Why do some businesses prosper, whle others fall? Why are some countries richer than others? While there are a variety of explanations depending on the situation, the core answer is efficiency.

When a country can efficiently gather and deploy resources, it thrives. When a country is inefficient, it falls. The Soviet Union collapsed because centralized planning was inefficient. A bunch of beurocrats cannot efficiently determine the prices of goods and services and allocate economic resources. It just does not work well. Centralized planning is not in of itself evil and therefore results in failure. The reason centralized planning does not work is because it is inefficient since it is too difficult for beaurocrats to allocate resources and determine prices.

Let’s also think of efficiency in terms of businesses. Suppose Sloth’s  Widgets and Henry’s Widgets both produce the same widget.  Sloth’s Widgets is very inefficient. Its boss is drunk, the workers are poorly trained and unsupervised, the business buys its inputs from the boss’s cousin, who is also an idiot and charges a high price for his inputs. In contrast, Henry’s Widgets is well-run and efficient, filled with hard-working, cost-conscious individuals. Obviously, Henry’s Widgets can produce more widgets and at a lower price. In this instance, Henry’s Widget is able to produce a widget for $5, while it costs Sloth’s Widgets $20 for the same widget. Ultimately, Sloth’s Widgets goes out of business while Henry’s Widgets thrives since Henry’s Widgets can sell widgets for as low as $6, while the minimum price for Sloth’s Widgets is $21. This is the best scenario for both society and Henry’s Widgets, though not for Sloth’s Widgets.

Let’s say though that Sloth’s Widgets owner is good friends with the governor. The governor manages to somehow heavily subsidize Sloth’s Widgets. For every widget Sloth’s Widgets makes, the governor will give them $19. Sloth’s can now sell widgets for as low as $2. They get a $19 subsidy, a $2 sale price, which covers the $20 production cost. They can now undercut Henry’s Widgets and put them out of business.

Customers think “ooh, the price of widgets went down.” Of course, this is not truly the case. While the price charged for widgets went down, it was simply because the government subsidized them, meaning more tax dollars will have to be raised. So while people are paying $2 for each widget, they are also paying an extra $19 in taxes for the widgets produced. All in all, society is made poorer because Sloth’s Widgets is making the widgets instead of Henry’s.

The moral of the story is that we want the most efficient producers to make the products. If the price of widgets go down, but we have to end up paying more in taxes, we as society lose out. We all have less money to pay for other items and create other goods.

Obama’s budget is an attack on inefficiency in this indirect way. By borrowing heavily, he promises higher taxes on businesses, large and small. He tries to guise this as class warfare, to make everyone think they’re just soaking some rich fat cat, but the truth behind it is that Obama is simply soaking businesses for money and deploying it through government spending. Whether its the increase tax on small businesses (those evil people making $200k+), closing corporate loopholes, attacking the health care industry, cap and trade, they are all taxes on private businesses aimed to fund massive government spending.

The result of this is less money in the hands of private businesses, more in the hands of government. There’s plenty of precedent to show that countries where the government is a higher proportion of the economy are ultimately poorer societies. You don’t need to look at the extreme examples of the Soviety Union or Cuba. Just look at our neighbors in Western Europe or Japan, where taxes are higher and the government plays a larger role in the economy. In those countries, GDP per capita is at least 20% less than ours, meaning the average person is at least 20% poorer than in the United States.

After Obama and the Democrats are done raising taxes and increasing government spending, our taxes may be higher than Western Europe/Japan and government spending may be even higher. All things being equal, the inefficiencies of government spending means society as a whole ultimately suffers, and we will all be at least 20% poorer than we once were.