Will governmental folly now allow for a cyber crisis?
8 July 2012 / KENNETH ROGOFF, SUNDAY’S ZAMAN
CAMBRIDGE –- When the financial crisis of 2008 hit, many shocked critics asked why markets, regulators and financial experts failed to see it coming.
Today, one might ask the same question about the global economy’s vulnerability to cyber-attack. Indeed, the parallels between financial crises and the threat of cyber meltdowns are striking.
Although the greatest cyber threat comes from rogue states with the capacity to develop extremely sophisticated computer viruses, risks can also come from anarchistic hackers and terrorists, or even from computer glitches compounded by natural catastrophe.
A few security experts have voiced great alarm, including, most recently, Jonathan Evans, the head of the British Security Service (MI5). By and large, however, few leaders are willing to compromise growth in the tech sector or the Internet in any significant way in the name of a threat that is so amorphous. Instead, they prefer to establish relatively innocuous working groups and task forces.
It is difficult to overstate the dependence of modern economies on large-scale computer systems. But imagine if one day a host of key communications satellites were incapacitated, or the databases of major financial systems were erased.
Experts have long identified the electricity grid as the most acute vulnerability, since any modern economy would collapse without power. True, many skeptics argue that with reasonable low-cost prophylactic measures, large scale cyber-meltdowns are highly implausible, and that doom-mongers overstate the worst-case scenarios. They say that the ability of cyber-terrorists and blackmailers to take the global economy to the brink, as in the 2007 Bruce Willis movie Die Hard 4, is utterly fictional.
It is difficult to judge who is right, and there are important experts on both sides of the debate. But there do seem to be an uncomfortable number of similarities between the political economy of cyberspace regulation and of financial regulation.
First, both cyber-security and financial stability are extremely complex topics with which government regulators can hardly keep up. Industry remuneration for experts is far in excess of any public-sector salary, and the best minds are continually bid away. As a result, some argue that the only solution is reliance on self-regulation by the software industry. One hears this argument for many modern industries, from big food to big pharma to big finance.
Second, like the financial sector, the tech industry is enormously influential politically through contributions and lobbying. In the United States, all presidential candidates must make pilgrimages to Silicon Valley and other tech centers to raise money. Excessive financial-sector influence was, of course, a root cause of the 2008 meltdown and remains deeply implicated in today’s continuing eurozone mess.
Third, with slowing growth in advanced economies, information technology seems to hold the moral high ground, just as finance did until five years ago. And crude attempts by governments to enforce regulation are likely to prove ineffective in protecting against catastrophe, while all too effective in strangling growth.
In both cases –- financial stability and cyber security –- the risk of contagion creates a situation in which a wedge can form between private incentives and social risks. Admittedly, progress in the technology sector overall often produces huge social-welfare gains, which arguably outstrip those produced by all other sectors in recent decades. But, just as with nuclear power plants, progress can go awry in the absence of good regulation.
Finally, the greatest risks come from arrogance and ignorance, two human characteristics at the heart of most financial crises. Recent revelations about the super-viruses “Stuxnet” and “Flame” are particularly disconcerting. These viruses, apparently developed by the US and Israel to disrupt Iran’s nuclear program, embody a level of sophistication far beyond anything previously seen. Both are deeply encrypted and difficult to detect once inside a computer. The Flame virus has the capacity to take over a computer’s peripherals, record Skype conversations, take pictures through a computer’s camera, and transmit information via Bluetooth to any nearby device.
If the world’s most sophisticated governments are developing computer viruses, what guarantee is there that something won’t go awry? How can we be sure that they won’t “escape” and infect a much broader class of systems, or be adopted for other uses, or that future rogue states or terrorists won’t find a way to turn them on their creators? No economy is more vulnerable than the US, and it is arrogance to believe that US cyber superiority (to all except perhaps China) provides it with impenetrable security from attack.
Unfortunately the solution is not so simple as just building better anti-virus programs. Virus protection and virus development constitute an uneven arms race. A virus can be just a couple hundred lines of computer code, compared to hundreds of thousands of lines for anti-virus programs, which must be designed to detect wide classes of enemies.
We are told not to worry about large-scale cyber meltdowns, because none has occurred, and governments are being vigilant. Unfortunately, another lesson of the financial crisis is that most politicians are congenitally incapable of making difficult choices until risks actually materialize. Let us hope that we are lucky for a while longer.
