The Spy Scandal’s Price Tag

The early days of the National Security Agency scandal were filled with speculation about political and societal implications. As time passes, however, one set of consequences is coming into sharp focus: the economic ones.

The Information Technology & Innovation Foundation estimated last month that disclosures of spying abroad may cost American technology companies as much as $35 billion through 2016, Bloomberg reported. Cisco Systems Inc. has reported that NSA disclosures have already caused hesitation in certain emerging markets. Robert Lloyd, the company’s head of development and sales, said the scandal “is certainly causing people to stop and then rethink decisions.”

The damage to America’s information industry was at the top of the agenda for 15 tech-company CEOs who met last week with President Obama. The group, including the heads of Google, Yahoo, Facebook, Apple and Microsoft, has endorsed a set of principles to reform the nation’s intelligence-gathering apparatus. There is no indication yet, however, that the president and his administration are prepared to do anything beyond listening to the proposals and defending their current activities in court.

Meanwhile, the disclosures triggered by Edward Snowden have given ammunition to those who call for greater Internet regulation across national borders. Countries like China and Russia have long opposed the United States’ call for an open, truly international Internet environment. Now democratic nations including India, Brazil and Germany are instituting or considering policies to keep their citizens’ data within their national borders. In light of the NSA’s actions, openness is losing ground to security concerns. This creates the potential for an online environment divided into regional or national fiefs. Such splintering would do further harm to companies like Google and Facebook, which have thrived using global networks with few restrictions up until now.

While worrying about losing international customers, technology companies are also scrambling to beef up security to appease the fears of users both abroad and at home. The New York Times recently reported that Microsoft has joined Google, Mozilla, Twitter, Facebook and Yahoo in announcing plans to shield its services from outside surveillance – presumably primarily from the NSA, along with others attempting to access private data. Where security was once one of competing concerns, including speed and user experience, revelations about the scope of the NSA’s actions have moved it squarely front and center.

Some companies had been reluctant to institute security measures that slow down loading times, in fear of losing customers. Now, however, they risk losing customers if their security is not seen as sufficiently robust. This directional shift will take time to implement, and it will cost money as well. While reacting to security threats is always going to be part of a technology company’s business, we used to expect those attacks to come from Chinese hackers or Russian cyberspies, not our own government.

There is a real, measurable economic cost to the NSA’s actions. We will likely continue to see that cost accumulate over the next few years, at the very least. Trust is easy to shatter and hard to earn back, as American companies will come to know all too well.

In its single-minded pursuit of the power it says it needs to stop terrorist attacks, the NSA is neither inclined nor qualified to gauge whether the benefits of such power are worth the evident cost. In theory, that is why we have an executive branch, Congress, and independent oversight.

Unfortunately, the Snowden affair has made clear that the overseers have largely become captive to those they are supposed to oversee. If the American public isn’t careful, one day we may wake up to find that the economic power that once resided in Silicon Valley has shifted to some other part of the globe.

About Larry M. Elkin 553 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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