Ed Yardeni thinks we may get a year-long recession comparable to the 1974 oil shock. This is the worst-case scenario that any economist is presenting.
But he knows that there are far worse cases. He calls them plausible.
This is from the CIO Web site (May 15).
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CIO: If it isn't inevitable, how might it be avoidable?
Yardeni: I've been doing what I can to raise some awareness, but there are lots of people doing the same thing. People, companies and governments need to make preparedness for the year 2000 a top priority. If I saw that happen over the next few months, I'd be less concerned, but my worry is that there is not enough panic about the problem now, and that increases the odds that there will be major problems in the year 2000. My personal motto is "Prepare of the worst and hope for the best." But I don't see enough companies and governments preparing for the worst case scenarios, and with the year 2000 problem, worst case scenarios are actually quite plausible.
CIO: Economically speaking, what are those worst case scenarios?
Yardeni: All you really have to do is think of the United Parcel Service strike, combine that with the failures of the Union Pacific railroad system during the past few months and the government shut-down that occurred during the budget crisis a year or two ago. Combine some of the disruptions we've experienced during the past few years and imagine they all coincide; then, I think you are getting just a hint of the kinds of problems we are facing in the US and on the global basis. I am concerned that airlines will cancel many flights in January, 2000. I am optimistic that the phone system will work, but I am concerned that people wondering why they have not gotten their Social Security Disability checks will overwhelm it, for example. That program may not function properly in time. The Internal Revenue Service is under great stress to get their year 2000 problem fixed, and if they don't get it properly fixed a lot of people will be calling asking where their refund checks are.
CIO: I've heard it suggested in all seriousness that we'll get a flat income tax in the year 2000 only because the IRS will be unable to get its computers to adjust to the technology problems posed by the millenium.
Yardeni: That thought came from me. But rather than a flat tax, I think a more realistic scenario will be a national sales tax, which will be much easier to collect. Those are the kinds of scenarios that are really becoming quite a bit more plausible.
CIO: How about around the world?
Yardeni: It is a global problem, and I am concerned that the rest of the world is behind the US in awareness and in dealing with the problem. A lot of countries are losing programmers to the US where they can be paid a lot more. Brazilian programmers are going to Portugal. Mexican programmers are coming to the US. With the Asian meltdown [of its currencies and financial infrastructure], they won't be paying a lot of attention to their computer systems.
CIO: So you think it's possible we could be tipped into a deflationary spiral?
Yardeni: Oh, yes. That's really becoming a more plausible scenario. Asia is a major source of deflation all by itself. If we combine that with a global recession caused by the year 2000 problem then a global deflationary spiral is plausible. Again, not inevitable, but plausible.
CIO: What are your worst worries?
Yardeni: I guess at the top of my worry list is the supply of electricity. Let's face it, if the lights go out, we won't even know if we have a year 2000 problem! (laughter) Nuclear power plants are very automated, and all those computer systems have to be fixed. I am not worried about safety, because the safety systems are not date sensitive, but if any other systems doesn't work, like the inventory system or the system that controls the maintenance of the rods that go into the reactor itself, the operator has to shut the whole thing down. Twenty-two percent of our electricity comes from nuclear power. Fossil fuel plants are reporting shortages because of the Union Pacific railroad's problems, so imagine what will happen in the year 2000 if the railroad system is compromised and it becomes difficult to deliver the coal that is necessary to run electric plants.
CIO: In terms of what will actually happen, as opposed to worst case scenarios, what sectors of the economy are most vulnerable?
Yardeni: Honestly, I think everybody is vulnerable. We live in an interdependent system. I don't think anyone is especially at risk. When I first got into this research, all the worst case scenarios were about credit cards not working, or elevators not working. Those are inconveniences. I am more concerned about embedded chips and manufacturing processes because I have found it almost impossible to find good information on what sort of vulnerabilities we face with embedded chips.
CIO: So you think the problem extends to my toaster oven?
Yardeni: No. I'm talking about chemical processing plants or aluminum plants. I would not want to see these things blow up because an embedded chip forgot to open a valve. But the honest truth is I do not know if embedded chips do or do not pose a serious risk for safety and the economy. That's what disturbs me: Given the possible risk, we should be getting a lot more information. The reality is we are going to stress test the entire global computer network on January 1, 2000, and hope for the best.