Post from First Trust Economics Blog

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist 

March 24th, 2025

In spite of severe polarization on so many issues, there is at

least one thing that Americans agree on across the entire political

spectrum, left, right, and center. That is: At some point in the

past sixty years, or so, something major went wrong with the US

economy and it is still causing problems today.

What are those problems? Different political tribes, and

their respective economists and commentators, may explain it

differently, but they generally agree that economic growth and

productivity increases are too slow, the distribution of income is

too skewed toward the upscale, housing is unaffordable, and

there is too little manufacturing in the US.

The left often blames “greed” and “capitalism,” or maybe

just “late capitalism,” and proposes to raise taxes on the rich. If

you listen closely, they argue that capitalism’s worst evil is that

it causes “climate change,” which just makes every other

problem worse. They want higher tax rates on regular income

and investment income, and even talk of a wealth tax on

unrealized capital gains. Then, by redistributing that money to

the appropriate people and places, the US could fix all the

economic problems that confront it.

On much of the political right there is a different narrative,

which was recently expressed in depth by former US Trade

Representative Robert Lighthizer in an interview with Tucker

Carlson. In his telling, the movement toward freer world trade

over the past forty or fifty years, what he calls “hyper-

globalization,” is at the root of many economic and social

problems.

As manufacturing went global, the fabric of the US

changed. Not only did the US economy slow, but the structure

of the country changed. He argues that many places have lost

their sense of community, compared to the immediate post-

World War II era in which rich, poor, and middle class, often

lived in the same towns.

His argument is bolstered by the data. Industrial production

data show that manufacturing has grown just 4.3% in the past

twenty-five years. Not 4.3% annualized, we mean 4.3% total.

This translates to 0.2% annualized growth. In some cases, entire

industries are uncompetitive without large government contracts,

like shipbuilding.

Both narratives, in our opinion, are trying to deal with the

symptoms of the underlying problem, not the problem itself.

This is similar to the argument that our food supply makes us less

healthy (obesity, diabetes, compromised immune systems). By

treating these symptoms, we are ignoring the root cause.

There is an “elephant in the room” and almost no one

incorporates it into their analysis. That elephant is the massive

growth in the size and scope of the federal government.

Excluding defense (in order to understand the impact of the

bureaucracy and redistribution) federal government spending

was 7% of GDP in the 1950s. That rose to 10% in the 1960s and

then 14% in the 1970s. It stabilized there between 1980 and

2000, but then started growing again. So far in the 2020s, non-

defense government spending has averaged 23% of GDP, more

than triple its size in the 1950s.

Every dime the government spends is taken from the private

sector, so the bigger the government gets, the smaller the private

sector becomes. Adding all government spending – federal, state

and local – with the cost of regulation, and government directs

or prevents more than 50% of all output. No wonder saving rates

are low, houses are unaffordable, manufacturing has moved, and

economic growth rates have stumbled.

In many respects we have already abandoned capitalism.

Abandoning it harder, or moving toward protectionism, is not the

real answer. We believe shrinking the size of government itself

would fix most of our problems, certainly the economic ones.

There is enormous upside potential (long-term, not short

term) if DOGE helps the federal government get its fiscal house

in order and downsizes government spending. Yes, we know it’s

disruptive in the near term, but this is the kind of disruption that

deals with the major cause of our problems, not just the

symptoms.