Government surveillance has been a hot topic for a while now, particularly after the National Security Agency (NSA) leaks in the US. One of the main questions in the public debate is how much privacy can be forfeited in the name of security, as Benjamin Franklin said “They who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.”

A common defence for the increasing amount of government surveillance is that if you have nothing to hide, then you have nothing to fear. However, this argument can be very harmful to a society and its economy. After all, the base of all social interactions and exchanges is trust, and without trust the economy cannot prosper.

Mass surveillance can be defined as “the subjection of a population or significant components of a group to indiscriminate monitoring. It involves a systematic interference with people’s right to privacy” (Privacy International).

Government monitoring is nothing new, and its effects on interpersonal trust are obvious; but measuring the economic impact is not so simple. For one thing, it is very hard to disentangle the effect of mass surveillance from other effects that may be due to the nature of the regime, the historical and cultural context of the country, and so on.

Measuring the economic impact of mass surveillance

An attempt at measuring the economic impact was published in 2015 by Lichter, Löffler and Siegloch (The Economic Costs of Mass Surveillance: Insights from Stasi Spying in East Germany), using Stasi surveillance in the former German Democratic Republic (GDR) as a case study.

The Ministry for State Security, more commonly known as the Stasi, was created a few months after the constitution of the GDR. By 1989, there were 90,000 employees and 170,000 unofficial informants listed as working for the Stasi (more than 1 in 100 citizens of GDR worked for the Stasi). Their aim was to “battle against agents, saboteurs, and diversionists to preserve the full effectiveness of [the] Constitution” (Erich Mielke, Minister for State Security 1957-1989). This surveillance network was based in East Berlin, but had many offices in each of the 15 GDR states, each office exerting a certain amount of autonomy. This meant that surveillance levels differed across GDR states, which provided the basis for the study. It attempted to measure the effect of the Stasi state-level surveillance on economic outcomes in post-reunification Germany, by exploiting discontinuities across states in spying densities, and by accounting for time invariant characteristics of each state (using pre-war data).

This study found that the more spies there are, the worse-off the state will be. Its results indicate that abolishing all surveillance would have reduced the average unemployment rate by 1.8 percentage points (equivalent to a 10% drop compared to the GDR average), and increased average voter turnout by the same amount.

Mass surveillance also seems to stifle entrepreneurship, with an estimated drop of 2.5 percentage points in the self-employment rate due to surveillance. Post-reunification innovation is also affected, as the study estimates that the number of patents per capita would increase by 20% for one standard deviation decrease in the state’s spying intensity. The Stasi spy network significantly degraded trust in GDR institutions and in trust between economic agents, causing significant harm to the economy that persisted even after the end of the Stasi network.

In the past, mass surveillance relied on spies all over the country, relaying information back to the central intelligence services, but this is no longer the case. In the age of the algorithm and of omnipresent technology, surveillance now permeates every facet of our lives. Individual rights to privacy are being consistently eroded in the digital era.

Governments have been passing more and more legislation allowing these practices to continue and to develop to a tremendous extent. Indeed, as John Oliver said in response to President Obama’s defensive claim that NSA programs have plenty of Congressional oversight and safeguards, “Mr President, no one is saying you broke any laws. We’re just saying it’s a little bit weird that you didn’t have to.”

This surveillance is also extremely costly to put into effect: for example, a US$1.5 billion centre was recently built to analyse internet data, and it even has its own water treatment centre, with 60 back-up generators, and with enough storage for a year of 24/7 video recording of over a million people. That is roughly equivalent to 9 billion hours, just for that one centre. While this is undoubtedly riveting footage, the argument that surveillance is only used for the bad guys rings false, even if surveillance on ‘non-bad guys’ is unintentional.

The microeconomics of mass surveillance

Besides these direct costs, the economy takes a huge hit from the loss of trust due to high levels of surveillance. Foreign and domestic customers will be reluctant to keep buying the country’s goods and services if they do believe that their personal information is not secure, or that they are being spied on.

The Information Technology and Innovation Foundation, a think tank based in Washington D.C, estimated that the NSA revelations would cost the US cloud computing sector US$35 billion in lost foreign custom. However, they have since released another report saying that the economic impact will “likely far exceed” their previous estimate. Daniel Castro, one of the writers of the study, went on to add that without some intervention from the US government to limit their now famous surveillance programs (PRISM for instance, which allows access to private online conversations), foreign businesses will continue to be wary of dealing with US companies, and it will be difficult to put a figure on the cost to the US tech sector. Indeed, in 2013, the European Parliament’s civil liberties committee received a proposal suggesting that every American website would have to include surveillance notices for EU citizens.

US firms were put at a competitive disadvantage, because consumers will worry about them not being able to protect their personal information. Customers will instead look abroad for alternatives, such as Runbox, a Norwegian email service marketing themselves as an alternative to Gmail and the like. The premise of their service is that it will not comply with foreign court orders requiring the disclosure of personal information. It is safe to say that people are taking notice: after the NSA leaks, there was a 34% annual increase in the number of customers.

Furthermore, when government surveillance colludes with firms to allow data access, this can harm a firm’s security. Such deals often create more backdoors into the firm’s software, which can be exploited more easily by hackers or other people wanting to steal information.

Perhaps the greatest harm of all in the long run will be the impact on creativity, which is becoming increasingly important for the economy, as Edward Snowden said “we must remember that creativity is the product of curiosity, which in turn is the product of privacy.” The loss in creativity may not be measurable, but it could have devastating effects on the global economy and global prosperity.

Mass surveillance undermines trust in firms, in institutions, and ultimately undermines the rule of law. However, it is not just governments that demand that firms monitor their clients, some firms are also collecting increasing amounts of data for commercial purposes. These include targeted advertising in order to gain an informational advantage over consumers and over other firms. The market for customer data is growing.

Consumers are also increasingly aware of this data gathering, but there seems to be a phenomenon that behavioural economists refer to as the “privacy paradox”. This stems from the fact that most people would claim to be worried about abuses of privacy, yet behave in a contradictory fashion (Spiekermann, Grosskags and Berendt, 2001). Most of us are too lazy or have better things to do than trawl through the terms and conditions to see what rights a website will have on our personal data, for example.

People are very vulnerable to cognitive biases, with short run interests taking a much more important role than long run ones. Most of the time, individuals do not have time to calculate the minutiae of the costs and benefits of every decision, and so they do not behave in a strictly rational way, in the economic textbook sense of the word. The risks and potential losses from handing over personal data are difficult to imagine ex ante, and it is even harder to estimate how probable they are (identity theft for example). This results in people giving away much more data than they would necessarily want and they will process risk in an ‘irrational’ way. This can have very serious consequences for the individual. On a bigger scale, for the society, it poses questions like whether it should be legal for an insurance firm to obtain search data to determine how much it can charge a new customer. Sick customers will undoubtedly value health insurance more, and probably be willing to pay more but it is amoral for firms to exploit this.

In the wake of the NSA leaks, the consensus seems to be that surveillance has gone too far. Seemingly, no one is immune from having their personal information or private online conversations stored. This is harmful to the economy, especially for the US, and indeed any regime that decides to use excessive amounts of government surveillance. As the White House stated in 2011, “People must have confidence that data will travel to its destination without disruption. Assuring the free flow of information, the security and privacy of data […] are all essential to American and global economic prosperity, security, and the promotion of universal rights.”


by Tristan Salmon


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