The 206 is is, without a doubt, helping to grow numbers.
Sure, there are the 2 cycle and TaG guys that came to the 206 from other classes, but i continue to see new (and returning) kart racers get into our sport via the LO206 class.
Now, what cmac and Steve Baker have said, I believe, is a big part of our current problem.
Pavement sprint racers have been turn-key (low maintenance) racers for a long time now. Purchasing a turn-key kart, having a personal tuner, or picking up your tires at the track has been the case as long as I can remember.
That's not been the case so much on the dirt side (and still isn't.)
Really, it hasn't been until the last 10 years or so that we have seen a tremendous reliance on "tire gurus" come into the dirt side of our sport. Chassis companies are offering "seat mounting" as a regular option that previously was thought of as someone being too lazy to do it themselves - now it's an integral part of "factory" chassis set-up and tuning. The same can be said for body mounting.
I believe the sport has changed considerably. It's certainly much more competitive (and expensive!) As mentioned, some chassis and engines have doubled in price. Tire life isn't what it used to be 20 years ago. I still get bewildered looks when I tell people about running the same set of Burris T2 tires every night for 5 years. We've lost that...and it's not coming back. Yes, we now cut and prep treaded tires. Why? Because they're faster.
We raise the cost to compete, then wonder why there's no one left to compete with!
A lot of comparisons have been made with football (and valid ones.)
But I suggest that English football (yes, soccer) is a much bigger draw away from karts than any other stick and ball sport.
20 years ago, soccer in the US was relegated to rich kids at prep schools.
Today, it seems that every 4 year old playing in a pee wee league is the next Pele. Soccer fields have sprung up all over town and are flooded with kids of all ages every day of the week. Sure, there are plenty of injuries involved in soccer, I am sure, but they don't get the headlines that racing, 4-wheeler crashes, and the likes seem to draw from the media. Plenty of single moms (and dads) have taken their kids to soccer practice as an excuse for baby-sitting, lesson-learning, disciplining, team-playing, etc training instead of taking on this task themselves. It's just the new "yuppie" way.
It's not the way many of us were raised or choose to raise our kids, but it is a way that many have chosen to raise their kids in today's society. There's another thread on here currently about participation trophies and why winning is so important. I think a LOT of that discussion is intertwined with this one.
The LO206 appeals to a lot of this younger generation and parents because of it's "plug and play" ability. For others, it fills a niche left behind by fully blueprinted, high dollar, race engine classes. Face it, not everyone can (or choose to) compete with their bank accounts. Yes, it's another class in an already too watered down number of classes. But it certainly IS retaining some racers who are getting squeezed out and bringing in some fresh new racers for the first time.