The results are in. The federal government spent about 5% more in 2011 than it did in 2010, a real increase in spending:

The Congressional Budget Office recently finished tallying the revenue and spending figures for fiscal 2011, which ended September 30, and no wonder no one in Washington is crowing. The political class might have its political pretense blown. This is said to be a new age of fiscal austerity, yet the government had its best year ever, spending a cool $3.6 trillion. That beat the $3.52 trillion posted in 2009, when the feds famously began their attempt to spend America back to prosperity.

What happened to all of those horrifying spending cuts? Good question. CBO says that overall outlays rose 4.2% from 2010 (1.8% adjusted for timing shifts), when spending fell slightly from 2009. Defense spending rose only 1.2% on a calendar-adjusted basis, and Medicaid only 0.9%, but Medicare spending rose 3.9% and interest payments by 16.7%.

The bigger point: Government austerity is a myth.

As I pointed out in a post a couple of weeks ago, the same is true here in Illinois, in New York, and in California. Sure, you can find states that have reduced real spending. But you can find a lot more that have increased spending.

In that post I asked for the operative definition of austerity. Unless your definition is “spending less than I want to”, austerity this ain’t.

One more remark about public spending. If you want to slow the decline in government jobs, cut public employee pay across the board by 10%. The reason that state and local governments are cutting back on employees is that they’re required to balance budgets and when tax revenues are down the only way they can pay the step increases that the public employees’ contracts call for is to reduce the number of employees. Revenue is a constraint. Public employees’ contracts are being treated as a constraint, too. The irresistible force and the immovable object.

Bill Gross, managing director of the world’s largest bond fund, (whose star has become a little tarnished this year) has advice for investors and, sadly, for all of us—get used to it:

If structural solutions are not put in place, a six-pac market observer should look at both stocks and bonds as rather flabby knock-offs of their former selves; no resemblance at all to Jack LaLanne but more to a 55-year-old terminator grown fat and rendered out of shape by years of neglect and perhaps greed for short-term profits as opposed to long-term balance. There are no double-digit investment returns anywhere in sight for owners of financial assets. Bonds, stocks and real estate are in fact overvalued because of near zero percent interest rates and a developed world growth rate closer to 0 than the 3 – 4% historical norms. There is only a New Normal economy at best and a global recession at worst to look forward to in future years. A modern day, Budweiser-drinking Karl Marx might have put it this way: “Laborers of the world, unite – you have only your six-packs to lose.” He might also have added, “Investors/policymakers of the world wake up – you’re killing the proletariat goose that lays your golden eggs.”

As with many commentators recently his message is one of the problems posed by growing income inequality. Unfortunately, also as with many commentators, his ability to diagnose the problem is a lot better than his advice for curing it which seems limited to other managers resolving to pay their employees more and a “Buy American” program. Clearly, Mr. Gross hasn’t looked at the content of consumer goods lately. It’s darned hard to buy American even if you want to. If you buy a small car, the odds are extremely good that its engine was made in Japan or South Korea. If you buy fresh meat, it’s probably American. If you buy frozen prepackaged meat, chicken, fish, or seafood, it’s probably from Asia, Latin America, or Australia.

Relatively few consumer goods are 100% made in the U. S. A. any more.

With any luck Arnold Schwarzenegger, the Austrian-born former governor, former actor, former body-builder, former 100 lb. weakling, may be a better metaphor for the United States than Mr. Gross realizes. As Mr. Gross observes, he’s showing his age. However, over the years he’s shown a remarkable ability to re-invent himself. That’s what we’re going to need to do.

Inspired, no doubt, by the Occupy Wall Street protests, I’ve seen quite a number of posts and articles on the subject of income inequality. The first, from Barry Ritholtz, largely consists of several graphics illustrating income distribution gains from 1917 to 1981, 1982 to 2000, and 2001 to 2008. I won’t reproduce those here; go on over there and take a look at them.

As you might expect over the last 10 years the overwhelming preponderance of the gains have gone to those in the top 1% of income earners, smaller gains have gone to those in the next highest 9%, while those in the bottom 90% have seen no gains whatever. Indeed, they’ve seen declines. In the prior two periods the lowest 90% saw more gains but the top 1% have seen the greatest income gains throughout the 91 year period illustrated.

I think I interpret these charts a little differently than Barry does. What I see is an exponential curve in income growth among the highest income earners throughout the period. I don’t think it slices quite as neatly into the BR (before Reagan), AR (after Reagan), and AB (After Bush) epochs he apparently does. There may be some of that but I think I see a long term trend at work.

