If you haven't noticed it already, flip back a few pages and take a good look at the front cover. Unless you picked this magazine up on a newsstand, you should see your neighborhood's grinning mug shot, exposed in all its glory from above. Depending on where you live, you may be able to glimpse your neighbors' homes, a gas station or two, and perhaps the local elementary school.
Welcome to the database nation, where the tiny chunk of data that represents your physical address can pull up an overhead view and driving directions to your front door. And that's not all. When your address is linked to databases like those used by Yahoo! People Search, your phone number may be readily accessible. Your county government's Web site probably displays your home's floor plan and assessed value, letting nosy neighbors chuckle over Alice's quaint split-level or Bob's lack of elbow room when the in-laws visit. Pay-as-you-go databases like Lexis-Nexis' P-TRAK, P-FIND, and P-SEEK tie together mortgage records, vehicle registrations, court judgments, bankruptcy histories, and any other public information they can gather. Google and Yahoo! can record every search you've ever made and link it to whatever computer you used at the time. Credit card companies know what you buy, frequent shopper programs know what you eat, and your insurance company knows what medical procedures you've undergone.
Is it any wonder that public concern about privacy has risen dramatically during the last decade? Self-help and advocacy books abound, with titles like I Love the Internet But I Want My Privacy Too! and Privacy for Sale: How Big Brother and Others Are Selling Your Private Secrets for Profit. Hundreds of privacy-related bills have been proposed in the U.S. Congress and state legislatures. In a February 2003 Harris poll, 69 percent of those surveyed agreed that "consumers have lost all control over how personal information is collected and used by companies." That view was summed up with cynical certitude by Sun Microsystems CEO Scott McNealy. "You have zero privacy anyway," he said a few years ago. "Get over it."
What McNealy didn't mention, and polls and politicians don't recognize, is the unsung benefits that have accompanied the databasification of American society. More precisely, they're unacknowledged or invisible benefits. It's easy to complain about a subjective loss of privacy. It's more difficult to appreciate how information swapping accelerates economic activity. Like many other aspects of modern society, benefits are dispersed, amounting to a penny saved here or a dollar discounted there. But those sums add up quickly.
Markets function more efficiently when it costs little to identify and deliver the right product to the right consumer at the right time. Data collection and information sharing emerged not through chance but because they bring lower prices and more choices for consumers. The ability to identify customers who are not likely to pay their bills lets stores offer better deals to those people who will. In films like The Net and Changing Lanes, Hollywood tells us that databases can be very dangerous. The truth is more complex. Being a citizen of a database nation, it turns out, can be very good for you.
Mistreat Me, Please
When Safeway or Giant offers you a supermarket discount card, it's not because their executives are making value judgments about whether it's appropriate for you to nosh on mocha fudge ice cream instead of wheatgerm�infused organic macrobiotica. They don't care. Instead, supermarket managers use the cards to evaluate the effects of promotional campaigns, understand the impact of price on consumer demand, and make better predictions about what you might be looking for on your next shopping trip. IBM even sells grocers software to "quickly roll out a loyalty program designed to reward and retain your best customers and track shopping patterns." Technological innovations are crucial in the cutthroat supermarket business, where profit margins hover around 2 percent and sales at rival superstores like Wal-Mart and BJ's Wholesale Club have been increasing by 19 percent a year. Far from a means to snoop on customers, discount cards are more like a way for supermarket chains simply to survive.
Some vocal activists don't see it that way. A group called Consumers Against Supermarket Privacy Invasion and Numbering (CASPIAN) has sprung up for the sole purpose of condemning supermarket discount cards. "We've got to stop supermarkets from manipulating us into surrendering one of our most intimate possessions -- the ability to make reasoned, non-coercive decisions about how and to whom to disclose intimate information about ourselves," CASPIAN warns. "How can supermarkets justify this vicious mistreatment of the very patrons who keep them in business?" Simple: Nobody is forcing shoppers to sign up for discount cards; they do it because the benefits outweigh the costs.
The implications of living in a database-driven society go far beyond supermarket cards. Consider Gateway, which in 1997 was looking for a way to boost Internet purchases of its computers. It decided to offer would-be purchasers a way to obtain instant credit through its Web site. By filling out an online form, customers could apply for immediate financing and, in nearly all cases, receive an answer in just 15 seconds.
