This image classification can be done on client devices as well and backed up to the cloud with encryption. Expecting Google to do this is unreasonable.
Sure, image classification can be done anywhere. People could classify their own images without any algorithm. The point is, image classification isn't scary, and I don't see how it could be. Using classifications to manipulate people might be scary, but that has little to do with whether it is done by Google, the server, or the client. If you don't want your images classified, don't send them to photo stores whose entire reason for being is the organization and classification of data.
That's disingenuous: Google strongly and repeatedly encourages Android users to enable Google Photos for private backup with a single click. Users don't like to lose photos, and their phone vendor is telling them how to avoid it. This often isn't an informed or premeditated decision.
What are your expectations, and why would the elicit such an extreme reaction to the status quo?