By Rajiv Chandrasekaran
Washington Post Staff Writer
Thursday, November 18, 1999; Page E01

U.S. businesses and government agencies are being forced to spend about $100 billion to keep the year 2000 glitch from crashing their computers, making a simple two-digit programming "bug" the most expensive peacetime catastrophe in modern history.

But the vast electronic repair effort, which has commanded an unparalleled mobilization of people, money and executive attention in the past two years, is not likely to slow down the surging American economy, the Commerce Department predicted yesterday.

Comparing Y2K to "a tangled shoelace for a world-class marathon runner," the department also forecast that any problems created by malfunctioning computers--either domestically or overseas--will have an insignificant impact on the U.S. economy.

"Any glitches that pop up next year should not hurt our economic growth," said Commerce Secretary William Daley, who noted that the Y2K price tag works out to $365 for every American citizen.

"Is this a lot of money? Absolutely," Daley said. "But the potential cost of not doing anything was far greater."

Across corporate America, the cost of making Y2K repairs has produced staggering bills. General Motors Corp., for instance, has said it could spend as much as $626 million. Exxon Corp. has earmarked $250 million for the problem, and Procter & Gamble Co. expects to shell out $90 million. The federal government has estimated its repair costs at $8.4 billion.

The Commerce Department's $100 billion estimate covers the cost of testing and repairing computers affected by the Y2K problem from 1995 to 2001. It does not, however, include the money that businesses have spent to buy new machines to replace older ones that have date glitches, which economists say could provide some long-term economic benefits through productivity gains.

The Commerce estimate also does not take into account firms' Y2K-related publicity campaigns or the possible cost of litigation stemming from undiscovered glitches. As a result, some economists believe that overall Y2K spending probably is higher, perhaps closer to $150 billion.

By contrast, the cost of rebuilding South Florida after Hurricane Andrew in 1992, the costliest natural disaster in U.S. history, was $15.5 billion.

The department's estimate, however, is significantly lower than previous predictions of Y2K costs. Two years ago, when information on the topic was far sketchier, the Gartner Group, a consulting firm, issued a widely quoted report that said the costs for U.S. businesses and government agencies could reach $300 billion.

"This gives us a strong factual underpinning for the discussions that have gone on for the last few years with some abstraction," John A. Koskinen, chairman of the President's Council on Year 2000 Conversion, said of the Commerce estimate.

The year 2000 problem stems from the fact that millions of computers, as well as microchips in many electronic devices, were programmed to recognize only the last two digits of a year, assuming that the first two would be 1 and 9. On Jan. 1, unprepared machines will understand the year "00" not as 2000 but as 1900, potentially causing them to shut down or stop working properly.

Instead of slowing down the economy, economists say that Y2K spending might actually be having a positive short-term impact, by creating new jobs for programmers and greater demand for computer hardware and software. "At the margins, it has made the economy slightly stronger last year and this year," said William Dudley, the chief U.S. economist at investment bank Goldman Sachs Group Inc.

But over the long run, the $100 billion spent to keep existing computers operating through the new year will create little lasting economic benefit. It's the digital equivalent of patching a flat tire: The fixed tire will work like before, but the tread does not become any newer.

"Billions of dollars have been diverted from other uses to fix the problem," Daley said. But given that most of that spending already has occurred, he said, "the greatest cost to our economy is behind us."

According to Commerce, yearly Y2K spending grew from $5 billion in 1995 to around $30 billion in 1997, 1998 and this year. Next year, the figure is expected to drop down to $5 billion as businesses attend to any unforeseen problems.

Economists say they have not yet been able to determine the significance of any long-term benefits from Y2K fixes that have involved buying new, more sophisticated computer systems. "It has caused some businesses to buy new computers sooner than they would have, and that's good for productivity," said Commerce Undersecretary Robert J. Shapiro.

Shapiro said the "pattern and timing" of economic activity at the end of this year and early next year could be affected by businesses increasing inventories to guard against any Y2K-related disruptions in the supply of goods and services. That would likely add to economic growth this year but cause a slowdown early next year as firms use up their stockpiled inventory.

"The biggest impact on the economy is going to be the rise of inventories as people get ready for Y2K," Dudley said.

Commerce officials also predicted that the United States probably would not be significantly affected by any Y2K problems overseas. The department believes the country's major trading partners are sufficiently prepared, Shapiro said. Although other nations have a greater risk of Y2K failures, he noted that a considerable portion of U.S. trade occurs among multinational firms, many of which have already tackled the glitch.

"There's no evidence that problems abroad will significantly affect imports or damage our economy," Shapiro said.

Koskinen said yesterday that he continues to worry about the preparedness of small businesses. He estimated that between 400,000 and 500,000 smaller firms have decided not to test their systems and instead have adopted a "fix on failure" strategy.

"Some of them may lose their customers and go out of business," Koskinen said.