However, note that the incomes of all of the top 10% of income earners grew over the entire period, not just the top 1%.

The second post is a very interesting one from Mike Konczal on how the top 1% (and the top .1%) of income earners earn those incomes. Pay particular attention to the first two tables (Mike hot-links the first one which I think is rude). I won’t reproduce them here but I will put a few numbers behind them: the top .1% of income earners comprise about 140,000 people and the top 1% about 1.4 million people.

In 2008 the six categories with the largest number of individuals among the top .1% of earners were non-financial executives, managers, and supervisors (40.8%), financial professionals including management (18.4%), the idle or deceased rich (6.3%), lawyers (6.2%), real estate (4.7%—I expect the numbers for 2011 would be somewhat different), and medical professionals.

In 2005 the six categories with the largest number of individuals among the top 1% of earners were non-financial executives, managers, and supervisors (31%), medical professionals (15.7%), financial professionals including management (13.9%), lawyers (8.4%), non-financial computer, math, technical, and engineering professionals (4.6%), and the idle rich or deceased (4.3%).

Let’s put some more numbers behind those: the top 1% of income earners make about $380,000 per year while the top .1% make a couple of mill.

One last note before I launch into the things that concern me: quite a number of the lawyers who are among the top 1% or top .1% of income earners are, basically, camp followers of the financial sector and there has been a bloodbath among them over the last five years. I expect lawyers’ position in these rolls to change pretty dramatically. Some, too, are the Michael Jordans and Bill Gateses of the legal profession. They do make a lot of money but there really aren’t very many of them.

Okay, here goes. Here’s what worries me about this:

• Too many of those in in the top .1% but, particularly, the top 1% of income earners are rent-seekers, clients of the government. The situation is even worse for the top 10%. A pair of GS-10s working in DC are in the top 10% of income earners (FBI special agents start as GS-10s).
• We’ve redoubled our efforts at bailing out and subsidizing the top .1% and the top 1% over the last four years. What would these tables look like without all of the subsidies? There’s no way to tell.
• We’ve been so afraid of destabilizing the financial sector that they’ve effectively been indemnified not only against financial loss but against civil and criminal penalities. That’s infuriating not to mention counter-productive.
• The categories that the Occupy Wall Street protesters have been dividing the country into, the top 1%/the bottom 99%, are wrong. We should be contrasting the top 10% with the bottom 90%.
• I think that the bottom 90%’s problem is a combination of globalization, massive immigration of low-skilled and semi-skilled workers from Mexico, and the healthcare system. Most of the income gains the bottom 90% might have seen have gone to healthcare spending.
• I don’t see any plans on the table that would do much for the bottom 90%.
• I do see plans on the table under which the top 1% would subsidize the next 9%. I don’t think that solves whatever problem of income inequality that we have.
• The trends have been in place for a very long time.

Here’s a two-line summary of what my Sunday has been like:

Six days thou shalt work and do what thou’rt able.
The seventh the same and clean out the stable.
‘

As I drove between appointments yesterday I happened to listen to a bit of the regular film criticism program on our local public radio station. In this particular program the hosts listed their top five pictures in which the main character loses his mind excepting instances in which drugs or alcohol are involved. Without that proviso the winner bar none would be Ray Milland’s chilling portrayal in The Lost Weekend.

There are any number of pictures in which a supporting character starts off nuts and gets nuttier. The world’s heavyweight champion in that department must certainly be Sunset Blvd. Who is the main character in that picture? If it’s Norma Desmond (Gloria Swanson), it almost fits although she’s pretty far around the bend when we first meet her. Does it fit if the main character is Joe Gillis (William Holden)? Does he lose his mind during the course of the picture? It’s an interesting question. He certainly loses his life but does he lose his mind?

Another picture that leaps to mind in this category is Hitchcock’s Vertigo. What iis Scottie’ Ferguson’s mental state at the end of the picture? I think he’s lost his mind.

A little-seen picture, mentioned by the hosts, is Sam Fuller’s 60s picture, Shock Corridor. I haven’t seen that picture in decades. In the film a newspaper reporter (Peter Breck) has himself checked into a mental institution as part of an investigation and proceeds to go mad. It’s pretty lurid as many of Sam Fuller’s pictures are.

Many of the other films they mentioned are pretty obscure but several aren’t, e.g. The Shining and Rosemary’s Baby. The former certainly qualifies and the latter qualifies if you don’t believe the Devil exists. But that brings up another interesting question.

