Something BIG to Worry About Jude Wanniski May 12, 1998

I’ve been trying not to, but I find myself worrying more about the Y2K computer problem than I do about anything else in the universe, including incoming meteorites, Islamic fundamentalism, where the IMF will strike next, Fed Governor Larry Meyer’s itch to increase the unemployment rate, the decline of Japan, the euro, or what Newt will next turn over to the Christian Coalition. I worry about Y2K more than I worry about the President being impeached and Vice President Gore taking over, about nuclear bombs going off in India, about the budget surplus being spent on trial lawyers, and about Webster Hubbell’s privacy being violated.

Ever since Sen. Robert Bennett of Utah called me from out of the blue in early March, to tell me he has been conducting Y2K hearings for the last year as chairman of the Senate Banking Committee on technology, I’ve had to put Y2K higher and higher on the list of things that keep me awake at night. The more questions I ask, the more I’m finding a great likelihood that there will be a certain amount of unavoidable chaos as we approach January 1, 2000 -- and even more thereafter.

What worries me most is that I find so few others are worrying, as they assume others must be worrying enough so they don’t have to. Everyone knows Ed Yardeni is terribly worried, but they assume he’s making a good living by scaring people, and if there really were reason for alarm, there would be legions of Yardenis marching up and down Wall Street holding “The End Is Near” signs. We now are sifting through a great many sources of concern about Y2K and will produce our own report in several weeks. As is our practice, we don’t want to alarm unless we are alarmed, but as it stands, we only can see risks increasing as one day follows another, with no sign that the world is getting its arms around the problem. I sent a memo to Treasury Secretary Bob Rubin two weeks ago, urging him to advise the President and the nation that there MAY be more chaos ahead and that he should take responsibility for the executive branch alerting the nation.

Senator Bennett is no alarmist, but his new Senate Select Committee on Y2K wants to focus attention on the possible consequences in order of their seriousness. The financial markets, which we are hired to worry about, are well down his list. He worries first about the lights going off all over the world, particularly here. Will the North American power grid hang together? Paine Webber’s Ed Kerschner, who has written a paper pooh-poohing the alarms, dismisses the possibility of widespread outages, on the argument that there were power grids before there were computer chips. Alas, once computer chips became available, they have been replacing the old-fashioned switches, not only in power grids, but everything else that makes the world work more efficiently now than it did years ago. There soon will be Senate and House hearings on the power grid issue, whence we will begin to learn more about the embedded chip problem.

Bennett worries about the computers that run water and sewer systems around the country. He thinks it likely that our telephones will work, but is dubious our multinational corporations will be able to get dial tones in many other parts of the world. Dan Isenberg, a former AT&T high-tech guru whose website <www.isen.com> seems even more alarmist than Yardeni’s, suggests the national telephone network will be hopelessly clogged. Isenberg is among those who point out that after so many years of replacing switches with chips, everything is linked into everything else, and it is pointless for one corporation after another to announce that it is OK. Even if we could imagine that General Motors is ready for Y2K, are its suppliers ready? Are its suppliers’ suppliers? There won’t be one weak link, there will be millions of weak links here and many, many millions of weak links around the world. He believes it will be impossible to know in advance which broad systems will function and which will fizzle.

Will the millions of barrels of oil we consume every day that come here from the Middle East or Africa in tankers still be able to manage the trips? Bennett worries about this even more than about airplanes flying blind, as he seems to have some sort of assurance from the FAA that if worse comes to worse, there will simply be far fewer planes in the air, until everything is straightened out. Down his list is banking and finance, which is what I can worry about, but thus far there are no answers.

The value of financial assets will not be affected by a storm, even a bad one, of the kind we recently observed in Canada where the power grids did go out for days when tumbled by ice. The financial markets assume that the underlying fundamentals of 99.99% of assets will be able to weather acts of God, bouncing back when the sun comes out. Y2K is a horse of a different color. Will it knock things out for hours, days, weeks, months, years? I wonder if the chaos will affect the presidential primaries, several weeks into the year. Because there are so many different calendar problems associated with embedded chips, Isenberg thinks the first major effects will be felt as early as January 1, 1999, with others including Yardeni, noting that many old codes were written to terminate at 9999, which will be read as September 9, 1999. There is even a leap year problem, because 2000 is a Leap Year with a 29th day in February, while 1900 was skipped in order to square with the timing of the solar system.

In my March 31 paper, which I entitled “Y2K Opportunities,” I suggested tackling the problems associated with government by going to a new simplified tax system, as there is no possibility of the Internal Revenue Service being able to manage Y2K. None. The assumption that several hundred new technicians hired by IRS will get up to speed is a fallacy. The IRS problem, we’re advised, is “sequential,” which means it can’t be handled in chunks, but in sequence. By adding 600 or 6000 kibitzers, you only reduce the time by tiny increments. Our Paul Bond says it is like nine women trying to produce a baby within one month. Can’t be done.

I’m told my idea of a simple tax system and a gold standard to handle the global monetary chaos is not reasonable -- because that only complicates the problems. My obvious answer is that when bureaucrats see they can’t fix the existing systems, they will realize it is easier to throw them out and go from scratch. The American people would have to be told the new postcard tax system would have to rely on the honor system for the first year, in order to get through the problem. There would be cheats, but tax cheats are already getting away with $150 billion or more. I’ve been telling people about how Harry Truman in 1945 used common sense when his Cabinet told him the war contractors were submitting exorbitant bills for wrapping up their contracts and a commission should be set up to vet each one. Truman told them to pay what they asked, with spot checks to follow. The late Herman Kahn told me this story many years ago, and how this bit of common sense rescued the nation from a post-war recession. With that kind of creativity and common sense, maybe we can make it through Y2K with not much more chaos than we get with a big-time, worldwide storm. We’d at least emerge with global simplicity in governments everywhere -- and financial markets at much higher levels. I’ll sleep on that.