Panic In The Year 2000

For the economy, the Year 2000 software problem has already arrived. The good news is that the pell-mell race to fix the Y2K bug is pumping up capital spending and tightening the job market for any college kid who can write code. The bad news is that fixing the first-ever global glitch in information technology will take half a percentage point off gross domestic product growth in 2000, reduce productivity growth, and raise inflation. But that's under a best-case scenario. Odds are, given the enormous complexity of the problem, the economic impact will be worse. For individual companies and government agencies, such as the Internal Revenue Service, the situation could be a disaster.

Corporate America has no excuse for taking so long to face Y2K. The enormity of the problem has been known for years. There are 40 years of software "out there," made up of billions of lines of code spread over different programming languages, operating systems, databases, and hardware platforms. It isn't enough for a corporation to debug its own software. It must synchronize with all its vendors, suppliers, and customers in every town and village in every country around the world. Not only must the changes be made, they must be made in exactly the same way. Or computers will crash. If a small regional German landesbank, for example, chooses a different method to solve its Y2K problem than, say, Citibank, their computer systems could corrupt each other as the banks trade currencies. Ditto for a Taiwanese motherboard manufacturer that supplies Dell Computer or Compaq Computer.

The complexity of the Y2K problem boggles the mind, which is perhaps why Washington has been so slow to deal with it. The General Accounting Office reports that 16 of 27 major government agencies are planning to complete the debugging of critical software by November or December, 1999. That leaves only weeks for crucial testing of extremely complex computer systems and almost guarantees breakdowns. Some 60 senior corporate executives--from companies including Texas Instruments, Unilever, Ford, Bombardier, and Lloyds TSB Banking--recently warned President Clinton and the Prime Ministers of Britain and Canada that government failure to solve Year 2000 problems could produce "delays in welfare payments, the triggering of financial chaos by a breakdown in revenue collection and debt management, and malfunctions in the air traffic control and defense systems."

Dealing with the Y2K bug is already bending the U.S. economy out of shape. An army of software writers is busy fixing old programs instead of developing new ones, hurting productivity. An army of attorneys is getting ready to step in to cash in on Year 2000 liability when computers start crashing. Real wages in the management consulting and accounting businesses are rising at a fast clip, pulling up the national average. But if the Federal Reserve tightens monetary policy in 1998 or 1999 to battle wage inflation, it risks tipping the economy into recession later, at its most Y2K vulnerable.

The Y2K shock is probably the first of many new and unexpected high-tech jolts that will hit the economy in the decades ahead. This one is entirely predictable and should have been totally manageable. Yet it was not. That should be a warning: As the U.S. shifts from an industrial to an information-based economy, technology is likely to affect growth and the business cycle as much, if not more, than more familiar variables. In the New Economy, the business cycle is the child of innovation and product development.

Before it's here, it's on the Bloomberg Terminal.