In the Nation's Interest

Big Data’s Economic Impact

December 03, 2014

By Joseph Kennedy
President of Kennedy Research, LLC

Big Data is beginning to have a significant impact on our knowledge of the world. This is important because increases in human knowledge have always played a large role in increasing economic activity and living standards. Continued improvements in the price and capacity of tools for collecting, transmitting, storing, analyzing and acting upon data will make it easier to gather more information and to turn it into actionable knowledge of how systems work.

Big Data is best understood as an untapped resource that technology finally allows us to exploit. For instance, data on weather, insects, and crop plantings has always existed. But it is now possible to cost-effectively collect those data and use them in an informed manner. We can keep a record of every plant’s history, including sprayings and rainfall. When we drive a combine over the field, equipment can identify every plant as either crop or weed and selectively apply herbicide to just the weeds.

Such new use of data has the capacity to transform every industry in similar ways.  A recent OECD report listed some of the ways that more and better data will affect the economy:

     • Producing new goods and services, such as the Nest home thermometer or mass customized shoes;
     • Optimizing business processes;
     • More-targeted marketing that injects customer feedback into product design;
     • Better organizational management; and
     • Faster innovation through a shorter research and development cycle.

A report from McKinsey Global Institute estimates that Big Data could generate an additional $3 trillion in value every year in just seven industries. Of this, $1.3 trillion would benefit the United States. The report also estimated that over half of this value would go to customers in forms such as fewer traffic jams, easier price comparisons, and better matching between educational institutions and students. Note that some of these benefits do not affect GDP or personal income as we measure them. They do, however, imply a better quality of life.

The impact affects more than consumers, however. Erik Brynjolfsson of MIT found that companies that adopt data-driven decision making achieve 5 to 6 percent higher productivity and output growth than their peers, even after controlling for other investments and the use of information technology. Similar differences were found in asset utilization, return on equity, and market value.

The Omidyar Network recently released a study of the impact of Open Data policies on government. The report concluded that implementation of these policies could boost annual income within the G20 by between $700 billion and $950 billion. The benefits include reduced corruption, better workplace conditions, increased energy efficiency, and improved foreign trade.

Even the advertising industry, whose use of data is sometimes viewed with suspicion, delivers large benefits. A study by the Direct Marketers Association found that better use of data made marketing more efficient both by allowing companies to avoid sending solicitations to individuals who are unlikely to buy their product and by matching customers with offers that better meet their individual needs and interests. Big data also reduced barriers to entry by making it easier for small companies to get useful market data. Finally, another McKinsey study concluded that free Internet services underwritten by Internet advertising delivered significant benefits to Internet users. It estimated the social surplus from these services at 120 billion euros, 80 percent of which went to consumers.

This trend in data also has an impact on workers. Data analysis has been called “the sexiest job of the 21st century.” The United States already has an estimated 500,000 Big Data jobs. But McKinsey estimates that there is a shortage of between 140,000 and 190,000 workers with advanced degrees in statistics, computer engineering and other applied fields. Perhaps more important is the shortage of 1.5 million managers and analysts who hold traditional jobs but are capable of integrating Big Data into their decision making. The need to understand and act on improved data is likely to increase worker productivity and pay.

Thanks to continued technological improvements, data will become even easier to collect, transmit, store, and analyze. Together with related advances in material sciences, biotechnology, information technology, and nanotechnology, it will enable a vast range of new products and services. As with any resource, the main constraint will be the ability to imagine new uses for this resource and to build a viable business model around these uses that delivers valuable products and services to consumers. 

Joseph Kennedy is President of Kennedy Research, LLC, which consults on a wide variety of policy issues. He is also a Senior Fellow at the Information Technology and Innovation Foundation.

Guest blogs are the views of the individual and not the official policy of CED.

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