The Cost of Spying on Everyone May Unexpectedly Rise
The most recent spate of revelations in the 'Guardian', the 'Washington Post' and elsewhere about the NSA's sprawling snooping programs may have rather large unintended consequences. We are not referring to the fact that the NSA reportedly routinely violated the already extremely lax rules meant to limit its activities for a number of years, or that it ships all its raw data to Israel 'hoping they won't be misused' (apparently there are no legal limits to the use of the data, so one can only hope).
Rather, we are referring to the fact that the NSA has reportedly cracked internet encryption protocols and that its hackers have 'back doors' into the hardware and software of various mainly US based technology companies at their fingertips. As 'Der Spiegel' reports in a recent article on the NSA's amazing ability to spy on every type of smart phone (including the 'Blackberry', which hitherto was regarded as especially secure), there is no indication or proof that the companies concerned voluntarily helped the NSA to gain access to such back doors. However, the NYT reports (and so does the Guardian) that the agency and its British counterpart, the Government Communications Headquarters, have either collaborated with technology companies or simply strong-armed them into inserting vulnerabilities into their encryption products. It seems therefore likely it will backfire on them anyway.
Recall that the US Congress made a big issue over US companies buying hardware from Chinese telecom equipment manufacturer Huawei, alleging that Huawei's products contain precisely such 'back doors' that would enable spying by China. This campaign has hit the company's export sales hard. The same thing could now happen to US technology companies, according to a recent Bloomberg article:
“A congressional committee’s effective blacklisting of Huawei Technologies Co.’s products from the U.S. telecommunications market over allegations they can enable Chinese spying may come back to bite Silicon Valley.
Reports that the National Security Agency persuaded some U.S. technology companies to build so-called backdoors into security products, networks and devices to allow easier surveillance are similar to how the House Intelligence Committee described the threat posed by China through Huawei.
Just as the Shenzhen, China-based Huawei lost business after the report urged U.S. companies not to use its equipment, the NSA disclosures may reduce U.S. technology sales overseas by as much as $180 billion, or 25 percent of information technology services, by 2016, according to Forrester Research Inc., a research group in Cambridge, Massachusetts.
“The National Security Agency will kill the U.S. technology industry singlehandedly,” Rob Enderle, a technology analyst inSan Jose, California, said in an interview. “These companies may be just dealing with the difficulty in meeting our numbers through the end of the decade.”
Internet companies, network equipment manufacturers and encryption tool makers receive significant shares of their revenue from overseas companies and governments.
[...]
The New York Times, the U.K.’s Guardian and Pro Publica reported in early September that NSA has cracked codes protecting e-mail and Web content and convinced some equipment and device makers to build backdoors into products. That followed earlier reports that the NSA was obtaining and analyzing communications records from phone companies and Internet providers.
The revelations have some overseas governments questioning their reliance on U.S. technology.
Germany’s government has called for home-grown Internet and e-mail companies. Brazil is analyzing whether privacy laws were violated by foreign companies. India may ban e-mail services from Google Inc. and Yahoo Inc., the Wall Street Journal reported. In June, China Daily labeled U.S. companies, including Cisco, a “terrible security threat.”
“One year ago we had the same concern about Huawei,” James Staten, an analyst at Forrester, said in an interview. “Now this is the exact flipping of that circumstance.”
(emphasis added)
In short, the advanced paranoia of the US and UK security services, which have convinced themselves that in order to find a few needles in a haystack they need to collect the entire haystack, may well end up significantly undermining the economic well-being of their home countries. One might well call this a case of economic sabotage. In any event, it is a major own goal.
Potential Economic Consequences
One cannot be sure that the estimate of $180 billion in lost sales by 2016 mentioned above will turn out to be correct, but it is clear that especially foreign government clients of these tech companies are likely to look for alternatives they consider more reliable, and they are very big purchasers of IT equipment. The same holds for the critical IT infrastructure of big companies, as it will be very difficult to persuade them that no industrial espionage is conducted on the side (does anyone recall the fore-runner snooping program called 'Echelon'? Here is an extensive presentation by Nicky Hager to the EU commission on its alleged misuse for industrial espionage).
Companies mainly selling retail products like Apple probably have little to fear, as the great mass of couch potatoes obviously couldn't care less (otherwise there would be a far greater public outcry already). Most people probably console themselves with the fact that the flood of data is so vast that no-one has the time to actually look at it all. On the other hand, the fact that all of it is collected and stored is the real problem, as this means that it can be used (and potentially abused) at leisure.
Moreover, there is the question what alternatives to the products made by US technology companies exist. It is a good bet though that most industrialized nations are at least capable of producing many of the things currently bought from US corporations. If a large enough demand from prospective buyers is expected, then even slightly less competitive 'home-grown' products may be made.
It should be pointed out that such a course will ultimately be to everyone's economic disadvantage, as the global division of labor will shrink in favor of more autarky. A significant amount of capital may be directed into other branches than those in which a competitive advantage exists. All of us will end up poorer as a result.
Finally, the question arises what these developments could mean for US technology stocks, which have been among the biggest winners of Bernanke's echo boom:
The large cap technology index NDX over the past five years: up more than 200% – via BigCharts – click to enlarge.
Can current valuations be maintained if 25% of revenues are under threat? That seems rather unlikely actually.
Conclusion:
As we have often pointed out, to erect a total surveillance state is a sure-fire way to undermine civilization. Once people begin to watch what they say, the free flow of ideas is under threat. However, modern civilization depends on the free flow of information and ideas. Now we see that even more damage can result from the realization of what methods were employed to enable this all-encompassing surveillance.
It is not only relevant to US technology companies whether their revenues are under the threat: ultimately, it is relevant for everyone in the world, as an increase in autarky is neither economically inefficient nor conducive to the maintenance of peace. As Bastiat once said (at least the phrase has been attributed to him): “If goods don't cross borders, armies will”. Of course we are not arguing that war will break out because of this, we are merely underscoring that it is a big step in the wrong direction.
Lastly, there is always the question whether it is 'worth it'. Allegedly, countless terrorist plots have been thwarted by means of the NSA's surveillance. Unfortunately the details are all classified. We are therefore forced to take the word of a government agency that has been caught in numerous lies already and is under scrutiny and defending its turf. However, even if what it asserts is true, one must ask whether this is the best method of dealing with the problem. As Ron Paul never tires to remind us, the best way of lowering the danger of terrorism and of undermining its appeal, is to alter the conduct of foreign policy. Not only would we be genuinely safer, it would also save a lot of money.
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