Economic Effec Of The Y2k Bug Essay, Research Paper

The Year 2000 Bug

As the millennium approaches we come closer and closer to what some say could mean the end of civilization as we know it. What is this great event that would have such an impact on the world that it could end civilization? The problem is a simple computer bug refereed to as the Y2K bug but its ramifications could be immense. This computer bug has been predicted to impact the world anywhere from a minor problem to the end of a civilization. Whichever view you take on the subject it is clear that this bug will have a definite impact on the economy. The depth of this impact is yet to be determined but by looking at what can realistically happen as a result of this bug and by looking at situations that have upset the economy in the past it will give us a better look at what may happen.

In order to understand the Y2K bug we must first understand what it is. For many years electronic storage was very expensive. In the early days of computing a Megabyte or a million bytes of information could have cost up to $100,000 to store electronically. This same amount of information storage can now cost around ten cents. Because of this expensive storage limitation code written for these older computers was compressed in any way possible. One way to cut down the size of code was to compress dates to a format only six characters long. So instead of April 14 1999 the date would be compressed to 4/14/99. At the time of this programming this seemed to be the best solution to the space saving dilemma. As we come closer to the millennium we see that this style of programming was a great overlook of programmers. Assuming that the machines would not still be functioning in the year 2000, programmers did not see this as a problem. Now that the year is approaching there are a great deal more of these machines around then anyone ever would have thought. This poses a problem because when the last two digits of the year section of the date roll around to 00 the computer will think that the year is 1900 because it simply assumed that the first two digits are 19.

At first glance this problem seems to be minor but at a deeper look we can see that this Y2K bug can cause a great deal of havoc with our computer systems. Many programs that are date sensitive will react to this bug in a negative way. A good example of a problem that could occur due to the bug would be that of banking software. In that case one of the software s functions would be to bill all of its customers with outstanding loans. This program works by sending the bill progressively every month until the loan is paid off. If the computer were to think that it was the year 1900 then none of these loans would have even been made yet and the computer would become unstable or cease to function. Much of this software can be repaired or replaced with new versions, however, some of it is not as easily replaced. A great deal of the code that is causing worry at the moment is actually imbedded in automated machinery. This code can t be repaired, except by replacing the machinery itself. This code is in many of the machines that run companies, public utilities, and are even in our homes in such appliances as VCRs. Estimates of the effects of these embedded chips vary a great deal and no one really knows how the Y2K Bug will actually affect many of these chips. According to the Gartner Group in a recent study only 1 in 100,000 microcontrollers would be affected. This study however, is widely disputed and does not take into account other types of processors that have real time clocks. In September 1998, Datamation magazine estimated that, on average, about 7 percent are date sensitive and In November 1998, PCWeek, another leading trade journal, put the number at 5 percent. The main emphasis seems to systems with many chips all working on real time clocks such as manufacturing plants. These systems have been estimated at up to 30% not compliant with the Y2K problem. Companies with these systems have had trouble being ready for Y2K because in order to prepare for the problem the affected chips have to be isolated and repaired. In a system with thousands of these chips and little documentation on each one, this is an almost impossible chore. Replacing entire systems can cost millions of dollars and many companies can t afford the cost of the repair.

Billions of dollars have been spent preparing for this event already and much more will be spent both before in preparation and after in recovery. Most companies have been addressing the problem for the past few years. An entire industry has opened up just to deal with this problem. In the US most mission critical equipment has already been tested and was either compliant or repaired. The systems that caused most concern were things like power grids, telephone networks, and air and land traffic controllers. Most financial institutions have also dealt with the problem by updating their software and networks to avoid failure at Y2K.

With most of these problems resolved in the US, it is other countries that we are then concerned with. In many of the Asian countries progress on solving the Y2K bug is far behind that of the US and many speculate that they will not be ready by the end of the year. This could have a great deal of impact on the world economy if these countries shut down production. Most of Europe has addressed the bug but are behind the US in resolving the problem. If things like power grids or oil plants were to malfunction it could disable a country and all but stop production, import and export. If this were to happen several countries it could greatly affect the entire world because of the lack of goods that country provides.

Another key issue that could have global ramifications is the issue of transportation. Many of the ships that carry cargo around the world use microcontrollers and satellite communication to reach its destination. It has been reported that Satellites could be affected and possibly fall out of orbit causing a ship s navigation system to fail. This could make world trade chaos halting even the countries that were prepared for Y2K. Air traffic controllers have also been subject to a great deal of testing for fear that radar and other navigational systems could malfunction causing crashes. Since oil refineries and wells are also run on embedded systems they could also lose some or all production causing a fuel shortage that would all but stop trade. This lack of transportation could lead to famine and food shortages all over the world.

