By Andrew Falduto
On December 5, the Senate Banking Committee voted to advance the nomination of Jerome “Jay” Powell as the Chairman of the Federal Reserve in a 22-1 vote, with the only Senator in opposition to the nomination being Elizabeth Warren (D-MA). This past November, Jerome H. Powell became one of the most recent nominations in the Trump Administration and is expected to become the new Chair of the Federal Reserve on February 3 to replace Janet Yellen, who has served as Chairwoman since 2014. Considering Powell has served on the Board of Governors of the Federal Reserve since 2012 when he was appointed by President Barack Obama and has proved to be a moderate Republican with years of experience, this nomination is not controversial 10 out of the 11 Democratic Senators on the Senate Banking, Housing, and Urban Affairs Committee voted to further his nomination, including Ranking Member Sherrod Brown (D-OH) and even somewhat far left members such as Jack Reed (D-RI), Chris Van Hollen (D-MD), and Brian Schatz (D-HI). Although this decision has not sparked as much debate or controversy as many of President Trump’s other federal nominations, there are still massive implications of possible changes that may occur in regards to the economy, federal monetary policy, and changes within the Federal Reserve itself.
In his five and a half years on the Board of Governors, Powell has never dissented from any of the decisions made by the Board or by Yellen. Powell himself has stated, “One factor that favors easier adjustment in [emerging-market economies] is that U.S. monetary policy normalization has been and should continue to be gradual, as long as the U.S. economy evolves roughly as expected.” This similarity in monetary policy poses the question: why would President Trump nominate a new Chair instead of simply renominating Yellen? Primarily because, despite their similar ideologies, Powell is much more heavily favored by conservative Senators than Yellen is, thus easing relations between the Senate and the President, which have been questionable since the President took office last year. This strategy would also ensure a quick and easy nomination process, as it avoids any possible contention of the renomination of Yellen. Ever since the Republican Party took control of the executive branch, the GOP as a whole has been more confident in Congress; therefore, the threat of heavy resistance towards the nomination of a Democrat, such as Yellen, has drastically increased. Not to mention President Trump’s presidency has been filled with unpredictable and sometimes unnecessary decisions, including the nomination of Jerome Powell, a lawyer and investment banker who could become the first Chair of the Federal Reserve not to have a Ph.D. in economics since Paul Volcker, who was nominated by President Jimmy Carter in 1979. Continuing his string of unusual decisions, the President Trump has stated before that he wants to leave his “own mark” on the central bank as well.,
While Powell’s core economic principles may not have deviated from Yellen or the Board of Governors as a whole, if he is successful in following through with his previously stated intentions as Chairman, there would be lasting effects. Just after the nomination, Ben Bernanke, who served as Chairman from 2006 to 2014, became one of the first to comment on the decision, stating, “As Jay told me, we needed an ‘off ramp.’” The “off ramp” referenced here is the idea that the Federal Reserve must be able to instill new, alternative policies if necessary in case of a recession. This “off ramp” policy would also include a drastic decrease in the Federal Reserve balance sheet, which is the tally of the Fed’s assets and liabilities. In a speech in June, Powell commented on the Federal Reserve balance sheet, showing his support for decreasing the balance from the current $4.5 trillion to $2.9 trillion, or if possible, $2.4 trillion. This decision would primarily decrease the amount of control the Federal Reserve has over overall interest rates, by hindering the Fed’s ability to buy bonds from private banks. While Powell seems to be implying a shift toward less aggressive monetary policy, promoting the laissez-faire capitalism of the Trump administration, his actions on the Board have shown more consistent government support of the economy. “[Powell]’s detailed analysis and highly effective presentation of the day-by-day cash flows of the federal government was instrumental in last year’s efforts to resolve the debt ceiling crisis,” said Jason Grumet, the president of the Bipartisan Policy Center. This odd, but still coherent mixture of ideologies, seems like it will gradually shift the focus of the Federal Reserve from controlling the economy to more passively monitoring it, which many could argue was the original purpose of the Federal Reserve.
By Andrew Falduto
On November 16, with a vote of 227 in favor and 205 against, the Republican-controlled House of Representatives passed the "Tax Cuts and Jobs Act," a bill that reforms the federal tax code as the first of its kind since 1986. At the International Franchise Association’s Franchise Expo West, Secretary of the Treasury Steven Mnuchin stated "The Tax Cuts and Jobs Act is a bold, pro-growth bill that will overhaul our nation’s tax code for the first time since President Reagan’s historic tax reform 31 years ago," The bill was sponsored by Representative Kevin Brady (R-Texas), Chair of the House Ways and Means Committee, who claimed the bill is estimated to deliver $1.51 trillion in tax cuts over the next decade. The bill offers the greatest effect on the real estate market of any tax-related bill in recent years. Most notably, it would reduce potential deductions for property taxes levied by municipal governments, reduce tax deductions on mortgages, and indirectly decrease overall capital gains taxes on real estate.
