December 7, 1997
VIEWPOINT / By EDWARD YARDENI
Edward Yardeni is chief economist and managing director of Deutsche
Morgan Grenfell North America. This article is based on his testimony
last month at a Senate subcommittee hearing on the year 2000 problem.
A Race Against the Calendar
T he "year 2000" problem poses a serious threat that could disrupt
the United States economy and bring about a yearlong global recession
beginning in January 2000. Such a recession could be as severe as the
1973-74 global downturn that was caused by the OPEC oil embargo -- a
useful analogy for the economic consequences of the current
situation.
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The problem is time. All the money in the world will not stop Jan. 1,
2000, from arriving. There is not enough time to fix and test all the
systems around the world that must be fixed.
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Information, just like oil, is a vital resource for our global
economy. If the supply of information is allowed to be disrupted,
many economic activities will be impaired, if not halted.
The 2000 problem is both trivial and overwhelming. Unless fixed, most
computers, including many PC's, will produce nonsensical results or
crash because "00" in the widely used two-digit year field on the
computer screen will be recognized as 1900 rather than 2000.
Obviously, there are simple solutions. The two-digit fields, for
example, can be replaced with four-digit fields. Or software can be
programmed to recognize incoming years in a range, say between 0 and
40, as being in the 21st century.
The problem is time. All the money in the world will not stop Jan. 1,
2000, from arriving. There is not enough time to fix and test all the
systems around the world that must be fixed.
A problem in one system could start a domino effect. A failure in one
system could corrupt other systems. The problem will be a nonevent
only if the global computer network is 100 percent fixed, and there
is sufficient reason to believe that a significant fraction of the
system will not be ready in time.
Assessing the likelihood that the year 2000 problem will set off a
recession as well as measuring its depth and duration requires
answers from government and business managers around the world. They
must provide much more information so that the public and policy
makers can determine the risks ahead and prepare for a foreseeable
and plausible worst-case outlook.
All businesses, incorporated and unincorporated, should be required
by new laws or regulations to disclose their cumulative and quarterly
expenditures for fixing the year 2000 problem. They should also be
required to outline best- and worst-case projections for such
outlays.
Most important, all businesses should be required to post progress
reports on their efforts at least quarterly. They should be detailed
and include this information:
* Schedules for companywide progress, showing the projected and
realized dates of the standard five stages of remediation:
awareness, assessment, renovation, validation and implementation.
* Progress schedules for all critical activities related to
remediation.
* Lists of business activities that are expected to be impaired or
terminated as triage decisions are made before Jan. 1, 2000.
* Discussion of the risks from outside vendors and customers that
might not be compliant in time, including suppliers of electricity
and telecommunications services.
* Discussion of related legal issues, including anticipated expenses
for litigation and liability.
* Discussion of contingency plans if compliance is not achieved.
Senator Robert F. Bennett, Republican of Utah and chairman of the
Senate Banking Subcommittee on Financial Services and Technology,
introduced legislation last month to require publicly traded
companies "to make specific disclosures in their initial offering
statements and quarterly reports" on whether their computer systems
will be able to operate after Jan. 1, 2000.
I ndeed, publicly traded companies must be responsible for reporting
on the year 2000 problem, just as they are for any other event that
might have a material impact on their books.
The 2000 problem, however, is a unique business risk that requires
unique disclosure rules. It is a risk that will adversely affect all
businesses, all vendors and all customers. It will harm even those
who anticipated the problem long ago and expect to be ready for it
but depend on others who may not be prepared.
The interests of the public must be protected along with those of
investors. Self-interested capitalism is not designed to handle a
systemwide, global risk to collective well-being.
The mandate of individual business managers is to protect the
interests of their own entities. For competitive reasons, they are
likely to reveal as little as possible about material risks to their
businesses.
But in this case, the public's need to know must prevail over the
legitimate but parochial interests of businesses. It is time to level
the disclosure playing field. If all companies not just those that
are publicly traded are required to disclose their year 2000
activities and risks, none will be at a disadvantage.
If we give this problem top priority, it is not too late to reduce
the risk of computer failures. Full disclosure would focus public
pressure on managements that are not addressing the problem
appropriately.
S uch disclosure would also help creditors assess the risk of
earnings losses and even failures among their business borrowers who
fail to comply. Of course, full disclosure might increase the chance
of a credit crunch, as bankers refuse to lend to companies that are
not likely to meet the deadline.
But it is better to increase the risk for business borrowers now, so
they will take the threat to their survival more seriously. Those
that won't survive may decide sooner to seek acquirers that are
really trying to bring their systems into compliance.
The current disclosure system simply will not provide policy makers
and the public with needed information in time to prepare for the
worst possibly one of the longest and deepest recessions on record.
Without additional information soon, more problems and greater
hardship are inevitable. Conceivably though highly unlikely wider
disclosure may even show that the economic risks are small and
temporary. But with so much at stake, preparations must now begin in
earnest. We need answers from our business community. Then we can
prepare for the worst, and thereby realistically hope for the best.
Copyright 1997 The New York Times Company
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