Government grants and tax credits for favored groups would be economic junk food to an already obese state. Neoliberalism, a term that broadly describes market-friendly and small-government policies, has become a punching bag for both progressives on the left and national or common good conservatives on the right. The progressive Roosevelt Institute crows that years of slow growth and financial chaos following the 2008 financial crisis had led philanthropic leaders, policymakers, and politicians to question the credibility of the economic paradigm that had dominated for almost half a century: neoliberalism. Left-wing Nobel-winning economist Joseph Stiglitz warns of the growth of inequality, a problem stemming from modern neoliberal capitalism. Common-good conservatives blame neoliberal American capitalism for international outsourcing of jobs.

Neoliberalism's critics typically denounce stagnating incomes, the declining availability of middle-class jobs especially for blue-collar men in manufacturing, and increasing inequality. This last is questioned in recent work by U.S.-government economists, but even their refined data find some increased pre-tax inequality. Even if we accept the neoliberalism critics' description of the problem, their prescriptions are horribly wrong.

Markets operate as transmission mechanisms through which the effects of misguided policies are spread, and that's certainly true of three major, failed macroeconomic policies: soaring spending, ballooning deficits, and unrestrained monetary policy.

For the past half a century in the Roosevelt Institute's words, economic and income growth has been in marked decline, as I show in the following chart that includes the size of government inverted for the purposes of comparison.

Economic growth peaked above 4 percent in the late 1960s to early 1970s then declined and stabilized above 3 percent until the Great Financial Crisis, after which it fell to around 2 percent. Government spending, far from reflecting half a century of neoliberalism, has seen unrelenting growth with just a pause for the post–Cold War peace dividend. Spending averaged 27 percent of GDP from 1953 to 1962 and 36 percent for the last ten years, a one-third increase in its share of the economy. Neoliberalism was hardly the dominant paradigm. It's not possible for the progressives to be more wrong in their diagnosis of stagnation.

Of course, if government spending takes an increasing share of the economic pie, something must decrease, and, in large measure, that has been investment, which is vital to growth. The chart below compares private investment's share of the economy with the government's.

Investment decreases uniformly with increased government spending. Critics on the left may say this is cyclical – when the economy declines, government spending goes up and investment drops – which is true but far from a complete explanation. Secular, noncyclical changes in government spending have a negative effect on investment that is comparable to cyclical effects. Less investment means less growth as shown in the next chart:

For net investment after depreciation, the decline in growth parallels the decline in investment. Income stagnation, attributed to neoliberalism by its critics, in fact arises from uncontrolled government spending that crowds out growth-sustaining investment, not only in the U.S. but in all advanced economies.

Government spending's negative impact on investment and growth is compounded by the government's running large deficits. The Congressional Budget Office finds that government deficits are offset 33 percent by lower investment and 24 percent by greater trade deficits. The next chart compares governme deficits with investment:

Deficit spending has a clear negative impact on investment and therefore growth. Again, there is no discernable distinction between cyclical and secular effects.

The other impact identified in CBO's deficit analysis is on trade. For any economy, financial inflows equal financial outflows. Since U.S. government borrowing is financed in large measure by foreign capital inflows, the international sector obtains those dollars by selling goods to the U.S., hence the trade deficit. In effect, we obtain goods in exchange for our wampum, the U.S. dollar, which, for now, foreigners are happy to take and hold.

The connection between the twin deficits, government and trade, is shown in the next chart:

The two deficits generally are in lockstep, except for the period following the post–Cold War peace dividend when government spending shrank relative to GDP, spurring growth and an investment boom that drew foreign capital, which was offset in the balance of payments by a growing trade deficit.

So, the trade deficits, blamed on neoliberalism, in fact stem from government deficits that neither the progressives nor the common-good conservatives propose to do anything about.

For the last four quarters, government borrowing averaged 7.4 percent of GDP. CBO estimates that 24 percent of the deficit is financed internationally, with corresponding trade deficits, which, for the U.S., are primarily in goods. We can estimate that a balanced budget would increase U.S. manufacturing output by 1.8 percent of GDP, which would translate to 2.3 million jobs. Important to note is that closing the trade deficit should produce more domestic manufacturing jobs, but since foreign investment inflows also produce jobs, the net effect would be minimal. Manufacturing jobs pay above average, so it's likely U.S. incomes would gain.

The final failed macroeconomic policy is untethered monetary policy. Until the mid 1990s, incomes grew slightly faster than monetary measures such as M2, and asset prices such as stocks and housing grew in line with incomes. Since the mid 1990s, as the relationship between money and incomes changed, the Fed increased monetary growth, producing repeated asset bubbles.

The following chart compares the growth of income, the money supply measured by M2, and stock-market value measured by the Wilshire 5000 index:

After decades of comparable increases, money and stock-market values shot far ahead of income growth beginning with the asset bubble of the 2000s. The following chart makes a similar comparison to housing prices:

Through the mid 1990s, housing generally became more affordable as incomes rose faster than prices. Since then, there have been the boom-and-bust cycles we know all too well. Asset inflation allows the rich and those who service them to grow richer, contributing to inequality.

So, credit where it's due, neoliberalism's critics have identified important problems, but their solutions won't work. Their proposed government grants or tax credits for favored groups and activities would amount to economic junk food to an already obese state. They may feel good at first, they may be politically popular, but they would be bad for our economy's health. They wouldn't create more or better jobs. They wouldn't increase productivity, the key to prosperity. They wouldn't put our youth or the disadvantaged on the path of economic success.

In the Roosevelt Institute's words:

Inequality is not inevitable: it is a choice we make with the rules we create to structure our economy. Over the last 35 years, America's policy choices have been grounded in false assumptions, and the result is a weakened economy in which most Americans struggle to achieve or maintain a middle-class lifestyle while a small percentage enjoy an increasingly large share of the nation's wealth. Though these lived experiences and personal challenges are important, they are only the tip of the iceberg that is the crisis of slow income growth and rising inequality.

For the past half century, we and the other declining Western economies have been boosting big-government statist policies, which have demonstrably failed. Boosting growth-strangling spending doesn't help the downtrodden. Manufacturing-robbing fiscal deficits don't support the working class. Razzle-dazzle bubble money doesn't reduce inequality.

No one can say the necessary reforms are easy, but no one can say they're impossible.

Douglas Carr is a financial-markets and macroeconomics researcher. He has been a think-tank fellow, professor, executive, and investment banker.