Government Is Crowding Us Out

The Bureau of Economic Analysis’ final estimates for the first quarter came out recently, and while economic growth numbers went on a bit of a roller-coaster ride before settling at the now-canonical 2.1 percent, inflation came in at an unsurprising yet blistering 4.6 percent.

Both numbers confirm what we’ve been seeing over the past year. The economy appears to be settling into a new normal of cooler growth and hotter inflation.

Tariffs and wars are temporary contributors to inflation. In the long run, persistent inflation pressure comes courtesy of federal deficits. The more the government borrows, the more upward pressure it puts on real interest rates. That annoys borrowers. The more the Federal Reserve tries to push interest rates back down, the more upward pressure it puts on inflation. And that annoys consumers.

The deficit is our first long-term economic threat, and it stems from our actions. The second, population stagnation, arises from what we don’t do. Too many Americans aren’t having babies. Babies are barely being born fast enough to replace Americans who die. Recent restrictions aside, today we tend to create more new Americans through immigration than through the old-fashioned way. And that slowed population growth contributes to our slowed economic growth.

People matter for economic growth because people are the ultimate resource. Of course, people produce labor, but they do so much more. They invent things that didn’t exist and discover things that were unknown. Our technological progression from human muscle to domesticated animals to machines to computers to AI is driven by human invention. Our energy progression from wood to coal to plant and animal oils to mineral oils to natural gas to uranium to solar is due to humans discovering new resources. Only a fraction of humans have what it takes to attempt to pull off that kind of innovation. And only a fraction of those find themselves in the right place at the right time to make it happen. Discovery and invention are rare. If you want a lot of it, you need a lot of humans. Stagnating population growth yields stagnating invention and discovery, which yields a stagnating economy.

We can learn some timely lessons if we take a moment to look around. The United States is a nation of 50 relatively similar but importantly different states. Some of these states are attracting people, and some are repelling them. From 2024 to 2025, more Delaware residents died than were born. Yet Delaware’s population grew almost 1 percent, putting the state among the top 10 for population growth. How can this be? Conditions in Delaware attracted people from other states and from abroad. Delaware attracted so many people that the positive in-migration more than counteracted the negative natural growth.

At the other extreme, California ranks among the top 10 states for natural growth. From 2024 to 2025, almost 110,000 more Californians were born than died. Yet California’s population shrank as conditions there caused residents to flee the state faster than the good people of California could make more.

A state’s economic growth depends on its population growth, and its population growth increasingly depends on in-migration. People move to states that offer better conditions for living, working and raising families than the alternatives. Some of those conditions, like climate, culture and familial ties, lie beyond the reach of policy. Many do not. And among the conditions lawmakers can affect, one that appears especially important is the size of state and local government.

States with larger governments (as measured by state and local government spending per state GDP) appear to crowd people out. In 2025, the 25 states with the largest governments averaged 1.9 percent economic growth vs. 2.3 percent for the 25 states with the smallest governments. Adjusted for differences in cost of living, median household incomes were 7.6 percent higher in the half of states with the smallest governments. Compared with larger government states, smaller government states have lower poverty rates, lower income inequality, and lower state and local government debt burdens.

People are already voting with their feet, and they’re not voting for places that make life harder, poorer or more precarious. Population growth is no longer automatic. Economic growth is no longer something the country can counterfeit with borrowed money and rosy forecasts. That leaves states with a simple but uncomfortable truth: They do not create prosperity. They create the conditions under which productive people decide whether to come, to stay or to leave. Prosperity follows that decision.