The idea proved to be a terrific success. By providing instant credit, Gateway was able to attract customers who didn't have credit cards or didn't want to use them. Its previous, manual method of approving loans took an average of five hours and resulted in $377 million a year in consumer financing. After Gateway offered instant credit, sales picked up and financing ballooned to more than $2 billion by 1999.
Gateway was able to do that by taking advantage of one of the marvels of modern American society: the credit reporting system. Every day this system churns through millions of transactions relating to approximately 1.5 billion credit accounts held by 190 million people, each with his or her own FICO (Fair Isaac Corporation) score, a rough estimate of how credit-worthy that person is. This constant flow of information lets businesses and lenders make more accurate -- that is, less risky -- decisions about whether to grant or withhold credit. Thanks to this system, you can log on to Gateway.com and have a custom-built computer immediately shipped to you; you can apply for a mortgage at ditech.com, Moneywarehouse.com, or LendingTree.com and receive an instant answer. Go to a shopping mall, and you'll find that nearly every store seems to be pitching its own brand of credit card. You can visit a car dealer you've never been to before, obtain a five-figure loan, and drive your new purchase home the same day. In 1999 credit cards were used in the U.S. for 14 billion transactions totaling about $1.1 trillion, with an average purchase of $76, according to the U.S. Department of Commerce.
This incredible convenience is something our grandparents never enjoyed. Just a few decades ago, applying for credit meant an in-person visit to a loan officer. If the loan officer didn't know you personally, he or she would contact your references and other creditors and eventually make a decision a few weeks later. If you had just moved to the community, you might be turned down or be approved for only a small loan. It was a slow, painful process that was hardly consumer-friendly.
Today, not only can you get a loan nearly instantly; you'll pay less for it than in countries that prevent the free flow of information. Some nations permit only negative information in credit reports, instead of the mix of positive and negative details that form the backbone of the U.S. system. Walter Kitchenman, an economist at Purchase Street Research, estimates that because of information sharing among financial firms "mortgage rates in the United States are as much as two full percentage points lower" than they would be otherwise. In the words of Fred Cate, a law professor at Indiana University, "with outstanding mortgage rates approaching $4 trillion, American consumers save as much as $80 billion a year because of the efficiency and liquidity that information makes possible. The cost of credit in the United States is also lower [than in most places in the world] because the information that credit decisions depend on is assembled routinely and efficiently, rather than at the time the consumer desires credit." That's a few hundred dollars per American every year.
Most of us know people who misuse their credit cards through holiday spending sprees or random acts of profligacy. But millions of us do not; we use credit cards because they're safer and more convenient than carrying thick wads of dollar bills. Cash is dirty and carries germs. It can be ripped or torn accidentally. Unlike a credit card, if you lose it, you're out of luck.
Also, few of us can buy our homes outright. By giving us a schedule of regular payments, a bank loan to buy our home lets us plan for the future.
Building on Reputation
All this was made possible by the convergence of several trends half a century ago. After the Depression, the pent-up demand for consumer goods exploded and the desire for an entirely cash-based society evaporated. The end of World War II brought a population boom and greater mobility. The most crucial change was the invention of the computer, which permitted more-efficient information storage and retrieval. The invention of high-capacity hard drives, fatter memory chips, and ever-speedier integrated circuits completed the databasification of American life.
While computers were essential to this latest phase of data gathering, the need to compile and exchange financial information is hardly new. Stanford economist Avner Greif's history of trade between 11th-century Mediterranean cities, published in the Journal of Economic History in 1989, showed how merchants used overseas agents, backed up by a web of information flows, to save money. For merchants, hiring agents to receive shipments when they arrived at the destination port was cheaper than traveling with the goods. To prevent agents from absconding with the merchandise, Maghrebi traders relied on a social network that provided agents and kept track of those who cheated. "Information was crucial to business decision-making," Greif noted. To keep agents honest, "coalition members blocked a cheater's access to the coalition's internal information flows." The traders' rudimentary paper ledgers served the same purpose as today's electronic credit reports: helping to distinguish honorable traders from frauds and deadbeats.