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Can the Internet of Everything bring back the High-Growth Economy?

The United States and the other major advanced economies are currently stuck in a seemingly endless twilight of slow growth. The numbers are ugly: The April 2013 forecast from the International Monetary Fund predicts that economic growth in Europe will average only 1.7% over the next five years. Japan is projected to average only 1.2% growth. Germany, held up as a paragon of success, is expected to grow at only 1.3% annually.

The United States is doing better than Europe and Japan, but not by much. The nonpartisan Congressional Budget Office is currently projecting that the underlying growth rate of the U.S. economy—the so-called ‘potential’ growth—is around 2.2% annually, compared to an average of roughly 3.3% in the post-war period.

Both Democrats and Republicans in Washington, miles apart on most issues, have accepted the slow growth scenario. That helps explain, in part, the political gridlock in Washington. An economy growing at barely over 2% per year doesn’t generate enough income to pay for everything that Americans need: Social Security and Medicare for the aging population, defense spending sufficient to handle critical threats, and support for essential government investment in basic research, education, and infrastructure. The longer that the slow-growth assumption gets locked in, the more it becomes a self-fulfilling prophecy.

Yet we are not stuck with the slow-growth scenario and the endless and frustrating Washington policy debates about dividing a shrinking pie. Over the past year, a series of studies from research institutes and industry have laid out a compelling new vision of a highgrowth future—one that that could revolutionize manufacturing and energy, create employment for the jobless generation, and bring back rising living standards.

These new studies—from organizations such as the McKinsey Global Institute, GE, Cisco, and AT&T—describe the economic potential of a new wave of technological innovations known as the Internet of Everything (IoE)—also sometimes called the Internet of Things, the Industrial Internet or Machine to Machine. (Though as discussed below, the Internet of Everything is a broader, more accurate concept than the other terms, encompassing much more than just ‘things’.)

Taking the McKinsey projections as a base, we estimate that the Internet of Everything could raise the level of U.S. gross domestic product by 2%-5% by 2025. This gain from the IoE, if realized, would boost the annual U.S. GDP growth rate by 0.2-0.4 percentage points over this period, bringing growth closer to 3% per year. This would go a long way toward regaining the output—and jobs—lost in the Great Recession.

Equally important, from the macro perspective, the result will be a shift to growth that is not just faster, but higher quality. Rather than being fueled by consumption and borrowing, the Internet of Everything will lead to an economy built on production and investment, with much more extensive education and training built right into the fabric of the economy rather than being separated out.

Download the memo.