201812

December 4, 2018 9:33AM

Central Bank Digital Currency Threatens Financial Privacy and Economic Growth

Various proposals for “central bank digital currency” (CBDC) have been under discussion for several years now. The central bank of Ecuador launched a digital currency in 2015 — and shut down the failed project three years later. A number of economists have addressed the topic.

What is a CBDC? It is a payment medium that would be denominated in the established fiat money unit, not in any new unit. There are two main models: (1) a digital token that, like traditional coins and currency notes, and like Bitcoin, passes peer-to-peer without going through the interbank clearing system, presumably validated by a distributed-ledger blockchain system; and (2) account balances that individuals and businesses can directly hold on the books of the central bank, retail versions of the balances that commercial banks presently hold there for interbank payments. The latter model is not really properly called a currency, being a deposit-transfer system, but it is put under the “digital currency” umbrella because it resembles fiat currency notes in being a liability of the central bank, and as such a “final” means of payment, and because transactions would settle nearly instantly on a single balance sheet.[1]

The debate over CBDCs was recently revived by the IMF’s Managing Director Christine Lagarde in a speech suggesting, rather tentatively, that central banks should consider issuing some kind of digital currency so as to keep up with the times. (Why on earth the IMF continues to exist, long after the demise of the Bretton Woods system that it was created to support, is a question for another time.)

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December 3, 2018 3:42PM

Three Basic Principles for Immigration Reform

I have previously described in detail the reforms that America’s immigration system needs. In this post, I want to highlight what I think the general principles behind those reforms should be. Three basic principles should guide immigration reform: openness, equal treatment, and flexibility. Reform should make America more open to immigrants, should treat all immigrants equally as individuals, and should be flexible enough to respond automatically to changes in the economy or society.

1) Openness to new immigrants. Reform should make it easier to immigrate legally, not more difficult. This pillar protects the rights of Americans to associate, contract, and trade with people born in other countries. These people might be their family members, friends, employees, or employers, but ultimately, restrictions on immigration are restriction on the liberty of Americans. Reform should recognize the presumptive right—overcome only for very good reasons—of Americans to freely interact with foreigners on U.S. soil.

Of course, the freedom to associate across borders also benefits Americans—even those who don’t participate directly with the immigration system—by expanding the pool of employees, consumers, investors, and entrepreneurs who produce goods and provide services that improve the quality of life of all Americans. The social capital that immigrants bring with them makes America a stronger, safer country. Immigrants marry, have children, and participate in religious groups at higher rates than the U.S.-born population, and it is precisely for these reasons that they have much lower rates of criminality.

As a practical matter, there are many ways to move toward a more open immigration system. My list of reforms gives specific examples. But here is a general blueprint: grant indefinite work visas to anyone with a job in the United States, confer legal permanent residency on anyone who works for 5 years, and remove the quotas on green cards for immediate family members—adult children and siblings of U.S. citizens as well as spouses and minor children of legal permanent residents.

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December 3, 2018 10:17AM

Should the Fed Raise Rates Now to Combat Future Recessions?

Many macreconomists believe that the Fed needs to keep raising rates now so it can lower them in future to combat a recession. See, for example, my colleague Martin Feldstein’s recent op‐​ed in the WSJ.


I have always been puzzled by this argument; it seems to assume an asymmetry in the effects of raising versus lowering rates. 


Specifically, if raising rates now will hurt the economy just as much as lowering them later will help, why is the net effect beneficial? To a first approximation, one might expect a symmetric effect, which makes the standard case for higher rates now unconvincing.