Seduced by Incentives and Misled by Exemptions

An era of change requires people to make considerable efforts to live, to work and to think in entirely new ways. Of these, thinking is the most difficult to change. People too easily revert to their past ways of thinking. Yet, these fail to provide a magic prescription for creating a new sense of well-being. People only waste time and risk suffering from disillusion.
Although we seem to have celebrated the funeral of socialism, many continue to regard the state budget and government generosity as the only solutions to existing problems. Those who have lately sought government support are many in number. Their ranks include more than simply the expected cultural and educational establishments, or hospitals and care homes. Strange as it may seem, all kinds of enterprises, including small businesses and very large firms, factories, port authorities, utility giants and even banks, have lined up seeking government support.
Many the public and the government continue to believe that it is the state’s responsibility to take care of the populace. Unfortunately, government care is usually understood as providing favorable conditions to some, but not all. The more government favours some of us, the fewer opportunities are left for the rest. Instead of limiting government, this actually renders it even more important. When people acquire membership in a “protected class,” they admit their helplessness. They must submit entirely to the will of the “guardian.” This dependence is not blissful, however. Once endorsed, it curbs the freedom of both the “protected” and all others alike. People become dependent upon the government’s will and capacity to address their problems. Government becomes omnipotent and omnipresent. Privilege-seeking-through lobbying and the use of political connections-becomes standard behavior. The capacity to obtain new favours is elevated to the status of virtue, while freedom, honor and self-esteem are devalued.
The previous issue of The Free Market examined the use of taxpayers’ money to provide government favours. It highlighted the economic implications and consequences of such government “generosity,” and contemplated the immorality of this government assistance and the inevitable corruption that arises from it. But it is not only the redistribution of wealth that is dangerous. Other forms of government overreaching must also be stopped.
Exemptions are frequently viewed as a more “contemporary” and “neutral” form of assistance. One should remember, however, that any exemption-any preferential treatment that forgives one’s obligations-is always an exception to our shared burdens. It always rests on extraordinary and temporary rights which violate that common order. It provides advantage only to those who can make their demands loudly enough to attract sufficient attention or to those who can lobby for their requests quietly enough to escape notice. For these reasons, exemptions should be regarded, not as a good, or as a blessing, but as an evil which inevitably makes life harder for everyone else.
It would not be easy to demand tax breaks if one had to identify publicly those who would bear the burden of financing the exemptions. Which of us-except for mystical illegal millionaires, who themselves paradoxically benefit from various exemptions and relief-have an easy life in today’s Lithuania? Recently privatized enterprises?-No. The young or budding entrepreneurs?-No. Talented young artists or craftsmen just beginning their careers?-Again no. But exemptions for any one group selected by the authorities ultimately punish the rest of us.
In a time of sweeping change loans can provide real salvation for struggling firms. But loans are expensive to borrowers and often are unavailable due to insufficient reliability of creditors. Is there a way out? Typically, many have turned to the government. It has taken seven years of active governmental lending and issuing guarantees, but people are now beginning to understand that the theoretical warnings about future losses and economic distortions have become a reality. Such redistribution fails to rescue the economy and stifles its most progressive elements. The findings of the State Control Department published on page 3 confirm this once again.
Investigations by the Department reveal that, from 1992 to 1996, government loans and guarantees were extended without any rules and regulations. In most cases the borrowing firms continue to lose money, and the support provided can do little to keep them from failing. Since no safety measures exist, the loans must be repaid from taxpayer money. By January 1, 1997, as much as 29.2 million litas of tax revenue had been spent to repay the debts of insolvent firms owed to foreign lenders. What will become of an entire portfolio of nonperforming loans that will come due in the future? The problem of taking loans from the state or with state guarantees has become so severe that it calls for urgent action.
There is still a danger that decision makers will not learn from their past mistakes-that the root causes of their problems are government favours. Politicians will likely be reluctant to renounce the role of the state as banker. The current distribution of guarantees may come to be replaced with direct lending, by disguising underperforming loans as a “government investment programme”. An ordinary citizens would be horrified to find that this program was brought to life in response to the pleadings of the same politically connected pressure groups, both public and private, caculating the price of persuasion at the very least. That there are no state priorities. That he, the ordinary citizen, can also hope to have the construction of his workshop included in this government investment programme. NO. That would be too much. It is time to stop misleading and impoverishing people, with all aspects of state paternalism.
Weaknesses in Granting Foreign Loans Received on Behalf of the State and Violations of Their Use