The fact of the matter is, Google doesn't appear to be doing anything worse than what companies likeApple, Microsoft, Yahoo, and Facebook have doing for years. It's just that Google has taken arguably unprecedented pains to alert the public of imminent changes to its privacy policies and has made the new policy approachable enough for the average person to read it. (Or skim it. Or skim what someone else wrote about it after skimming it.)
Google already knows about you
In a nutshell, Google is effectively replacing the 60 or so separate privacy policies the company currently has for its wealth of services. The new policy (along with a blog post and video on the subject from Google) reiterates what you already should have realized: Google collects data about you as you are logged into your Google account and using a Google service (e.g. Search, YouTube, Gmail, Google+).
If you were unaware that Google or any other company was collecting data about you while you used one of their online services, you must be new to the Internet or (with all due respect) oblivious. Nothing's changed here: Google has long collected your data as you've searched and Gmailed, and it has used that data for such things as targeted ads. The type of data the company is collecting is not changing.
What's new is that the policy states clearly that the aforementioned data can be shared among the other Google services that you use while logged into your Google account. It's similar to, say, how Facebook shares varying amounts of data about you among its services -- as well as with the third-party apps on the site.
Google is spinning it as an opportunity for a more personalized, integrated Google experience. Per the company's official blog, "We can provide reminders that you're going to be late for a meeting based on your location, your calendar, and an understanding of what the traffic is like that day. Or ensure that our spelling suggestions, even for your friends' names, are accurate because you've typed them before."
Perhaps this could even lead to better integration of existing Google services with Google+ (something I've wanted to see for some time now).
Won't someone think of the surprise parties?
As I noted, critics are raising flags, including members of the U.S. Senate. Senator Richard Blumenthal of Connecticut is fretting that Google's policy "does not give consumers the ability to opt out of such new uses of their data." He foresees potential abuses such as this: "Private email messages might contain any number of personal, embarrassing, or otherwise damaging information, and Google's attempts to amplify and contextualize this information through targeted ads, Maps suggestions, or Calendar reminders could have negative consequences for users," he wrote in his blog. "These harmful impacts could range from the inconvenient (spoiling a surprise party) to the truly harmful (popping up a calendar reminder about an evening job interview while you're at work)."
I confess that I'm not on the Senate Subcommittee on Privacy, Technology, and the Law like Sen. Blumenthal and thus may not fully grasp why Google sharing data among services raises any more of a risk of telegraphing a job interview or a surprise party than, say, simply leaving your calendar (be it digital or paper) open in the wrong place and at the wrong time.