Gary North's Y2K Links and Forums - Mirror

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Category: 

Stock_Market

Date: 

1998-04-07 00:10:04

Subject: 

Typical Economist: We Can't Say Anything Specific

  Link:

http://www.senate.gov/~banking/98_02hrg/021798/witness/deak.htm

Comment: 

Economist Edward Deak remains true to his craft: he says no one knows what the costs of the y2k repairs will be, and no one knows if there will be a y2k-based recession or what its magnitude may be.

Men persuaded of the usefulness of the so-called science of economics, when push comes to shove, are unable to tell us anything about the future. If economists can't figure out that y2k will produce a recession, what good are they?

* * * * * * *

Let me state clearly and unambiguously from the outset that no one knows the true extent of the economic costs and benefits that will be associated with the century date change effort! It is a global information technology problem. The actions that are taken or not taken between now and the year 2000, along with the renovation choices that are made will profoundly affect the final Y2K bill. . . .

Necessary conditions for a Y2K based recession - The above economic scenarios represent order of magnitude assessments with a very high margin for error. The actual probability and magnitude of a Y2K recession are indeterminate. However, again the information from the IT professionals indicates that the probability of either slower growth or a recession must be assigned a value greater than zero. First, there would have to be pervasive and persistent mission-critical failures at the governmental level. Examples would include the IRS being unable to collect tax revenues, the Social Security Administration unable to deliver a significant amount of pension checks, and the Federal Aviation Administration unable to guarantee the safety of commercial passenger and cargo flights. These would have to be computer system failures that could not be corrected by massive diversion of programming effort to identify and fix the source of the problems. I can tell you from my limited contacts that private firms are concern about the likelihood of these kinds of failures.

Second, there would have to be major failures in the infrastructure system delivering essential services. Examples here include electric power outages, disruptions in the flow of natural gas, oil, water, and product distribution services. I would guess that if these problems do occur that they might be handled on a case by case basis with the infusion of targeted programming resources. Any disruptions here would appear to be burdensome, but short term and correctable with some catch up of lost business after repairs are made.

Third, there would have to be a significant number of failures along the economic food chain from small to medium to large scale producers of goods and services. Here the Capers Jones report provides some chilling thoughts. He sees the greatest vulnerability to century date change failures among the mid-sized firms with 1000-10,000 employees. They rely a great deal on computer systems and software, and have the least internal ability to maintain the information technology. W. Jones anticipates a 5-7% failure rate among these firms and offers the following observation:

There are about 30,000 companies in the "mid sized" range in the United States, and a 5% to 7% business failure rate would mean that from 1500 to perhaps 2100 companies might close or file for bankruptcy as a result of a year 2000 problem. This is a significant number and it is an open question as to whether the impact of the year 2000 problem is severe enough to trigger a recession. (25)

He further estimates a 1% chance of failure among Fortune 500 class firms and a 3% failure rate for small firms with less than 100 employees. (26) Earlier I noted the observation made by Unilever regarding a 20% failure rate for its smaller suppliers. And there is the comment made by Midland Bank of the U.K. that one-in-five companies may not survive the Y2K problem. (27) There is also the possibility that in reaction to faulty logic commands, computers will produce corrupted data, or loose some data entirely. Sorting out these errors and correcting for them will take time and money.

Taken as a whole, the above comments begin to raise the recession probability above zero. However, all is not lost. As firms fail, new distribution channels and suppliers will emerge. Some of the losses in early months may be made up and something resembling normal product flow reestablished fairly quickly. As new suppliers are found, their output will expand helping to absorb the workers displaced from the failing firms. The real questions are how big the disruptions will be and how long will this adjustment process take.

Fourth, there would have to be a breakdown in global trade and payments flows. I have already commented upon the pressures in Western Europe on available IT resources as members of the Economic Union strive to meet both the demand of euro conversion and the repair requirements of Y2K. Shifting attention to the current financial meltdown in Asia, the situation there does not create a lot of confidence that Asian banks and manufacturers will be fully Y2K compliant. Many of these firms are trying to survive to 2000 let alone worrying about the technical performance of their computer systems. . . .

In no way am I predicting the likelihood of a Y2K based recession. However, the scope of the problem is broad and complex with global interconnections. It will require nontrivial dollar costs to repair, and will almost assuredly result in a slower macro growth rate with or without the onset of a recession. While no one knows for sure either the size or the extent of these costs, there is no escaping the Y2K problem. And the costs will be bigger depending upon the degree of public ignorance, apathy and delay. To the extent that your hearing today alerts the public to the potential magnitude of this problem, you are better preparing them for the tasks and challenges that lie ahead.

Thank you for your attention.

Link: 

http://www.senate.gov/~banking/98_02hrg/021798/witness/deak.htm

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