actually end up eliminating essential functions while preserving inefficiencies. The most capable employees, recognizing the dysfunction, often leave first. Those who optimistically try to implement reforms eventually burn out facing institutional resistance, leaving management to those who may lack the necessary competence to address fundamental issues.
The student loan system provides a perfect illustration of these dynamics. Prior to 1993, American universities successfully educated millions without creating massive student debt. The situation deteriorated significantly after the 2008-09 financial crisis, when zero interest rate policies made borrowing appear more manageable, and student loans became virtually impossible to discharge through bankruptcy.
This system particularly benefits wealthy investors who hold securitized student loan debt as income-producing assets, while creating a generation of debt-burdened graduates. Now, as higher education faces declining revenues, institutions struggle to reduce administrative bloat, with even modest reductions threatening institutional stability.
Looking ahead, this pattern seems likely to repeat across various sectors of society, from household finances to corporate structures and government institutions. The common thread will be the tendency to preserve inefficiencies while sacrificing essential functions, leading to potential systemic failures.
The solution requires more than simple budget adjustments or spreadsheet revisions. What’s needed is a fundamental transformation of organizational culture and values. Without such comprehensive change, meaningful adaptation to new economic realities appears unlikely, suggesting challenging times ahead for institutions resistant to genuine reform.