A Practical Problem -- Y2K Jude Wanniski June 11, 1999

Fourteen months ago, I sent the first of many analytical letters involving the Y2K computer bug problem to my Polyconomics clients. Because this problem is the one that worries me most as I scan the horizon for my clients, I reprint it here as the final lesson of the spring semester as a practical problem for you to think about. Because there is no textbook on how to deal with Y2K, you can join the fun and propose solutions to potential problems, and we can discuss them in the TalkShop and perhaps review the most interesting in the summer session, which we will begin the weekend of July 11th. Read this "Y2K Opportunities" piece of March 31, 1998. I will offer some further comments at the conclusion.

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We are all aware, I suppose, of the gigantic problems the world will face when January 1, 2000 arrives. Computers around the world that are not programmed to deal with four digits, only two, will revert to a default year, or jump back to 1900. No matter what is done between now and then, serious problems will occur almost everywhere on earth because so much of the economic universe is automatically programmed to respond to the calendar. Early estimates that it will take$600 billion to fix the worst of the problem are expanding, $4.7 billion just for the federal government. Early estimates are that there will be at least $1 trillion in lawsuits in the United States alone. The piranha trial lawyers are already filing lawsuits against companies that sold two-digit computers way back when, if they refuse to replace them or fix them. We assume that at the very least there will be no accidental launches of nuclear warheads to celebrate the new millennium with fireworks, but it is hard to assume much else.

Sen. Robert Bennett, the Utah Republican, who chairs the Y2K hearings of the technology subcommittee of Senate Banking, is about to chair a Y2K Select Committee at the behest of Senate Majority Leader Trent Lott. He will have his hands full responding to the myriad appeals from the grass-roots business community that sees itself getting wiped out by that $1 trillion in lawsuits. Here, as just one example, was William Maley, Sr., chairman of the Connecticut Hospital Association, at the subcommittee field hearings February 17 in Wallingford, Connecticut:

First, Congress should assist the FDA, by appropriating necessary resources, in its actions to ensure that manufacturers of medical devices investigate and correct Year 2000 related problems, and disclose Year 2000 compliance information in a timely fashion. Second, Congress should consider enacting some form of legislative immunity from liability for health care providers that have taken reasonable steps to obtain information on the Year 2000 compliance status of medical devices and equipment. Finally, we believe that federal legislation mandating periodic interim payments under the Medicare program (based on past payment levels) should be implemented to ensure adequate cash flow for providers should carrier and fiscal intermediary payment systems fail to adequately function due to the date change.

You can read through prepared testimony from seven different field hearings covering different regions and industries, at http://www.senate.gov/~banking/hearings.htm. My advice is that in addition to focusing attention on the $1 trillion in private lawsuits, Congress also take note of the gigantic problems governments everywhere will have because of Y2K, and the easiest way to alleviate them: A simple flat tax system and a dollar/gold standard.

We already know the Internal Revenue Service is overloaded under the best of conditions. Now Congress is passing legislation requiring IRS agents to be polite. There are 7 million words in the federal tax code and tens of millions of tax returns being assessed electronically. There are individual taxpayers whose returns run into thousands of pages. We know almost surely there will be a breakdown that will throw the government's finances into chaos and disrupt the household and commercial network that does business with the government. It makes perfect sense for the President and GOP leadership to agree on a simple postcard system of the kind House Majority Leader Dick Armey has proposed, just to get the country past 2000. Once everyone finds out how nice it is, the electorate would have a hard time giving it up. The same is true, by the way, for every system of individual and business taxation in other countries. The arguments about not doing a simplified system would normally prevent one from being drafted, but the sheer horror Y2K presents to government bureaucrats and political intransigents might be sufficient to do the only thing that will stand a chance of working.

The gold standard is another fix that eliminates much of the chaos that would otherwise occur in 2000 when the clock strikes 12 midnight. The only reason the business world can exist in its present form of floating exchange rates are the computers that are capable of juggling myriad rates of exchange and currency contracts. The currency markets seem sufficiently self-contained to be able to manage the chaos, or so I am told. The 150 different currency units in the world have a separate existence in international contracts at the corporate level. Octopus Inc., the giant multinational, does business in all 150 currencies, and while Octopus may have spent $100 million getting ready for 2000, the transactors at the other end have not. If the United States were to fix the dollar to gold, say at the end of this year, by the time the clock strikes a year later, every one of the 150 currencies could be plugged into it.

