To All: From todays WSJ:
Commentary
Y2K--An Alarmist View
By EDWARD YARDENI
Concerns about the Year 2000 Problem--often called "Y2K"--have focused on the cost and difficulty of finding and eliminating the software glitch in time. Most older mainframe computer software systems, many personal computers and millions of embedded semiconductor chips could malfunction or even crash on Jan. 1, 2000, simply because they read only the last two digits of the year, and may interpret it as meaning 1900. But I believe most people are not yet aware of the magnitude of the problem we face.
A survey released in March by the Information Technology Association of America indicates that 44% of responding companies have already experienced Y2K-related failures under operating conditions, and 67% report failures under test conditions. The entire Y2K problem will not be solved. We must prepare for the possibility of business failures and the collapse of essential U.S. government services, including tax collection, welfare payments, national defense and air traffic control.
Situation Worsened
I am a Y2K alarmist, having previously predicted a 40% likelihood of recession in the wake of Y2K computer crashes. Despite many warnings, the situation has only worsened: The recession odds are now up to 60% in my estimation, and there is even a possibility of a depression. The time has come to mobilize against Y2K as if for a war. While we work to minimize government and business exposure to Y2K, we must also begin preparing to soften the inevitable disruptions that will occur when the millennium bug bites.
Our global and domestic markets for financial securities, commodities, products and services depend completely on the smooth functioning of the vast information technology infrastructure. Information technology has helped create modern versions of the division of labor, like just-in-time manufacturing, outsourcing and globalization. Imagine a world in which these systems are either impaired or completely broken. Suddenly, people will be forced to do without many goods and services that cannot be produced without information technology.
The likely recession could be at least as bad as the one during 1973-74, which was caused mostly by a disruption in the supply of oil. Information, stored and manipulated by computers, is as vital as oil for running modern economies. If information is harder to obtain, markets will allocate and use resources inefficiently. Market participants will be forced to spend more time and money obtaining information that was previously available at little or no cost.
How much could GDP fall? In the U.S., it dropped 3.7% from peak to trough during 1973-74. We should prepare for a similar fall in 2000. Furthermore, a 2000 recession is bound to be deflationary. The U.S. may experience a $1 trillion drop in nominal GDP and a $1 trillion loss in stock market capitalization.
Why am I so sure that we will fail to have all our information-technology systems ready and that the disruptions will be severe enough to cause a major global recession? Fixing and responding to Y2K requires a cooperative and collective approach, which has yet to be adopted by businesses and nations facing the millennial malady.
There is currently no global Y2K battle plan. Each company and government agency is responsible for fixing Y2K on its own. Even worse, there is no global campaign to increase awareness of Y2K, and very few national efforts to alert the public. Preventing disaster will depend on launching a centralized international effort to direct several crucial damage-control initiatives.
British Prime Minister Tony Blair plans to put the Y2K matter before the Group of Eight at its May meeting in Birmingham, England. This should be an occasion for concerted action. An international Year 2000 Alliance must emerge from the meeting--which should include all 29 members of the Organization for Economic Cooperation and Development--to deal comprehensively with the worldwide Y2K problem.
U.S. government reports indicate that the Pentagon has a "tight schedule for meeting its massive Y2K challenge," and the situation in other nuclear countries is no better. The military leaders of the G-8 states, especially the U.S. and Russia, must jointly assess the risk of an accidental nuclear missile launch or a provocative false alarm. They must rapidly develop a fail-safe joint communication and intelligence network to eliminate any such risks.
The international alliance should establish Y2K "sector alliances" to deal with the bug on an industry-by-industry basis. The top priority should be to ensure the world-wide supply of electricity, water and other utilities. Contingency plans for rationing utility use should be prepared.
Nothing should divert government or business resources from fixing the millennium bug. The Y2K Alliance should encourage states to follow the example of Bank of England governor Eddie George, who says the British government should freeze all regulatory and legislative changes that would burden the computers of financial institutions already struggling to fix their Y2K problem. Canadian Prime Minister Jean Chretien is informing his cabinet that Y2K should be their top priority.
The Y2K Alliance should consider requiring all nonessential employees to stay home during the first week of January 2000. Financial markets might have to be closed during this period. This global Y2K holiday would give information-technology personnel an opportunity to stress-test their systems with a slow "reboot," rather than under peak load conditions. They could first test the integrity of basic utility services. Then they could bring their own systems on-line in a phased sequence that can pinpoint weak links.
The Year 2000 Alliance should further require all members to fund a Y2K emergency budget with an initial minimum balance of $100 billion. This money should be spent on both last-ditch efforts to repair or replace key computer systems around the world and to implement contingency plans once the weakest links have been identified. The funds may be also be needed to purchase strategic stockpiles of fuel, food and medicine.
The alliance should direct and supervise current efforts by governments and companies to fix or minimize their Y2K problems. Currently, each organization with a Y2K liability establishes a triage process to identify "mission-critical" systems. But there are no objective standards to determined what is mission-critical. As a result, Y2K fixers are free to reclassify mission-critical systems as noncritical.
For example, the number of U.S. government mission-critical systems dropped from 8,589 to 7,850 in just the three-month period ending Feb. 15; much of the reclassification was done by the Department of Defense. As the deadline approaches, the pressure will only increase for organizations to define down their systems, making it seem they have made greater progress. Only improved monitoring and verification can prevent such dangerous fudging.
Cooperative approach
Those responsible for dealing with Y2K must decide whether to fix their noncritical systems or to let them fail in 2000. But without a cooperative or collective approach, it is likely that some entities will kill supposedly noncritical systems that are actually mission-critical to some of their external, and even internal, dependents.
Therefore we need to know if the products, services, information, incomes and payments we rely on have been doomed by the triage decisions of those who provide them. If so, we might already be toast in 2000 and not know it in 1998 or even in 1999.
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Mr. Yardeni is chief economist and managing director of Deutsche Morgan Grenfell. This article is adapted from a speech he delivered at the Bank for International Settlement's Year 2000 Roundtable in Basel, Switzerland. |
