Year 2000 'Bug' to Cost Firms $50 Billion
Washington Post Staff Writer
Wednesday, April 29, 1998; Page A01
U.S. businesses are likely to spend at least $50 billion fixing Year 2000 computer glitches, a Federal Reserve official said yesterday, providing the federal government's first official estimate of such costs.
The massive effort to reprogram millions of computers to recognize dates in the new millennium and, therefore, continue to function, could trim U.S. economic growth by a tenth of a percentage point in each of the next two years, he added.
The problem is "real and serious," Federal Reserve Board Governor Edward W. Kelley Jr. told a Senate committee, saying the total worldwide repair bill could top $300 billion. Kelley's projections bolster earlier forecasts by corporate analysts.
Millions of computers some of which are central to running financial markets, air traffic control systems and even elevators in office buildings cannot distinguish between the year 1900 and the year 2000 because an old programming practice expressed years as two digits. Unless they are repaired, these systems will process the year 2000 as "00," and the computer will think it's somehow been transported back to 1900, which could cause it to shut down or turn out erroneous data.
As the year 2000 gets closer, this "bug" is attracting high-level attention in both government offices and corporate boardrooms. The Securities and Exchange Commission is now requiring companies with publicly traded shares to disclose how much they're spending to fix the problem and how far along they are. Businesses have started to question readiness of their suppliers and distributors, while "headhunting" firms have started to offer lucrative signing bonuses for increasingly scarce programmers. And yesterday, the Senate took the unsual step of establishing a committee solely to press for rapid work on the issue.
Of concern is not just how much it will cost to fix the glitch, but also whether critical government and private-sector systems will be repaired in time. A growing number of economists and industry analysts, pointing to recent surveys that indicate many U.S. and foreign businesses have been slow to deal with the problem, predict there will be business slowdowns and shutdowns as critical systems fail.
They contend that U.S. economic growth now projected at around 2 percent a year could slow to recession levels at the turn of the century. "Disrupting the flow of information could be just as distressing as the disruption in the A growing number of economists and industry analysts predict there will be business slowdowns and shutdowns as critical systems fail.
flow of oil in 1973 and '74," said Edward E. Yardeni, the chief economist at Deutsche Morgan Grenfell Inc. in New York. Yardeni said he believes "there's a 60 percent chance" of a recession starting in 2000 because of date-related computer problems.
Although Kelley told the committee that prospects of a "deep recession" are "probably a stretch," the Fed's analysis did not extend into the year 2000 and beyond, and did not include the economic impact of possible business slowdowns or shutdowns resulting from date-related system failures.
For many large firms, making their computer systems understand the year 2000 is proving a Herculean task. BankAmerica Corp., for instance, must fix 2,500 separate computer systems. The San Francisco-based bank has 1,000 employees devoted to the project and has also hired several hundred outside contractors in an effort that will cost about $380 million, according to David Coulter, the bank's chief executive.
About $100 million of that amount is being used to create a bonus pool for the bank's technology employees. Those who shun the dozens of lucrative job offers they're now receiving from competitors will share in the pool if they see the projects through, Coulter said.
Although Coulter thinks the bank will be ready when year 2000 rolls around, it has already begun testing whether the programming fixes are working smoothly. "Some of the stuff we're getting [from outside contractors] is not working," he said in a recent conversation with Washington Post reporters and editors.
The diversion of corporate resources to repair affected computers could also reduce the growth of U.S. labor productivity by two-tenths of a percentage point a year for the next two years, Kelley said in his testimony. Recent growth in productivity a measure of output per hour worked has helped hold inflation down even in the face of rising wages; that is, workers are being paid more, but they are producing more, too.
"The year 2000 problem will touch much more than just our financial system, and could temporarily have adverse effects on the performance of the overall U.S. economy as well as the economies of many, or all, other nations if it is not corrected," Kelley told the Senate Commerce Committee. "The event is unlikely to be trouble-free."
Committee members also expressed concern about the federal government's progress in repairing the date glitch. Only 35 percent of the government's "mission-critical" systems have been fixed, according to a recent report issued by the Clinton administration, which estimates the entire price tag for date-related repairs at federal agencies will reach $4.7 billion.
The issue is particularly vexing for programmers because corporate and government computers, in the Internet age, increasingly depend on exchanging data with other machines. A failure in one machine could have broad ripple effects, crippling systems in other offices, states or countries, experts caution.
Like many others who have been tracking the issue closely, Kelley said he believes the cost of fixing the so-called "millennium bug" will continue to increase. "The one thing I'm confident of is that [the costs are] going up," he said.
The 500 largest U.S. publicly traded corporations expect to spend about $11 billion to fix the date glitch, according to the Fed's compilation of recent quarterly financial statements.
Financial services firms said they expect to spend about $3.5 billion, according to the Fed's analysis.
In a letter sent to the SEC last week, the Securities Industry Association advanced a higher figure, saying that the financial services industry could spend as much as $6 billion over the next three years on date-related fixes.
"The scope of the problem is large and complex," said Sen. John McCain (R-Ariz.), the committee's chairman.
"Without greater urgency and aggressive management on this Year 2000 issue, both federal agencies and private businesses are at risk of being unable to provide services or to perform functions that are critical to their mission," McCain said.
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