Year 2000 Issues Could Trim Economic Growth

U.S. economic growth could be trimmed by 0.1 percentage point in 1998 and 1999 because of costs associated with fixing year 2000 computer problems, Federal Reserve Governor Edward Kelley said Tuesday.

Kelley, testifying before the Senate Commerce Committee, said it’s unlikely that disruptions associated with reprogramming computer systems to recognize dates beginning with 2000 will induce a recession in the U.S.

“We have a very strong and dynamic economy,” Kelley said. To induce a recession, “you’d have to get to a situation where people felt this [disruption] would be long and prolonged. We don’t anticipate this happening,” he said.

Kelley’s comments came as the Commerce Committee examined the economic impact of addressing the so-called “Y2K” problem faced by private companies and government agencies. Many older computers were programmed to read only two-digit dates, and without modification, would improperly identify the year 2000 as 1900.

Kelley estimated that fixing the problem would cost private companies at least $50 billion in the U.S., and he estimated that it could cost about $300 billion to fix the problem worldwide.

Kelley and others testifying at the hearing warned that failure to address year 2000 problems could affect both public and private computer systems, disrupting everything from air traffic control to telephone service.

“The scope of the problem is large and complex,” said Sen. John McCain, chairman of the Senate Commerce panel. “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, an Arizona Republican, warned that the Commerce and Transportation departments, and particularly the Federal Aviation Administration, lag other government agencies and stand the greatest risk of suffering crippling computer problems on Jan. 1, 2000. McCain also warned that the semiconductor and pharmaceutical industries, along with small regional and community banks, also lag in year 2000 efforts.

“We may pay a great price for not being ready,” McCain warned.

Kelley said the Federal Reserve this June will begin testing computer interfaces with the 13,000 banks it supervises, and plans to ensure that all of those banks’ systems are tested by year end.

The New York Stock Exchange has already begun extensive testing and repair of its computer systems and plans to begin test runs of its systems beginning next year, NYSE Chairman Richard Grasso said.

“I’m confident that the U.S. securities industry and its peripheral suppliers . . . are going to be prepared,” Grasso said. The exchange’s 10-year, $1.5-billion computer upgrade begun earlier this decade is addressing many year 2000 computer problems.

Grasso and others warned that non-U.S. companies and governments were slower in addressing year 2000 problems, and that international communications and business links could cause problems worldwide.

“I’m less confident global markets . . . are going to be prepared,” Grasso said.