Privacy: The Key To The New Economy

Call it the economics of privacy. The cost of privacy violation to potential economic growth is rising in America. What was once seen as a threat to civil society is now a clear and present danger to the economic health of the country. Unless privacy is protected soon, the revolutionary potential of the Internet may never be realized. Commerce could be stifled as individuals avoid arenas, virtual and real, where their privacy is threatened. The invasion of privacy may turn out to be the greatest menace to the New Economy.

The chilling effect of the loss of privacy can be seen in Net avoidance. In a new BUSINESS WEEK/Harris poll of adults, 61% not online say they stay off the Net because they feel personal information and communications are not protected. The same doubts keep 78% of Net users from using it more than they do. Some 80% of people who have never bought anything on the Net say they haven't because of fears that their credit-card data will be given or sold to others. Some 65% of those who do buy things online have the same concern. By a vast majority, people say they do not want to give out financial and personal information to advertisers. They are refusing to register on Web sites.

People don't want the government to have access to their personal data, either. Government proposals to gain possible "backdoor" access to all software through controlling encryption is yet another assault on privacy. In an increasingly digitalized world, every minute fact, every transaction, every communication can be observed and tracked. People know it and feel threatened.

Privacy is being taken away in the name of good intentions. The Net is a new medium, and companies say they need information on people to target their products, build their business models, and plan their marketing campaigns. The government, in turn, justifies its attack on private communications in the name of combating crime and terrorism. Lofty goals, indeed. But the long-term cost will be high.

People are increasingly wary of the Net at precisely the time it is approaching critical mass. The advent of below-$1,000 personal computers, WebTV, and other inexpensive options are now opening the Net to its true potential. When the Net was the plaything of academics and the Defense Dept., it had almost no connection to the real economy. Now, it is a major engine for growth, and privacy matters a great deal.

Time is running out for the Net community. The public does not trust its promises for self-regulation to ensure privacy. The polls show that people don't believe that these voluntary standards are working. Any spot check of Web sites shows that few make any serious effort to protect privacy. It's no wonder that the public wants the government to step in immediately and pass laws on how personal information can be collected and used. Even Silicon Valley libertarians who believed in voluntary standards for years are no longer so sure.

As the economy shifts increasingly from an industrial to an information base, an individual's private data take on an economic utility unknown in the past. So, too, does a person's economic behavior in the electronic realm. Future growth depends on the security of that data and the comfort level for that behavior. Both civil society and economic growth depend increasingly on privacy.

Before it's here, it's on the Bloomberg Terminal.