Here's something odd: Consumer spending is drifting upward, raising hopes for an economic recovery. Yet the unemployment rate is spiking like a scary fever, with jobs more scarce than at any time since the 1930s.

Does this make sense? Where are unemployed consumers getting the money to buy new stuff? Are we so addicted to spending that we're forking over every last dime to get that doorbuster special?

The average American can be excused for thinking that CEOs raid companies rather than running them.

What was once the most august job title in working America has become a synonym for greed and chutzpah. In recent years, the chief executives of Bear Stearns, Lehman Brothers (LEHMQ.PK), AIG, Citigroup (C), Fannie Mae (FNM), and Freddie Mac (FRE) ran their companies into the ground while collecting pay packages that totaled eight and sometimes even nine figures. Some CEO perks sound like the trappings of royalty: car and driver, family use of private jets, personal security, lavish death benefits for family members, free tax and retirement-planning services. While CEO pay has drifted down on account of the recession, it still averages about $1.7 million, and the gap between the pay of CEOs and average workers has been widening for years.

Back in early May, the stock market looked as though it had rebounded from the depressing lows it had reached in March, but stocks still seesawed as investors vacillated between hope that the worst was behind and fear that nasty surprises still lay ahead. Then on May 7, the Federal Reserve released the results of its "stress tests" of the nation's 19 biggest banks. They showed that half were healthy, most of the rest would be OK if they raised reasonable amounts of capital, and only two or three were really in bad shape.

The markets yawned. On CNBC and Fox News, critics of the Fed rolled their eyes. Some said the Fed's methodology was too soft, others said its analysis was a whitewash that hid catastrophic problems at the banks. But over the next few weeks, that attitude changed as most banks raised the required capital, investors gained confidence, and a huge rally in financial stocks led the strongest bull market in decades.

Of all the villains responsible for the Great Economic Wipeout, the Federal Reserve is pretty far down the list. It's certainly behind members of Congress who deregulated the banks in 1999, allowing once staid institutions to gamble recklessly. Then there are notorious CEOs like Martin Sullivan of AIG, Angelo Mozilo of Countrywide Financial, and Richard Fuld of Lehman Brothers (LEHMQ.PK) whose greed and hubris wrecked their companies. Crooked mortgage brokers, rapacious Wall Street traders, and millions of irresponsible homeowners were key supporting actors in the revolting drama, too.

The Federal Reserve made one unambiguous mistake: It kept interest rates too low for too long after the 2001 recession, in the forlorn belief that Wall Street money hounds would exercise restraint instead of getting drunk on cheap money and heading to the casino. The Fed also could have spotted the housing bubble sooner than it did and acted more quickly to deflate it. And once the financial system was in full meltdown in 2008, the Fed arguably could have done a better job managing the collateral damage.

It's an agonizing time to be a laissez-faire capitalist.

Many folks who fancy themselves free marketeers are aghast as they watch the Obama administration taking the wheel at failed automakers, drafting a sweeping overhaul of healthcare, dictating salaries at bailed-out banks, and preparing stringent new rules for the whole financial sector. The U.S. Chamber of Commerce is mounting an ad campaign touting the virtues of free enterprise, as if it's a foreign concept. Fox News frets daily about a socialist takeover of the economy. Some Americans who begged for government relief a year ago, when the economy was in free-fall, have buyer's remorse now as they watch the public sector swell.

Save or spend? That will be the question that bedevils consumers over the next several years as they replenish their rainy-day funds, rebalance their debt, and limp toward retirement.

It's no secret that Americans spent too much and saved too little over the last decade. For 40 years after World War II, Americans typically saved somewhere between 6 and 10 percent of their after-tax income. The savings rate began to drift down in 1985, and for most of the last five years it's been less than 3 percent. It even dipped below zero in 2005. With frightened consumers now starting to hoard cash (if they have any), the savings rate has inched back up to about 4 percent. But many economists feel that's not high enough.

If reforms out of Washington are poised to wreck the healthcare industry, somebody forgot to tell the stock market—including hundreds of professional investors who own healthcare stocks and get paid to assess their prospects.

Many opponents of healthcare reform fret that deeper government involvement in the healthcare system will strangle free enterprise. The biggest worry is a possible federal healthcare plan—the "public option"—that might outcompete private plans, thanks to unfair advantages that come from government power. It's certainly true that stronger regulation, usually intended to correct abuses, tends to depress the profits of the firms being regulated. But if stock prices are any indication, investors are less concerned about healthcare reform than critics rallying to the cause of free enterprise.

If there's any good news about the economy, it's the startling surge in corporate earnings. In the most recent quarter, about 80 percent of S&P 500 firms reported profits greater than Wall Street analysts expected, according to Thomson Reuters. That's the highest proportion of upside surprises since Thomson Reuters started tracking the data in 1994.

[Slide Show: 10 Companies Missing the Earnings Boom.]

Boy, are we optimistic. The economy has been losing jobs for 22 months, and it's still not clear when that gruesome trend will turn around. Yet the stock market is skyrocketing, and investors are telling themselves that stocks are a "leading indicator," so a vigorous recovery must be right around the corner.

