Last month’s flood of financial privacy notices was enough to make even the most wasteful individual scream “save the trees.” But just in case those pieces of government-mandated junk mail weren’t annoying enough, California legislators are working to enact more financial privacy regulations.

Senator Jackie Speier’s (D-Hillsborough) financial privacy bill (SB 773) has already cleared the California Senate and appears set to sail through the Assembly in the next few weeks. Governor Gray Davis is considering the downsides of the bill and has offered some amendments of his own, including one that guarantees an “opt-out” standard for information sharing with outside firms under certain conditions.

Opt-in privacy laws force companies to contact their customers before they share customer information whereas opt-out laws require the customer to communicate his or her privacy preferences to the company. The key difference is in who takes the initiative to clarify a customer’s privacy preferences.

What advocates of opt-in legislation like SB 773 usually fail to tell the public is that opt-in laws will have one of two effects. They will either cause customers to be pursued by businesses more frequently in order to get their permission to send them an offer or, if the costs of contacting customers are too onerous, consumers will lose out on deals that could have been offered to them.

In the case of SB 773, it is rather unlikely that financial institutions will spend significant amounts of time and money contacting all their customers each time they want to share information with a third party, so the ultimate result of the opt-in legislation is to halt the free flow of information.

Not only is this contrary to an open society, but it harms consumers by reducing choice and making products and services more expensive. It’s not rocket science: the more a business has to spend on obtaining new customers, the more it will have to charge those customers for the product. An Ernst & Young study last year showed that information sharing by the financial services industry saves $195 per consumer household per year or $17 billion per year.

Opt-in laws might sound like a good way to “control our information,” but most consumers don’t want to be consulted that much. Proposals such as SB 773 are attempts by a minority of privacy extremists to impose their preferences, and the costs that those preferences entail, on the majority of the population.

It’s not that privacy isn’t a concern of many. Rather, financial privacy opt-in laws don’t make a lot of sense from a consumer perspective given that banks have a good reputation for safeguarding customer information.

For instance, according to this year’s American Banker/Gallup Consumer Survey, only 12 percent of respondents believes that banks are doing a “poor” job protecting their customers’ privacy. And, consumers are already protected by the federal Financial Services Modernization Act—also known as Gramm-Leach-Bliley (GLB)—that went into effect July 1 of this year.

GLB is a national financial services law that contains “opt-out” privacy rules and was the reason that financial institutions recently spent an estimated $400 million sending their customers pamphlets about their privacy options. The law gives consumers the right to stop banks from sharing their information with non-affiliated companies.

At a time when Californians are desperate for the economy to recover, California legislators are poised to travel down a precarious path that other states have already tried and rejected. Since the GLB was passed in 1999, North Dakota, Maine, Florida, and Louisiana have reversed their opt-in legislation in favor of opt-out. Not only are opt-in laws expensive, but the switch to opt-out helps to standardize state law with the federal law.

Given that the federal privacy protections of GLB just became active last month, Governor Davis should ensure that California legislators exercise some patience. Instead of tinkering with unsound legislation, Davis should compel legislators to wait to see how GLB works before passing any new laws. Otherwise, Californians may be subject to legislation that causes more harm than good.

Sonia Arrison is director of the Center for Freedom and Technology at the California-based Pacific Research Institute and author of Consumer Privacy: A Free Choice Approach (to be released Sept. 5th, 2001). She can be reached at sarrison@pacificresearch.org.