The cost of preparing for the Y2K bug has been estimated anywhere from the conservative estimate of $200 Billion to the Gardner Group s Estimate of over $600 Billion. This initial cost is the first impact that the bug will have on the economy. This cost will have a large impact on the profits of these companies for the next year or so and this will be the first issue resulting from Y2K that could affect stock prices. Many small and medium sized companies do not have the recourses to deal with the Y2K bug and some are projecting that a large percentage of these companies will fail when they are hit with everything from manufacturing problems to accounting crisis for the Y2K bug. With the loss of smaller companies comes the loss of jobs and could bring the economy further down.

No one can deny that there will be economic disruption as a result of Y2K. The stock market will most likely take a big hit and possibly crash. For the most part the computers for the market have been repaired, thanks to a crash in 1998 that brought the New York Stock Exchange down for a few hours due to a Y2K problem. But even if the market continues to function it will reflect the state of a very unstable global economy. For a number of years the US has been experiencing a bull market and a great deal of economic growth. As we have recently seen with the markets of many Asian countries, the market is volatile in times of crisis. With already slumping profits from Y2K repair, a company that loses half its investors due to a millennium panic and production is slowed or halted because of foreign trade problems, will have little chance of making it into the next millennium. If markets across the globe crash then a global economic slump, or worse a depression, is extremely probable.

Panic also plays a part in the problem of the Y2K bug. Because the Federal reserve foresees many Americans liquefying assets and withdrawing cash from banks, it has decided to issue an extra $200 Billion in currency to supply banks with enough money to meet a growing need. Many banks fear that this panic will just intensify the situation because it will cripple the economy if a great deal of people take their money out of investments such as stocks, bonds, 401Ks, and mutual funds. Even if there were absolute minimum effects form the Y2K bug itself, the lack in consumer confidence could cause a great deal of problems for the economy. Experts are afraid that companies will not be able to deal with problems that arise from the Y2K bug because they lack the funding that would have come from public investment.

The rise of many survivalist groups and products add intensity to the public fear of a doomsday outcome. Many economists say that the stock market is currently inflated more than it is worth and is headed for a set back regardless of Y2K. The Dow Jones had a recent milestone of hitting the 10,000-point mark and the market in general has gained 50% in value in the last two years alone. Under these conditions the market seems to be very unstable and in light of problems that could be arising it could be in for a great deal of change. The US is the only world market that has expanded so greatly in the last few years and if it takes a large setback the rest of the world is sure to take an even greater setback.

Consumer panic could be further fueled if and mission critical systems cease to operate on January 1st. According to new data revealed by astrological scientists, the earth could also be experiencing solar flair around the time of the New Year. Solar flair can cause a disruption in satellite communications. This phenomenon occurred this year making cellular phones and pagers in southern California inoperable of a number of days. Some scientists feel that solar flair could cause panic because it is scheduled to occur so close to the millennium. If people lose their communication devices it may provoke chaos.

According to Michael Hyatt, author of The Millennium Bug, the best case scenario would be what he calls a brownout. He states that the phones would go down, the power would be temporarily out, hospital’s equipment would malfunction, and it would start a recession. Although many consider Hyatt to be an extremist on the matter, he may be not to far off. Regardless of weather or not Hyatt is correct in his estimation it is clear that we need to be ready for something.

One of the latest warnings to the public by media has to do with lawsuits that may pile up after the Y2K bug has done its damage. Some experts are estimating the wave of lawsuits to be so great that the courts are jammed for years trying to resolve them. One estimate states that it could be as much as $1 trillion dollars in damages that are claimed due to the bug. The cost of this litigation would only increase whatever economic problems the US was facing.

If American consumer confidence is lost due to any or all of these factors the effects could be disastrous. The Y2K bug could easily cause a global disaster with more devastation than the world has ever seen. While it seems that the bug can be handled in a technological aspect, it may be too late for the economy. Survivalists are stockpiling food and more and more people are beginning to worry about the future. The next two years have the potential to be the most economically critical time we have ever seen. Though our government is currently making preparation for the event, no one knows how much preparation is necessary. As we approach the new millennium many of us do it with apprehension and fear. Hopefully we are wrong.

Bibliography

Lauren Gibbons Paul, Y2K, September 1998, Datamation magazine

Mitch Ratcliffe, Wall Street systems mended http://www.zdnet.com/enterprise/zdy2k/stories/0,6158,2241015,00.html PCWeek Magazine April 13, 1999

Michael Hyatt, Michael Hyatt s Y2K Survival resources www.MichaelHyatt.com [4/2/99]

Michael Hyatt, The Millennium Bug: How to Survive the Coming Chaos (Regnery, 1998)

S.C. Gwynne, Time Magazine Cover Story, Trouble abroad threatens the U.S. economy [Sept. 9, 1998]

Adam Cohen, The Y2K Bug Goes to Court APRIL 19, 1999 VOL. 153 NO. 15

HOUSE COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

Subcommittee on Government Management, Information and Technology Field Hearing on Year 2000 Efforts

September 3, 1998 Chicago, Illinois

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