As we all know, the Europeans are about to give birth to the Euro, at the very worst possible time, because the chaos of the Euro on top of the chaos of Y2K is chaos squared. By fixing the dollar to gold and fixing the Euro to gold, we arrive at exactly the place Robert Mundell suggested in his WSJournal op-ed last week. Not only is chaos averted on major aspects of Y2K, it also solves the Euro problem. This immediately liberates tens of thousands of technicians who are currently part of the limited pool of technicians able to write code for the computers. It is as if the army of experts now divided in order to fight two alien monsters from outer space suddenly find one monster has decided to go back to sleep in cyberspace. The united army can now deal with the remaining monster.

Until now, as far as I can tell, all the thought that has gone into Y2K has been mechanical. If only Bill Gates stayed awake nights, the problem could be solved with some fancy software. Alas, Bill Gates advises that even if he could find the perfect software, he will be unable to provide the requisite hardware and deal with the data variables. If we all put our heads to thinking about changing and simplifying POLICY, at every level of government and private business, the impossible chaos may begin to look manageable. If you are really worried about The End of the World as we know it, you can find the state of doomsday at www.yardeni.com/cyber.html, which is where Ed Yardeni of Morgan Grenfell hangs out his predictions of economic depression. I will say of Yardeni that he is broadcasting for ideas on how to solve the looming problems. The answers will most likely be found in all sorts of places. One of my favorite sayings from the wildcatters is: Oil is found in abundance when a great many people are looking for it in the most unlikely places. So, too, with Y2K.

Jude Wanniski

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In this March 1998 letter, I expressed the hope that by the end of last year the President would sign an executive order fixing the dollar/gold price to enable the rest of the world to link into the fixed system. Nothing of the kind even has been discussed, as the Clinton administration and the Federal Reserve have gone in the other direction -- assuring the population that everything is fine, as long as nobody panics. The Y2K problem is greater than I believed it might be even a year ago, because I've come to think further on how electronically interconnected the world is.

Prof. Robert Mundell, the Canadian supply-side guru, predicted in 1969 that the world soon would move into a floating regime, and the experience would be so painful that by 1980 it would move back toward fixity. He was right about the world floating away from the currency tether to gold that Bretton Woods provided -- and the experience was painful. However, something happened which he did not anticipate. The world's population of six billion people would replace most of their paper money with electronic money, and the power of the computer chip would surpass the wildest dreams of anyone back in 1969. The pain of floating currencies that Mundell foresaw was the inability of world commerce to manage the complexity of many instead of one accounting unit. Computers, though, manage this chaos quite nicely, making trillions of calculations a day to update the trillions of debits and credits that hold the world together. Thirty years ago, the world still kept track of the contractual promises that make the world as productive as it is with ink and paper ledgers, adding machines and calculators. The computers manage the chaos. The pain still is there, as we saw in the Asian crisis, when our Federal Reserve made terrible miscalculations that it has not yet admitted to itself, much less acknowledged. But at least there is no chaos.

Our governments now assure us that Y2K will be manageable, but remember there is no textbook that tells us what level of chaos the world will experience when even a small percentage of computers fizzle. A small percentage of trillions of contracts still is a large number. My Y2K specialist, Paul Bond, a year ago likened the situation to the old-fashioned lights on the Christmas trees where the lights all go out because one light goes out. We now ask each government and each company to assure us that it will not fail at Y2K, and a great many of them say yes, they are perfectly compliant. But those not compliant cause problems for all those to which they interconnect. Perhaps I worry about this more than I should, but the reason I do is that I see nobody else worrying as I think they should. The President should fix the dollar to gold, in order to simplify the task of managing the debits and credits that hold together the world economy. It really doesn't matter if we are the best prepared on earth. It will only mean that the chaos will begin outside the United States and push its way in here. There is no downside risk to fixing the dollar to gold, and inviting the rest of the world to join in, producing one accounting unit instead of 150. If we go through the envelope and discover everything is fine on the other side, we can float again, and if there are problems, we can float again after they are solved. The reason for not simplifying in this manner is that nobody wants to admit there may be a problem and that this is the way to deal with it. If you believe lightning may strike a building at a precise moment in the future, wouldn't it be prudent to put fire-fighting equipment nearby? If there is no lightning, there is no real loss.

In the same way, Internal Revenue will assure the President late this year that its computers are compliant, but only through simulated tests. They will not have time to do real tests of the system and if there is breakdown, the debits and credits that flow through the federal government will hit glitches that will add to the financial burdens of the world economy. There should be a fall-back plan of tax simplification, which could be discarded if unneeded. An enormous piece of the national economy flows though the government's computers. Instead, we read that the President and First Lady are planning a Y2K Jamboree on the Washington Mall for that midnight. It clearly is an attempt to reassure the national population that everything is going to be fine. I hope and pray they are right, but worry they are wrong.