economic disruptions when it bites. the difficulty of managing the y2k problem why has it been so difficult for people to come to terms with the year 2000 problem? at the most basic level of any organization - be it public or private, large or small - the y2k problem was all too easy to ignore. it is a hidden threat, cloaked in the arcane language of computer programs and in embedded microchips. as such, it was difficult at first for senior management in the corporate world and the public sector to recognize the serious nature of the problem. this was compounded by the fact that the costs and benefits of the situation for an individual operation are not easily quantified nor are they attractive. but after an initial period of denial, the majority of us business leaders now have recognized the problem and are taking action to correct it. nonetheless, given the pervasiveness of the problems involved, i suspect that even the most thoroughly prepared organizations are worried that something important might be missed. indeed, many organizations are developing elaborate workarounds and other contingency plans as insurance against y2k disruptions. thus, uncertainty about the ultimate effectiveness of y2k remediation programs already is affecting corporate investment and production plans and obviously will be with us until at least january 2000. the second feature of the millennium bug that makes it so difficult to analyze is the interrelated character of many computer systems. an individual company may be satisfied that it has done all it can to fix its own systems, but it still may feel very vulnerable to the actions taken by its suppliers and customers. in an environment where just - in - time inventory systems and electronic data interchanges ( edi ) have linked economic activities very closely together, one firm ’ s failure has the potential to ripple through significant segments of the chain of production, services, and distribution. thus, greater coordination of y2k remediation activities would have benefits for everyone. but it is clearly impossible to coordinate the y2k activities of millions of individual establishments. to help fill this void, numerous organizations have emerged as clearinghouses of information, and i have high hopes for efforts such as “ national y2k action week ”, which was just sponsored by the small business administration ( for the president ’ s council on the year 2000 ), together with a number of private groups. other institutions are functioning as vehicles for system testing. witness this past summer ’ s inception of federal reserve payment system testing

economy probably is negative. other than the obviously very valuable ability to maintain its operations across the millennium, few quantifiable benefits accrue to the firm - and overall productivity gains are reduced by the extra hours devoted to reprogramming and testing. conservative estimates suggest that the net effect of y2k remediation efforts might shave a tenth or two a year off the growth of our nation ’ s overall labor productivity, and a more substantial effect is possible if some of the larger estimates of y2k costs turn out to be accurate. the effects on real gross domestic product are likely to be somewhat smaller than this but could still total a tenth of a percentage point or so a year over the next two years. what is the spectrum of plausible outcomes for economic activity in 2000? as we have discussed, a great deal of work either is planned or is under way to deal with the year 2000 problem. but what if something slips through the cracks, and we experience the failure of “ mission critical ” systems? how will a computer failure in one area of the economy affect the ability of others to continue to operate smoothly? how severe could be the consequences of y2k problems emanating from abroad? the number of possible scenarios of this type is endless, and today no one can say with confidence how severe any y2k disruptions could be or how a failure in one sector would influence activity in others. that said, let me now turn to a discussion of the spectrum of plausible outcomes for economic activity in the year 2000. what will happen as the millennium rolls over? a few economists already are suggesting that y2k - related disruptions will induce a deep recession in 2000. that probably is a stretch, but i do not think we will escape unaffected. i anticipate that there will be isolated production problems and disruptions to commerce, and perhaps some public services, that will reduce the rate of gdp growth early in 2000. certainly a mild inventory cycle seems very likely to develop. but, just like the shocks to our nation ’ s physical infrastructure that occur periodically, i would expect the y2k shock to our information and electronic control infrastructure is most likely to be short - lived and fully reversed. we have many examples of how economic activity has been affected by disruptions to the physical infrastructure of this country. although the y2k problem clearly is unique, some of these disruptions to our physical infrastructure may be useful in organizing our thinking about the consequences of short