$787 billion worth of fiscal stimulus to get the economy back on track, and the best volley Conservatives can lobby is that it didn’t work. With the Obama administration’s widely off-the-mark estimates as to the unemployment rate with or without the stimulus (the actual job losses exceeded the estimates without the stimulus), the debate now centers around whether the stimulus did any good or if we’d have experienced even worse job losses without it.

If only the worst thing that could be said about the stimulus bill was that it did nothing: its pernicious effects are far worse than any politicians or pundits seem to realize. Both sides of this debate entirely miss the point. The failure of the stimulus bill is not that it didn’t create or save jobs – It may or may not have in the short term, but this fact is irrelevant – it is that we are setting ourselves up for a worse crash in the future.

Why do recessions happen? It is not a random occurrence that occasionally besets Capitalist economies: it is the result of malinvestment realized too late. Because the capital which has been invested in can only be sold at a net loss or converted to more valuable capital at great cost, once people realize they’ve been investing in the wrong things, they have to take a hit.

Individual malinvestments are extremely common in the market – imagine the businessman whose business ventures fail time and time again. Anyone who loses money on the stock market has made a malinvestment – and the market is generally resilient to this sort of isolated malinvestment. So what causes so many people to malinvest in tandem such that we get a recession?

Price distortions.

Now the perniciousness of the stimulus bill starts to become evident. The goal of the stimulus bill is to stimulate “aggregate demand” so that we can return to “full employment”. These terms obscure the nature of the situation. The reason we are not at “full employment” is because we have invested in capital which cannot be converted into things people actually want to buy. Returning to full employment is meaningless if we are not producing things people want – think of the giant paperclips produced by Soviet manufacturers in order to meet an arbitrary weight quota. These workers were employed, but their productivity was useless.

This is what the stimulus is doing for us. It’s postponing the problem – the problem that people have invested in worthless things – and propping up their value as if a worthless investment is just as good as a good investment. There is no such thing as homogenous aggregate demand: there is demand for cars, and there is demand for computers, but these are totally separate things. But after all, GDP is a number which doesn’t care what is produced. It doesn’t matter to the employment rate how the workers are employed. Keynesian economic metrics obscure the health of the economy just as its terms obscure the nature of our problem.

The Stimulus bill essentially implements a command economy by open market operations. Our government decides what to spend money on, and so prices shift accordingly depending on what they spend it on. The bigger the stimulus, the more we start to see the same economic problems of command economies arise in our own backyard. $7 87 billion can effect a lot of shifting – distortions which will ultimately come back to bite us with a deeper recession until we let the market adjust and get rid of these bad investments.