I've unloaded lots on this topic before and have found I only confuse people with all the jargon, so I will give an example of a cast recording I adore for its engineering and overall sound, then a brief (OK, OK, not so brief) explanation will follow.
Showboat - 1993 Canadian Revival
Yes, the sound is up close and personal but the singers have room to breathe and it doesn't sound dry (no reverb at all) or too wet (copious amounts of echoey reverb). It also doesn't attempt to mimic the sound of a live theatre performance, which almost always sounds as if it is being performed in a cave. I have issues with the speed racer tempo on this recording, but the fact they make the orchestra just as relevant as the singer makes up for all of that. I especially dig the detail you can hear in the instrumentation; that scratchy string quality and that hollow, deep clarinet presence just to name two. It's perfect.
I guess it all comes down to what the listener wants to experience and appreciate. If they want to relive a performance from their own audience perspective, they will want that quality recreated on disc. If you're all about nuances that nobody notices or cares about, that color and add texture and expression to a musical piece, then up close and personal is the way to go.
However, I agree about today's lackluster cast album quality. Morosco has mentioned one of the main culprits for the crappy sound these days; they want to shove everything into your ear at once without regard to balance because somebody equated loudness with clarity, and why anyone followed, beats me.
Another reason cast albums suck these days is orchestras and human musicians are being replaced by machines and sample-based, virtual orchestras that don't come even close to creating the sound that only a human and an authentic instrument can. In a disgusting new trend, however, many shows' classic and beloved orchestrations are being "updated." Not so, they are being stripped and the parts moved around to create the illusion of newness, when what is really happening is reduction and thinning-out. One of the more popular methods is to chuck the typically 6-10 member original string section and its harmonies, replacing it with a loud ass single cello or viola, giving the impression there is added texture and presence. In reality, it's a dumbing down of the formerly rich, harmonious blend of different string textures, which people are mostly ignorant about and assume are whipped out of the composer's ass like nothing and somehow just dumped on a disc. So when they hear that loud ass cello in place of what confused and made them scratch their heads, they accept it as an improvement because they can identify it as a loud ass cello. To those of us who noticed that moving harmony and distinct blend, it is a travesty and a sad sign of the times.
Recreation of original John Cameron orchestration to "On My Own" by yours truly. Click player below to hear.