Latest Privacy Proposal Could Cost California Billions Commentary by By PETER A. JOHNSON and ROBIN VAUGHESE It sounds good: require every business to contact you and get your permission before it can share any of your personal information with other companies. But underneath that simple-sounding idea are hard-to-see but harmful effects that would ripple through the economy. The California State Legislature is considering whether to require consumers to provide affirmative consent, or “opt-in,” for information sharing between businesses. Such an “opt-in” law would mark a significant and costly departure from the more flexible but still consumer-friendly “opt-out” approach found in the rest of the country. In fact, our own research shows California consumers, non-profit organizations, businesses and the state itself will be on the hook for several billion dollars. The types of costs for consumers range from increased interest payments for mortgages and credit cards to higher costs for financial goods and services. But consumers wouldn’t be the only ones to pay. Costs would also be borne by entities as diverse as California itself. Our recently completed study titled, “Hidden Costs: The Economic Costs of an Opt-In Privacy Regime for California,” represents the first attempt to quantify the economic impact of schemes that severely limit the use of information by businesses. The report looks only at a few sectors of the California economy: financial services, charitable organizations and non-store retailing. We relied on extremely conservative estimates, which means the economic impacts are understated and could, in fact, be much greater than what we found. But even using conservative assumptions, we made several notable findings, including: – California charities would lose more than $1.5 billion in revenue because of added expenditures and lost donations. – California customers of the 90 largest financial services firms would pay an estimated $1 billion more for goods and services because of added costs to identify and reach customers. – Financial institutions and e-tailers would pay hundreds of millions of dollars updating their businesses to comply with “opt-in.” – Direct marketers would have to spend over half a billion dollars more to reach the same consumers. We also looked at segments of the California economy for which the value of information is less apparent. For instance, we analyzed the effects “opt-in” could have on housing availability and affordability in California. We found that the inability of mortgage companies to use information to fine-tune risk and securitize debt could impact mortgage rates in California, as it has in places like Europe that operate under an “opt-in” system. Even a 1-percent increase in the average mortgage rate in 1999 would have increased interest charges paid by Californians by $418 million. By 2004, that’s an extra $2 billion in interest payments. And with $2 billion less for California tax rolls, at least $80 million would be lost. If we apply that same 1-percent increase to 1995 mortgage interest rates, the last year for which comprehensive U.S. Census housing affordability data is available, the broad impacts are even easier to see. Some 1,850 fewer homes would have been sold in California that year. As a result, approximately $332 million in home sale revenue would have been lost along with as many as 1,700 California construction workers’ jobs. New homebuyers would have paid $1,760 more per household in interest payments that year, totaling $110 million. This inability to fine-tune risk and securitize debt would also impact the credit card industry. We estimate that even a 1-percent increase in the annual interest rate on credit cards, again a conservative estimate, would result in an additional $927 million in interest payments by California consumers. “Hidden Costs” was just a first attempt to put a price tag on the broad concept of third party “opt-in” restrictions on California businesses and organizations. We believe the report presents, for the first time, a critical component to the “opt-in” discussion the economic consequences. Peter A. Johnson, Ph.D., is adjunct professor at Columbia University’s School of International and Public Affairs. Robin Varghese is adjunct fellow at the Forum for the Free Flow of Information and is completing his doctorate at Columbia University’s Graduate School of Arts and Sciences.