If you encrypt, then they simply haul you in and demand the password. If you fail to give it to them, it's a serious crime and you go right to jail for it. Simple.
As for people in the US standing for it, the Bush answer for that was simple also, don't tell anybody you're doing it. Cisco built a whole new class of network gear, HP and IBM built some of the largest data centers for the US Govt to do just what Britain is only talking about. That's why Bush and Cheney were so frantic about getting immunity for the telcos on data tapping, because they were threatening to out all the secret installations that monitor just about whatever Internet traffic the Feds want to look at.
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