That corner keeps slipping further into the future. Economists have been heralding a turnaround for six months, largely because key measures like home prices, retail sales, bank losses, and job cuts have been deteriorating more slowly than they used to. But there's a big difference between a slowing rate of decline and actual improvement, and the economy remains in worse shape today than many prognosticators ever foresaw. Back in the spring, for instance, the Federal Reserve predicted that, in the worst possible case, unemployment would average 8.9 percent for 2009. We soared past that level in April, and it's been worse than the Fed's worst case ever since.

You know about the bailouts, the stimulus plan, cash for clunkers, and moola for mansions. But for all the anxiety they've caused, those government giveaways are just a tiny part of a mushrooming problem.

By one measure, the government already plays an outsize role in our so-called free-market economy—and it has little to do with the recession. Economist Gary Shilling has calculated that 58 percent of the population is dependent on the government for "major parts of their income" including teachers, soldiers, bureaucrats, and other government employees; welfare and Social Security recipients; government pensioners; public housing beneficiaries; and people who work for government contractors. By 2018, Shilling estimates, an astounding 67 percent of Americans could be dependent on the government for their livelihood. The implications aren't comforting.

It might not be good for America's waistline, but froufrou dining off petite plates is out. The recession has made us hungry for family-size piles of comfort food, skyscraping burgers, and all-you-can-eat fries.

Like other segments of the retail economy, the restaurant industry has struggled over the past two years as unemployment has soared and consumers have curtailed spending. The National Restaurant Association's performance index shows that the industry has been shrinking for 23 months in a row. High-end bistros have fared the worst, with sales at fancy restaurants like Ruth's Chris (RUTH) and Morton's Steakhouse (MRT) off by 20 percent or more, as corporate customers pare expenses and other diners trade down. Casual- and family-dining places have suffered too, as people eat out less, order more takeout, or cook at home. Even fast-food chains like McDonald's (MCD) and Burger King (BKC) have lost business, despite dollar meals and other deals meant to keep the fryers sizzling.

Ford Motor Co.’s (F) latest earnings report doesn’t mention General Motors or Chrysler, its crosstown rivals. But those competitors have a lot to do with Ford’s surprising $1 billion profit in the third quarter.

Ford attributes its better-than-expected performance—its first quarterly profit since 2005—to aggressive cost-cutting, popular new products like the Taurus sedan and Fusion hybrid, a cash-for-clunkers bump, and improvements at its financing arm. But Ford also is a clear beneficiary of the woes at GM and Chrysler, both trying to recover after bankruptcy filings earlier this year. Ford cited a market share gain of 2.2 percentage points compared with 2008, which helped offset a shrinking market. For a mature industry like the car business, that’s a huge gain in a short period of time. And there’s little doubt that many of Ford’s new customers bailed on the other two domestic automakers as they shambled toward bankruptcy and wolfed down billions in taxpayers bailouts.

A lot of economic indicators go hot and cold these days, but here's one that's been consistently getting better: The government has been steadily withdrawing its extraordinary support for the ravaged economy.

It might not seem that way. Lender GMAC is lined up for another bailout of $3 billion to $6 billion from the Treasury Department. Federal pay czar Ken Feinberg recently elbowed aside the boards of directors at seven big bailout recipients by dictating the pay of their top executives. Congress is devising new regulations to police Wall Street, rein in risky practices, protect consumers from corporate predators, and get the government more involved in the private sector than it has been in 70 years.

Just a few months ago, we were gloomy all the time. It was easier that way.

Now we’re enduring frequent mood swings as the economy teases us with recovery, then smacks down our hopes. There was a bout of euphoria when we learned that the economy grew 3.5 percent in the third quarter, the first period in more than a year when GDP didn’t shrink. Growth was greater than expected, even on par with what you’d see in a normal, healthy economy. Yay! Life is good!

The sky isn't falling, exactly. America isn't on a fast track to irrelevance. Even in a state of total neglect, we could probably shamble along as a disheveled superpower for a few more decades.

But all empires end, and the warning signs of American decline seem to be blinking more consistently. In the latest annual "prosperity index" published by the Legatum Institute, a London-based research firm, the United States ranks as the ninth most prosperous country in the world. That's five notches lower than last year, when America ranked No. 4. The drop might seem inconsequential, especially in the midst of a grueling recession—except that most of the world has endured the same recession, and other countries are bouncing back faster.

The Obama administration is finally getting tough — on corporate invalids.

The government's "pay czar," Kenneth Feinberg, is coming down hard on the seven firms under his jurisdiction, ordering steep pay cuts for about 175 top executives. The brass at AIG (AIG), Citigroup (C), Bank of America (BAC), GMAC, General Motors, Chrysler, and Chrysler Financial will have to live without the nine-digit paychecks Wall Street's titans have become accustomed to. Some won't even make eight figures. And the majority of their pay will come in the form of stock that can be cashed in only after the companies have met long-term performance targets. Until that happens, the impoverished execs might have to get by on meager salaries that might not even reach $1 million.

Behold the damage the recession has wrought on the consumer economy: Retailers and automakers have gone bankrupt, restaurants have closed, and malls have become ghost towns. Most businesses dependent on consumer spending, from clothing to computers to appliances, have felt the pinch.

[Slide Show: 10 Products That Boomed During the Recession.]