What are the economic implications of a second Donald Trump presidency for the US, the world and Australia?

As we know, Trump has a powerful – and seemingly debilitating – psychological effect on the great majority of commentators. Very few seem capable of detached, balanced and nuanced analysis.

Many of my fellow economists, the vast majority of whom are politically to the left of centre, have fallen over themselves to denounce Trump’s economics. In June, sixteen Nobel Prize-winning economists, including Joseph Stiglitz, issued an open letter arguing that Joe Biden’s economic agenda (which no doubt will be replicated by Kamala Harris, if elected) was ‘vastly superior’ to Donald Trump’s.

A second Donald Trump presidency, they asserted, risked ‘reigniting’ inflation given his commitment to raise tariffs and cut taxes, conveniently ignoring the alarming surge in inflation on Biden’s watch. Bizarrely, the laureates suggested that Biden has lowered ‘long-run inflationary pressures’ by subsidising wind and solar energy, which as we know is a proven strategy for raising, rather than cutting, power prices.

Australian economists have been no better, predicting variously that Trump will destroy the international trading system, take control of the Federal Reserve and even, according to one, refuse to leave office once his term is up. (The idea of Trump assuming direct responsibility for monetary policy – and therefore interest rates and inflation – is ridiculous. He may be a lot of things, but he is not stupid).

While the outlines of Trump’s likely agenda are well known, his plans for trade and illegal immigration have received almost all the attention.

Economists have seized on his intention to impose an across-the-board 10-per-cent tariff on US imports, and tariffs of up to 60 per cent on goods from China. While this is understandable, they have typically ignored the bigger policy picture.

Trump is a committed tax reformer, and will want to extend his 2017 personal income tax cuts due to expire in 2025 (these narrowed deductions and lowered rates across most brackets, with the top rate set at 37 per cent). He is likely to call for a further reduction in the corporate tax rate.

And if elected, Trump will comprehensively deregulate the US energy sector, including: removing regulatory restrictions on oil production, natural gas, nuclear power and clean coal; scrapping car emission and electric vehicle mandates; and, once again, pulling the US out of the Paris climate change accord.

How should we characterise Trump’s economic philosophy? His critics have usually described it as populist and protectionist. Sympathisers have characterised it as nationalist-conservative, suggesting Trump favours a big and intrusive government, but dedicated to right-wing instead of progressive causes. In truth, none of these labels fits the bill, or at least not entirely.

While I agree that Trump is no classical free trader, his support for lower taxes and energy deregulation is firmly in the Reagan tradition. True, Reagan deregulated the US finance sector, not energy (although, he famously removed the solar panels his Democrat predecessor Jimmy Carter had installed on the White House roof), but there are parallels between these agendas.

In the 1980s, the economic costs of financial regulations (many dating back to the Depression era) became crushing for the US and other Western economies, raising the cost of capital, misallocating resources on a vast scale and limiting growth. Today, it is the extensive network of energy regulations, designed to force cheap and reliable fossil fuels out of the market, which is doing the most economic harm.

The positive supply-side impacts of Trump’s energy deregulation plans, if realised, are likely to dwarf any negative effect of his tariff agenda. (Remember that for large economies like the US, the costs of protection, while not trivial, are far lower than they are for smaller economies like Australia.)

Fiscal policy provides another parallel between Trump and Reagan. Reagan cut taxes but did not touch entitlement programs, securing the support of millions of working class Democrats.

Trump plans to do the same thing. Before we reach for the smelling salts, we should keep in mind that the US’s international creditors, with China at the forefront, have been only too happy – through their continued purchases of US government bonds – to finance its budget deficits.

Should Australians fear or be optimistic about a second Trump presidency? Leaving aside the simplistic view of his haters, it will be a mixed bag.

While Trump is a protectionist, Kamala Harris is as well (judging by the record of the Biden administration). So there will be broad continuity here. And let’s not panic about Trump’s sabre-rattling on China trade, which in my view is more about positioning him for a bilateral deal than anything else, a two-step strategy he followed during his first term. Back then, of course, Trump exempted Australia from higher steel and aluminium tariffs. Given the weakness of its economy, I have no doubt China will be ready to negotiate.

If trade, under either Trump or Harris, presents some risks, the big policy shift will come in the area of energy. Trump’s plans in this area, if realised, will undermine, perhaps fatally, the global – in truth largely Western – emissions reduction crusade. By delegitimising wind-and-solar ideology, it may free Australia to pursue more rational energy and climate change policies.

This all said, it would be foolish to over-analyse what a second Trump presidency might bring. After all, the Covid pandemic, which arguably cost him the 2020 election, came out of the blue. And with the election still months away and recent polls tightening, Trump is no certainty to take office.

It is intellectually lazy, and an insult to the millions of Americans who will vote for him, to dismiss Trump as a fool or would-be dictator. He is neither.

But nor is he a political messiah. He is flesh and blood, a singular politician to be sure, but a politician nevertheless. His plans on tax and energy, if realised, will deliver enormous gains to the US economy and set a positive policy example for Australia.