21st-century political economy transition
by C. Warren Neel*
8 July 2012 / ,
Political economics have an interesting history in every part of the globe. Changes that have been made vary in nations, even where the common goal is to benefit the citizens.
Viewing the evidence of the past 200 years affirms that a nation’s success has a tendency to generate a different model or some significant modifications, particularly during a crucial change in the business cycle.
Today’s global economic issues reflect changes in the financial wellbeing of countries. Political models are also undergoing change in national and international governments, particularly where there are new elections of leaders. When aware of these changes, one wonders if the global historical pattern of political economics thesis challenges the antithesis, and a synthesis is formed.
The US government is an example of the changing process, having spent most of the 1900s defining “who we were not.” Even while dealing with recessions, inflation and a variety of other economic issues, political actions appear to be dictated by a vision that policies would be designed and implemented to avoid communism. Democracy indeed had a powerful antithesis that pressured action.
In reality, the mirror of communism was used by virtually all political leaders to define what the country would not become and dictated what should be done to make sure democracy remained. Then in the mid-1980s when Russia abandoned the communist model, the US lost the reference that defined its actions.
Because countries no longer have the communist reference and no longer have individual political clout as in the past, it is becoming evident that emerging changes will continue to affect politics, making the public wonder if the political-economic model that dominates the “democracy model” in the US and new forms of government in Europe and Asia will now move nations to a global model of governance rather than that of individual country. If not, will it simply modify countries’ governance practices?
Major evidence reflecting change began appearing with the G-8 of the 1970s. Now it has become the G-20 and will move even further and continue to influence monetary and fiscal policies. Moreover, the growth in capital markets and their daily assessment of global activities add to the new emerging model of political economy. With each passing year, such critical financial policies are becoming more coordinated among nations, rather than having a single country dictating policies and having complete control over their economy. As evidence, the G-8 recently met to discuss monetary and fiscal policies. That has happened before, but this time it appeared different in that it is increasingly necessary for nations to coordinate policies and actions.
The period following the 1980s has produced enormous growth in technology. The results appear to be a major source of sea change to virtually every facet of the 21st century and thus are affecting all countries.
One of the major items creating political and economic change is technology. It appears to be developing, affecting virtually every industry and, ultimately, creating a major source for a different economic thesis that a host of nations will have to deal with in this century. Healthcare, retail, manufacturing and education are but a few examples. Delivering better healthcare is gradually being shifted toward individual responsibility, with the analysis of individuals and community wellbeing available immediately online. Forms of surgery are even being done by robots. Retail firm sales are growing online as pattern sales analysis is reducing the necessary inventory in stores to service a specific location. This has resulted in more rapid inventory turnover and an increase in gross margins. Manufacturing is changing due to a host of technology that is replacing labor. Education is also being affected, altering the delivery of the content to students in grade schools and universities.
The most notable statistic that reflects major change is the employment patterns that traditionally follow a business cycle. In the 1980s the accepted outcome of a typical business cycle was, in the US, 5 percent unemployment. The past four years have remained above 8 percent, and the pattern is not following the historical model. Stimulus funds have also not materially affected the pattern, as was very much the case in the past. Reality suggests that layoffs have resulted in a modest increase in increased capital investment in technology that enhanced the service and product outcome rather than rehiring. Thus the substitution of capital for labor is part of the sea change that is occurring.
Decisions made by companies will obviously continue to reflect a different model of service to customers and collectively continue to reflect a change in the historical business cycle of recovery.
The technology era is providing major changes, even to classic principles of economics. Perhaps the most significant change is, in principle, the economy of scale. Since the start of the industrial revolution, firms have always focused on growing to increase profits and compete very effectively. This era of technology could be replacing that principle with the “economy of agility” as a major objective. How quickly can a firm change its competitive edge in the global economy could become the focal point, not just size.
The emerging 21st century has begun to modify the traditional means of a government’s economic control. The borders of a nation, its states, countries and cities have been viewed in large measure as reflecting the rights and responsibilities of citizens. Now borders have begun to experience changes because of the technology. Tax collections, property values and a host of other changes appear to be absent from policies that have been significant in defining a government’s authority and responsibility.
The question remains as to how the democracy model changes will occur or if they will. Increasingly, evidence does suggest change is under way and will continue to alter the form of a nation’s and the globe’s political economic model.
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