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Mike Devaney is an associate professor of finance at Southeast Missouri State University. He has taught at the university for four years. He holds a doctorate degree.

`The Only Things Certain Are Death and Tax (changes)'

In the 1960's Wilbur Mills, chairman of the House Ways and Means Committee, admonished the administration that "taxes should not go up and down like women's hemlines." A rural Arkansas politician, Mills was derided as a fiscal curmudgeon by the bright young economists who talked of "fine tuning" the economy. Under the guise of providing tax relief to the middle class and "doing something" about the recession, some form of tax legislation is all but guaranteed. Presumably, our confidence should be restored.

The loose fiscal-tight monetary policy mix of the early Reagan years was brought on by the 1982 tax cut. Macro-economists often compared it to driving with one's foot on the brake and gas simultaneously. This policy mix was unique to the post-1974 era when the dollar was no longer fixed but allowed to fluctuate on world currency markets. Instead of the balanced budget promised by Reaganomics, deficits burgeoned and the Treasury scrambled to sell debt in every corner of the globe. Government and private borrowing, along with the tight monetary policy, kept real interest rates at modern highs resulting in an almost insatiable demand for U.S. debt and driving the dollar to stratospheric heights.

Primary goods and other U.S. industries subject to import substitution were devastated as the world price of U.S. products increased 40 percent and the price of imports denominated in dollars plummeted. Even though the dollar declined from its 1985 high, capacity and employment in many of these industries will never be replaced. More importantly, the policy mix of the early 1980's allowed foreign competitors to establish a strategic market beachhead that will be difficult to reverse.

Perhaps because the media is virually import protected, they did a miserable job linking trade deficits and job losses to the fiscal-monetary policy mix. Instead, we were treated to a Japanese travelogue and a parade of experts who blamed the trade deficits on everything from our low fiber diet to our shorter school year. Never eager to discuss fiscal responsibility, more than a few politicians jumped on the "fair trade" bandwagon engaging in sporadic Japan bashing and fanning the flames of protectionism.

Eminent "conservative" economists claimed that "deficits don't matter"; meanwhile, the national debt doubled and the U.S. became a net debtor nation. If leverage was good for the public goose, why not the private gander? Following Uncle Sam's example, corporations and consumers plunged headlong into the debt market. Junk bond financing flourished and consumers used long-term home equity loans to finance short-term consumer durables like automobiles and washing machines.

In an effort to forestall additional fiscal hemorrhage precipitated by 1982, another change in the tax law was introduced in 1986. Tax advantages for real estate investment were rescinded and prices plunged, exacerbating problems in banking and the savings and loan industries.

The gradual elimination of the tax deduction on consumer interest was supposed to give households the opportunity to rebalance their portfolios and liquidate high-cost debt. Unfortunately, the change was implemented at the end of an economic expansion. Stagnant income and accelerating costs for college tuition, health insurance, etc., prevented many households from acting. In 1992, they find themselves stuck with high levels of consumer debt at a much higher after-tax cost. Many consumers feel worse off because they are largely because of changes in the tax laws.

Companies use a weighted average of debt and equity as the cost of capital because even if an expansion is going to be financed entirely by debt, the use of debt financing `now' precludes its use in the near future except at a much higher cost. Government is also limited in its ability to finance expansion through borrowing. Any attempt to finance a 1990's expansion via a 1982 style tax cut could prove disastrous. Not only would it run the risk of igniting protectionism sentiment that is now barely contained, another doubling of the national debt in the 1990's is a legacy our children born into the 21st century do not deserve.

The bad news is that economic cycles are a fact of life and economic science is not sufficiently advanced to fine tune against minor recessions. Contrary to popular myth, there is not phantom "upper class" ready to assume the tax burden for working stiffs. The good news is that the U.S. economy remains resilient. Consumer confidence surveys widely quoted in the press are actually poor predictors of consumer spending. Leading indicators such as housing starts have been moving upward and will probably continue to do so as long as the Federal Reserve has room to accommodate low interest rates.

At this juncture, tax legislation can still be interpreted as another feeble attempt at fine tuning. If the economy does not pick up by late spring, then some form of fiscal stimulus would be appropriate, especially if it could be tied to future reductions in federal expenditures. For now, doing the right thing may mean doing nothing at all; the fiscal equivalent of turning the other cheek. Where is Wilbur Mills now that we need him?