Y2K Worries

CAMBRIDGE: The passage to the year 2000 involves more than the usual end-of-century doomsday fears. Even those who are comfortable that we are not approaching the end of the world and civilization anticipate a serious bump in the road. Information technology, the blessings of which are sung day in and day out, not least by investment gurus, may spoil the party. Payments systems may fail, transport systems may fail, even security installations might malfunction. But empty shops and banks are perhaps the least of the risks we face. Should we get out of the markets and into cash early, build inventories of food and simply hunker down until the uncertainties pass?

Preparedness for Y2K varies substantially around the world. Surveys show that the US is best prepared, that Japan has prepared very little, and that emerging markets basically not at all. What can go most wrong and where is the weakest link? A first useful distinction in judging the economic effects of Y2K is between what might actually happen and how people act, as a result, in anticipation. Two important areas come into play, production and inventories on one hand and financial transactions on the other. For production and inventories the story is simple: businesses fear the disruption of the supply of intermediate goods or final goods and, as a result, they increase their inventories. That way, if something goes wrong with their suppliers' systems, at least they will have something on their shelves. This effect means that there will be more production and inventory building in the run-up to the year 2000, and correspondingly inventory run-offs and less production in the beginning on next year. In the US this effect is estimated to be about one third of one percent of GDP, not small at all.

What appears appropriate for business will also be adopted by households. No one, of course, wants to face empty shelves. We know this perfectly well; anytime there is a snowstorm or other threatened disruption, households build stocks. They will act in this way even more so this time because it is in the nature of Y2K that no one can anticipate the scope and duration of the problems it will cause. All this is sound economics. But imagine if things don't work out this way. Imagine if households don't plan ahead, don't build up reserves. Clearly, we would see overproduction and unsold inventories resulting in a far sharper cut in production early in 2000.

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.


Log in

  1. Chris J Ratcliffe/Getty Images

    The Brexit Surrender

    European Union leaders meeting in Brussels have given the go-ahead to talks with Britain on post-Brexit trade relations. But, as European Council President Donald Tusk has said, the most difficult challenge – forging a workable deal that secures broad political support on both sides – still lies ahead.

  2. The Great US Tax Debate

    ROBERT J. BARRO vs. JASON FURMAN & LAWRENCE H. SUMMERS on the impact of the GOP tax  overhaul.

    • Congressional Republicans are finalizing a tax-reform package that will reshape the business environment by lowering the corporate-tax rate and overhauling deductions. 

    • But will the plan's far-reaching changes provide the boost to investment and growth that its backers promise?

    ROBERT J. BARRO | How US Corporate Tax Reform Will Boost Growth

    JASON FURMAN & LAWRENCE H. SUMMERS | Robert Barro's Tax Reform Advocacy: A Response

  3. Murdoch's Last Stand?

    Rupert Murdoch’s sale of 21st Century Fox’s entertainment assets to Disney for $66 billion may mark the end of the media mogul’s career, which will long be remembered for its corrosive effect on democratic discourse on both sides of the Atlantic. 

    From enabling the rise of Donald Trump to hacking the telephone of a murdered British schoolgirl, Murdoch’s media empire has staked its success on stoking populist rage.

  4. Bank of England Leon Neal/Getty Images

    The Dangerous Delusion of Price Stability

    Since the hyperinflation of the 1970s, which central banks were right to combat by whatever means necessary, maintaining positive but low inflation has become a monetary-policy obsession. But, because the world economy has changed dramatically since then, central bankers have started to miss the monetary-policy forest for the trees.

  5. Harvard’s Jeffrey Frankel Measures the GOP’s Tax Plan

    Jeffrey Frankel, a professor at Harvard University’s Kennedy School of Government and a former member of President Bill Clinton’s Council of Economic Advisers, outlines the five criteria he uses to judge the efficacy of tax reform efforts. And in his view, the US Republicans’ most recent offering fails miserably.

  6. A box containing viles of human embryonic Stem Cell cultures Sandy Huffaker/Getty Images

    The Holy Grail of Genetic Engineering

    CRISPR-Cas – a gene-editing technique that is far more precise and efficient than any that has come before it – is poised to change the world. But ensuring that those changes are positive – helping to fight tumors and mosquito-borne illnesses, for example – will require scientists to apply the utmost caution.

  7. The Year Ahead 2018

    The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.

    Order now