Prior to this bill, in most cases, property taxes and other taxes paid to municipal governments could be mostly or entirely deducted from one’s federal tax payments. However, the bill passed by House republicans would, unless amended by the Senate, eliminate municipal tax deductions that are not a part of property taxes. The property tax deduction would also be limited to $10,000. Considering the average American household pays $2,149 in property taxes, this revision to the tax code would not greatly affect the majority of people; however, it would contribute to the disproportionate taxation of the upper class. These property taxes are most commonly determined by a percentage of the property’s purchase value, therefore this bill would discourage the purchase of expensive houses with property taxes significantly higher than $10,000. The essentially higher tax rates on these highly valuable properties would obviously decrease the demand for their purchase, as people would be less willing and less able to handle the tax burden attached to them. This could in turn force home sellers to lower the asking prices of homes on the market, thus significantly decreasing the nominal gross domestic product (GDP), and slightly, but surely, decreasing the nation’s real GDP, causing an overall negative economic effect, not only for the rich, but for the populace as a whole.
The bill also proposes another deduction limit that mainly targets the rich on its surface. The new mortgage interest deduction under the bill would be capped at $500,000, meaning that those who pay over $500,000 in interest on their mortgage would not be able to deduct more than said $500,000 from tax payments. Based on the average home value in the United States of $221,800, and the average mortgage interest rate of 4.75%, a very small amount of very wealthy people would be affected by this. However, it must be taken into account that the richest 1% of people in the United States posses about 38% of all privately held wealth, so while a very small portion of the population is affected, a very large portion of the wealth is being potentially paid to the government. This revision to the tax code could also bring issues to first-time home buyers due to their lack of liquid assets, so while it may be most detrimental to the rich, the overall economy could become much less suitable for the very wealthy, possibly promoting the use of international banks rather than contributing to domestic money supply.
The Tax Cuts and Jobs Act, as it was passed by the House of Representatives, does not directly change the capital gains tax or the dividends tax; however, they are indirectly lowered by the lowering of federal income taxes. The decrease from seven income tax brackets to four brackets, and an average decrease in tax rates of about 5-10%, depending on income, would result in much lower capital gains taxes on assets that are held for less than 12 months. Therefore, the short term home investment, or “flipping”, market would be sure to benefit. Short term investments, property owned for less than 12 months, would be taxed at the same rate as income tax for the seller, meaning that the overall decrease in tax rates would aid in creating a more profitable market and therefore, more economic activity in the real estate market. As for long term investments--property owned for more than 12 months--the market would be essentially unaffected by the bill, with the exception of an increase in disposable income for the middle class from lower tax rates, promoting more housing exchanges and purchases.
On a national level, the housing market would decrease in value due to the House-passed GOP tax bill, and wealthiest few would be the ones immediately affected. This is not surprising based on the Republican Party’s recent attempt to shift the public image of the party away from the “pro-rich” party, and more towards the “pro-middle class” party in order to be successful in midterm elections in 2018.
By Andrew Falduto
On the night of August 25, Hurricane Harvey made landfall in eastern Texas as a Category 4 storm, with winds of over 130 mph. Being the first Category 4 storm to hit the United States since Hurricane Charley in 2004, it brought massive devastation to southeast Texas and southern Louisiana, killing at least 23 people and displacing millions. Less than three weeks later, Hurricane Irma struck western Florida as a Category 3, causing similar destruction. Considering it is arguably the most destructive storm in almost 15 years, Harvey has many asking why Hurricanes and Tropical Storms of this magnitude have become so common in the United States. Storms such as Katrina, Floyd, Sandy, and Irene, have terrorized the United States over the past 20 years, just to name a few. When asked about the issue, Gabriel Vecchi, a Princeton University climate scientist, stated, "Even though we expect that the intensity of storms should be fueled by global warming, it's really tough to say that that's already happening." Hurricane Harvey could have easily happened with or without global warming’s effects, thus further complicating the issue. Climate experts have studied and debated the effects of global warming on hurricanes and “hurricane season”, but the question still remains: does climate change, caused by humans, increase the amount and intensity of Earth’s hurricanes?
President Donald J. Trump believes the answer to this question is no, calling global warming “a total, and very expensive, hoax!” Due to his disbelief in climate change and a desire to save taxpayer money, President Trump announced his plan to withdraw from the Paris Climate Accord, a global effort to prevent climate change through government intervention, on June 1, 2017. This was met with overwhelming backlash from leaders of almost every nation in the European Union, and from Democrats and leftists in the United States. In some of the most left-leaning states, such as California, New York, and Washington, there has been such a strong disapproval of the decision that the three governors of these states, 30 mayors, 80 university presidents, and over 100 businesses have pledged to uphold the conditions of the Paris Agreement. The intentions of these states to essentially enter into the agreement without federal approval leads to three main questions: Can they? Will they? Should they?
