Trump, China, Inversions and Austerity

April 19th, 2016

Summers spoke at the International Monetary Fund on Wednesday, warning against austerity measures amid a tepid economy. Yahoo Finance sat down with him to get little more color on the economy and to find out what keeps him up most at night.

“I think the prospect of Donald Trump being President would be the gravest threat to our prosperity, our security, and our freedom in my adult lifetime,” Summers said. “That’s the thing I would worry most about.”

Summers believes the rise of populist candidates like Donald Trump and Bernie Sanders can be tied to the less-than-stellar economy.

“I think people are frustrated because the economy’s grown slowly…because their wages have increased slowly…because they have a sense that there’s a small group in the society who’s done remarkably well, while most others haven’t really made great progress,” Summers said.

He added that this fueled people’s fears for the future.

“People see a rising China,” Summers said. “They see rising emerging markets. They see tremendous new capacities coming from technology, and they worry about what the role is for them.”

The former president of Harvard University also warned against what he calls the recent “revolt” against global integration. “Trump’s proposals to wall off Mexico, abrogate trade agreements and persecute Muslims are far more popular than he is,” he wrote in a recent column.

Summers told Yahoo Finance that Trump has misunderstood the impacts of global trade.

“What a wage of $10 or $8 or $15 means depends completely on how much it costs to buy things. And he neglects completely that we get much cheaper goods because we have a relatively open market,” he said. “For decades the United States had relatively low trade barriers…Most of what these agreements are doing is opening up other countries’ markets for US exports.”

He added that globalization shouldn’t be thwarted because of its effects on industries like manufacturing.

“I don’t think the answer is to so much wall it off, any more than the answer is to stop the development of technology. But the answer is to make necessary investments and supporting these sectors, and to supporting transitions, just as the United States has been actively involved for many years in supporting the agricultural sector,” he said. “I think if there was a sense that we had a fair tax system that was… assuring that the government was raising its money in a way that reflected people’s ability to pay, I think that would be an important contribution.”

Meanwhile, he thinks that the move by the U.S. Treasury to block tax inversions, where American companies shifted their headquarters overseas to avoid U.S. taxes, was the best alternative given lack of willingness to make reforms in Congress.

On the termination of what would have been the largest pharmaceutical merger in history between Pfizer (PFE) and Allergan (AGN), Summers said there was a major problem with these inversions as they were tax-motivated, putting the Treasury at a big disadvantage.

“The right thing to have done would have been to have reformed the corporate tax code in a quite broad way…In the absence of that preferred solution, I think it’s understandable that there was a decision made to act on a more ad hoc basis,” he said .”It seems from what I’ve read to have had more collateral consequences than I would’ve preferred. But that may be inevitable in stopping a kind of abuse that’s very serious.”

For now, Summers said the economic uncertainty driven by policy, global risks, and economic stats–which makes the Fed’s “data dependence” message appropriate in his view– is likely to persist.