Article for Deutsche Bank's FORUM
Dr. Edward Yardeni
Chief Economist & Managing Director
Deutsche Morgan Grenfell North America
February 16, 1998


THE YEAR 2000 PROBLEM

The Year 2000 Problem (Y2K) is a very serious threat to the global economy. It is bound to disrupt the entire global economy. If the disruptions are significant and widespread, then a global recession is possible. Such a worldwide recession could last at least 12 months starting in January 2000, and it could be as severe as the 1973-74 global recession. That downturn was caused by the OPEC oil crisis, which is a useful analogy for thinking about the potential economic consequences of Y2K. Just as oil is a vital resource for our global economy, so is information. If the supply of information is disrupted, many economic activities will be impaired, if not entirely halted.

I have been studying and writing about Y2K since last summer. On my internet web site, I have a major section devoted to the topic including a "netbook" titled "Year 2000 Recession?" In July 1997, I concluded that the probability of at least a mild global recession in 2000 is around 30%. Now, I believe the odds are 40% based on numerous unsettling documents and news reports most of them posted on the Internet. At this time, it is hard to know which companies might not be ready for the century date change. In the United States, on January 12 of this year, the Securities and Exchange Commission advised company managements to disclose much more information about their Y2K efforts to investors. There has been much more information about the US government's preparations. And what I've soon so far is very worrisome. I am particularly concerned about the readiness of the Federal Aviation Administration, the Social Security Administration, and the Internal Revenue Service.

I am an optimist by nature. I am not inclined to be an alarmist. Indeed, I have been one of the most vocal stock market bulls on Wall Street for more than 10 years. Indeed, I am relatively optimistic that most computer systems will be fixed in time. However, I doubt that all computer systems around the world will be 100% fixed. If so, then some will fail, possibly causing widespread disruptions at critical choke points of vital economic systems and a global recession. If my ongoing research confirms this pessimistic hypothesis, then I may raise the odds of a recession. I am very willing to lower the odds if the unfolding story turns out more optimistically.

The Year 2000 Problem is both trivial and overwhelming at the same time. Unless fixed soon, almost all older mainframe computer software systems, many PCs and software programs, and millions (perhaps billions) of embedded semiconductor chips potentially could crash on January 1, 2000 simply because the new year will appear as "00" in the standard two-digit year field and will be read erroneously as 1900. Undoubtedly, most of the systems will be fixed in time. But even if only a small percentage fail, the resulting disruptions are bound to cause some trouble, and worse if the minority of noncompliantY2K systems have an adverse Domino Effect on compliant ones.

Obviously, there are simple solutions to this. The two-digit fields can be found and replaced with four-digit ones. The software programs can be "windowed" to recognize incoming years in a range, say, between 0 and 40 as being in the 21st century. New software programs can be written to replace "legacy" programs that may be too difficult to fix.

The problem is time. All the money in the world will not stop January 1, 2000, from arriving at the rate of 3,600 seconds per hour. There is not enough time to fix and test all the systems, with billions of lines of software code around the world, that need to be fixed. Many businesses, governments, and organizations have become aware of the Year 2000 Problem only recently and may simply run out of time.

Testing is much more time-consuming than repairing noncompliant code. This might not be a problem for some stand-alone systems. However, the majority of software programs are part of a bigger corporate, industrial, national, and even global network. They often depend on input information generated by other programs. They must all remain compatible as they are fixed.

In other words, the sum total of all interdependent computer systems must all be compliant. The network is the computer. A problem in one system could trigger a Domino Effect, which poses a great risk to all who fail to test whether their local compliant system is compatible with their global network. The networks that must function perfectly--at the risk of partial and even total failure--include:

electrical power systems,
telecommunications,
transportation,
manufacturing,
retail and wholesale distribution,
finance and banking,
government services and administration (including taxation),
military defense, and
international trade.

The Y2K virus has infected all the vital organs of our global body. It must be removed from all of them. A failure in any one system could corrupt other systems.

On Wall Street, investors have sharply bid up the prices of several Y2K companies that offer various tools and solutions for fixing the problem. However, none has a "silver-bullet" solution that can fix Y2K over a weekend. They can help to find and repair code that is not Y2K compliant. But every change requires time-consuming testing of each system. Each change has the potential of creating a new bug in the repaired program, which then requires another round of "debugging" and testing. There is simply no silver bullet for this process. Notwithstanding the widespread belief that "Bill Gates will fix it," the official position of Microsoft is that this is a problem that everyone must fix
on his own. It is too big and overwhelming for even Microsoft.

Software programming is far less disciplined and rigorous than most people realize. Two different programmers can and do write completely different programs that will perform exactly the same task. Programming is more of an art than a science. One of the biggest Y2K headaches is that few programmers take the time--or are even asked--to document the logic of their programs. Also, the original source code for many older programs is lost. The source code was translated into "machine language," i.e., the binary combinations of zeros and ones that computers understand, by so-called "compiler" programs. Reverse compiling is possible, but many of the original compiler programs are also lost.

I hope to see more of us giving top priority to fixing Y2K around the world. At the same time, we must all assess the impact of Y2K disruptions and prepare contingency plans for plausible worst-case scenarios. Conceivably--though highly unlikely--as the deadline approaches, we may conclude that the economic risks are small and temporary. But with so much at stake, we should prepare for the worst, and thereby realistically hope for the best.

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