It's an interesting way to use GPS information on a grand scale to solve practical problems. Many other Google services collect data that help Google develop new features: GOOG-411 collects voice samples that train Google's speech recognition systems, Google queries anticipate flu activity, while query refinements improve Google's "did you mean" feature.
Google Mobile's privacy policy includes a long list of information that could be collected by some of Google's services: your phone number, your carrier, basic usage stats about your device, your location, voice samples. It's worth pointing out that iPhone's mapping application "does not support traffic crowdsourcing", so you won't improve Google's traffic data by using it (iPhone's map application is not developed by Google).
Apparently, this new source of data allowed Google to expand the traffic feature to arterial roads. "Commuters have long relied on traffic sites to help them determine their last-minute path around poor traffic on the highway. But if the traffic looks bad on the highways, you'll probably want to know how it looks on the alternate routes through arterials," explains Google LatLong.
For now, Google Maps provides live traffic data for a small number of countries (US, UK, France, China), but crowdsourcing could expand its availability.