First, can states act on their own to be a part of the Paris Climate Accord? The answer to this question lies solely in the U.S. Constitution. In Article 1, Section 10, it states, “No state shall enter into any Treaty, Alliance, or Confederation;…[or] pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts.” Based on this, it would seem that it is not within a state’s rights to enter into any sort of contract, treaty, or agreement without federal consent. However, the Paris Climate Agreement does not qualify as a treaty, alliance, confederation, or contract, as there is virtually nothing legally binding involved in it. Thus, the Constitution gives regards to this issue once again in the Tenth Amendment, which states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.” This is essentially saying that since there is nothing prohibiting the states from entering the Paris Climate Accord, they are fully free to uphold it if their governors and state legislative bodies make such a decision. Therefore, can these states uphold the Paris Climate Agreement? Yes.
The next factor in this issue lies in the question of “will these states actually be a part of the Accord?” Considering that the conditions of the Agreement state that the earliest possible time of withdraw is November of 2020, and the agreement does not call for any financing until 2020, the chances that any immediate action will be taken is very low. In November 2020, when the United States will officially withdraw from the Climate Accord, the United States will be having a presidential election, and President Trump could likely only have a mere two months remaining in office, due to his recent approval rating of on 35%. Therefore, it is probable that, assuming President Trump runs for a second term, he will lose to a Democrat, possibly Cory Booker or Kamala Harris. The probability that this Democrat will support re-entering the Paris Climate Accord is very high, considering that the left is very much in favor of fighting climate change through government intervention. Thus, these governors and mayors will most likely recognize the high chances that the entire nation will re-enter the Agreement under the new democratic president. However, due to Hurricane Harvey’s recent devastation of eastern Texas and southern Louisiana, the nation could easily see a fresh outcry for climate change regulations. Therefore, will these states uphold the Paris Climate Agreement? Possibly, but most likely not.
The final issue in regards to the Accord, lies in whether or not these three states, or any others, should uphold and strive for former President Barack Obama’s commitments to the Paris Climate Accord. These commitments would mainly involve lowering greenhouse gas emissions by over 25% by 2025, contributing a large portion of the financing for the $100 billion goal per year, and attempting to limit the rise in temperature of the globe to 1.5-2 degrees celsius. While the reduction of carbon emissions and the increase in the usage of renewable energy seems like a worthy cause for these states, it is almost an unnecessary cause. The percentage of energy that is renewable produced in these three states, California, New York, and Washington is 24.38%, 44.79%, and 92.25% respectively. These are all significantly higher than the national average of approximately 13%, showing that these states have already gone a long way in reducing greenhouse gas emissions, making participation in the Accord harmful to themselves. The other huge factor in the conditions of the agreement is the financing requirements. Due to the Agreement’s pledge to keep global temperature increase from pre industrial era below 2 degrees celsius, the Accord would be in need of financing of $100 billion each year from 2020 to 2025, and then financing needs would increase after that, according to the conditions of the Agreement. Many economists and climate experts have estimated the overwhelming load this would place on the main economic contributors, such as members of the European Union, the United States, and Canada. According to Renee Cho, an educator at Columbia University, “fulfilling all the climate pledges would entail investments of $13.5 trillion in energy efficiency and low-carbon technologies between 2015 and 2030.” While this seems like to much of a burden already, it is also important to remember that there is nothing legally binding about the Paris Climate Accord, hence why President Donald Trump was able to withdraw so easily. Due to this lack of legal obligation, the Accord would have no real effect, as every nation sets its own regulations and funding goals. Therefore, while the United States could hypothetically cut their emissions in half, and contribute $250 million, China, the nation that contributes to most to air pollution, could hypothetically keep their emissions the same and contribute $1. Neither nation would be rewarded, and neither nation would be penalized, making the Paris Climate Accord essentially useless. There is effectively no benefit for being a part of the Agreement, nor is their a real drawback to being a part of it. To conclude, should these states uphold the Paris Climate Agreement? No.
As the Paris Climate Accord is ineffectual, it may very easily prove to be a waste of time, money, and effort, making the re-entering into Agreement on a state level futile. The only real purpose the Accord is guaranteed to achieve is furthering the globalist agenda of many on the left, the European Union, and the United Nations. Even with Hurricane Harvey’s devastation, the outcry against climate change will not be large enough to affect the President’s stubborn administration, nor will it actually cause any states to re-enter the Accord, at least not in the near future. Only time will tell if the Paris Climate Accord will become relevant again in the United States, but it seems America will not be involved in any way, whether on a state or federal level.