Editors' pick: Originally published Oct. 20.
It seems increasingly as if economists are realizing the fact that longer-term economic growth may be fundamentally unpredictable.
That is, the secular trend in the economic growth of a country may be determined more by the basic underlying fundamentals of the economy than by efforts to sustain higher rates of growth through monetary and fiscal stimulus.
As Robert Gordon demonstrates in his influential book The Rise and Fall of American Growth, economic growth appears to be more determined by what is going on in the economy, than by what governmental policymakers are doing.
Economic growth since 1970 has slowed substantially from the previous 50 years or so. This slowdown in growth has occurred despite almost continuous efforts by the U.S. government to spur faster rates of growth.
Stimulative monetary policy can affect financial factors over the longer run, but not physical factors.
Nobel prize-winning economist Milton Friedman argued repeatedly that "nominal" values, like the flow of money or the flow of credit, cannot impact economic growth and unemployment rates.
In the 1960s, Friedman took on those who argued that the higher rates of inflation could produce higher rates of growth and lower rates of employment through a relationship called the Phillips curve.
The Phillips curve is an empirical relationship between higher inflation and lower unemployment that policymakers claimed justified the use of monetary policy to bring down the rate of unemployment.
Friedman countered with the argument that the Phillips curve relationship would exist only because people were "fooled" by the unanticipated higher rates of inflation. Once these people anticipated these higher rates, the government could no longer "get away" with the deception.
Yes, errant monetary policies can cause recessions, and monetary policy can be used to soften or end recessions, like the Bernanke-led Federal Reserve did in the Great Recession, but monetary policies cannot, Friedman said, achieve higher rates of economic growth over time.
Economist Robert Barro argued that the longer-term impact of fiscal stimulus through deficit spending also only has a minor impact on longer-term economic growth because individuals anticipate future tax liabilities and temper their spending to prepare for higher taxes.
Again, short-run, unanticipated fiscal policies can result in recessions or in shortening recessions, but as people come to expect future deficits, they will account for their own spending and saving decisions.
One of the things that we have observed over the past 50 years or so is that people come to anticipate the actions of the federal government regarding fiscal policy, and they anticipate the actions of the Federal Reserve system when it comes to monetary policy.
In fact, many have become good at taking advantage of the Federal Reserve-created asset bubbles and government programs that provided incentives to build housing and provide other goods and services to people who need support from these programs.
Financial engineering has been one of the growth areas in the U.S. over the past 60 years, and a large part of the recorded increase in income inequality has resulted in this environment.
Economic growth has slowed considerably in the U.S. and in other areas of the world. It seems now that national governments and central banks can do little or nothing to get growth rising at a faster pace.
Sophisticated investors and businesses are now capable of anticipating what the sovereign nations and the central banks are going to do, and then they act accordingly.
Financial engineering takes place, asset bubbles appear, and these people get wealthier while the economy muddles along.
Maybe we need to look a little more closely at what is being proposed by political candidates and policymakers and what is being achieved.
Maybe we need to rethink how the world is working and not "goose up" the economy so that everything will be all right.
Don't be surprised if economic growth does not "take off," regardless of who is elected or who becomes the chairperson of the Federal Reserve.
This article is commentary by an independent contributor.