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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.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book Looking Ahead: Life, Family, Wealth and Business After 55.

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