The Costs of Y2K

By Chris Farrell

Part 1 2

Economists initially looked at Y2K as a productivity killer.

Imagine a town threatened by a rising river. Every able-bodied person in town is put to work stacking sandbags. It's necessary work to save the town, but it's unproductive work. Nothing gets built. No food gets grown.

With the Y2K bug, programmers, chief information officers, project managers, and other digital workers were getting paid to do unproductive work. In other words, stacking sandbags of silicon. No innovative investments. No new productivity enhancing software.

But economists were wrong. Y2K wasn't a flood.

Think of what happened as clearing a path choked with underbrush.

Once the trail is open, it's much easier to zip from point A to point B. Y2K gave companies an excuse to clean up their software and hardware underbrush. That's a critical factor in today's improved business productivity.

"A lot of companies," says Saffo, "said well, gosh, if we're going to have to spend all this money to fix our software let's also see what else we can do at the same time, so it was an invitation to replace a whole bunch of stuff. ... So it forced people to ask hard questions about how they were using things and in the best instances people really did become more efficient."

The result? Companies used the new systems they installed to cut costs, work smarter, and hire fewer workers.

Companies made other changes while coping with Y2K. Business and government learned that disaster preparation is critical in the computer age, a lesson that helped some businesses survive 9/11.

The attack on the World Trade Center stopped trading on the New York Stock Exchange. Against the odds, that citadel of capitalism opened six days later.

John Koskinen, President Clinton's Y2K czar, credits preparations for Y2K.

"The reason the markets, securities markets, were able to open the Monday after the Tuesday of 9-11," says Koskinen, "was they still had the test scripts that had been developed in 1998 and 99."

"They were able to, in effect, take all of those Y2K scripts and make sure that all the transactions with all of the major players would close. Without that, they never would have been able to do it in the time frame with the confidence they had."

Y2K was unique. Unlike other potential economic calamities, everyone knew when the catastrophe might strike. The surprise was how little immediate impact the much-feared millennial transition had on the economy. Yet we're still living and working with the economic impact of Y2K five years later.

Back to The Surprising Legacy of Y2K.