Losing one’s mind is actually a pretty common topic in genre pictures, particularly in fantasy, science fiction, and horror but also in westerns. Consider The Man Who Shot Liberty Valance.

First, who is the main character in the movie? If it’s Jimmy Stewart’s Ranse Stoddard it wouldn’t qualify and the picture would be classified as a comedy (I’m using something along the lines of the Aristotelian definition here). I would content that Ranse Stoddard isn’t the main character but the narrator. The main character is John Wayne’s Tom Doniphon, during the course of the picture, as a consequence of personal disappointments and, essentially, the end of his way of life, he has a psychotic break (the burning of the cabin) and succumbs to major depression from which he never recovers. It’s a tragedy and meets the criteria the Filmspotting hosts set.

Richard Matheson’s novella, I Am Legend has been made into three movies: The Last Man on Earth (1964), The Omega Man (1971), and I Am Legend (2007). I don’t know about the last picture (not having seen it) but the novella itself and, to some extent, the first picture can be interpreted as a man degenerating from agoraphobia into paranoid delusions.

The great strength and value of the entire fantasy genre either in literature or film is that it makes it possible via allegory to tell stories about extremely hard and difficult topics that might well be impossible to tell in a compelling manner in conventional fiction. When viewed in that way the challenge opens up considerably.

In The Wolf Man Lon Chaney, Jr. gives a poignant performance of a man going mad, first in obsession, then delusion, then mania. The physical transformation is actually extraneous but it made the movie much more palatable to 1940s audiences.

Robert Louis Stevenson’s novel, The Strange Case of Dr. Jekyll and Mr. Hyde, has been adapted for film, television, and even cartoons at least 30 times. I recall discussing the novel at some length with my mom. She saw it as a story of drug addiction. I saw it as one of multiple personality disorder (I still do). Hyde was not a physical monster but a moral one. Jekyll wasn’t addicted to the drug; he was addicted to being Hyde. In the film adaptations I’ve seen that’s clear in the 1940s version with Spencer Tracey (IMO and his one of Tracey’s worst) but clearest in the 1931 adaptation with Fredric March in the title roles. A close reading of Stevenson’s works reveals a recurring theme that evil is more attractive than good, irresistible in fact.

Before I draw this post to a close, I wanted to mention a genre picture in which the reverse happens—the main character is insane at the beginning of the movie and gradually becomes sane: The Sixth Sense. At the beginning (not the very beginning but after that) the main character, Dr. Malcolm Crowe (Bruce Willis) is in extreme denial, a state of delusion. In the course of the picture by helping Cole Sear (Haley Joel Osment) overcome his problems, he overcomes his own psychological problems and returns to his own best self. It’s a remarkable paean to the possibility of a practitioner healing himself by helping his patients to heal, caring as salvific.

What are the best movies, among genre films or straight drama, in which the main character starts sane and loses his or her mind during the course of the film?

is greatly exaggerated. U. S. manufacturers are producing more, making more money, and wages are higher than ever before. What U. S. manufacturing is not doing is creating lots more jobs. It’s doing more with less.

The U. S. remains the greatest manufacturing country in the world—the value of our manufactured goods in aggregate is higher than the value of China’s manufactured goods in aggregate. Will that remain the case? I have no idea. China certainly wants to be a bigger player in the manufacturing of high value goods, e.g. aerospace.

I wish more people understood this. Manufacturing is not dying in the U. S. What is dying is the industrial union. Union membership today is mostly composed of members of service unions, many consisting of government workers.

Scott Sumner neatly summarizes something close to my views on where we stand right now and how we got there:

I don’t doubt that a WWII-style military build-up would more than offset Fed policy conservatism. But what about politically plausible stimulus, say another $400 billion? I see the most likely outcome as a modest boost to the economy, which pushes up oil prices and headline inflation, which frightens the Fed, which leads the Fed to refrain from additional unconventional stimulus that they would otherwise do.

How do I know that the Fed would otherwise do more monetary stimulus? I don’t, but that’s certainly been their pattern over recent years, whenever the economy faltered. And there are already rumblings of the possibility of additional stimulus. And the number of hawks on the FOMC drops from 3 to 1 in January.

None of this means I’m right–as I’m no mind-reader. But if you look at how the Fed actually behaves, rather than what Bernanke says or “really” believes, then you are forced to conclude that the 2009 stimulus was sabotaged. That stimulus was not enough to create a robust recovery, even with unconventional Fed moves. If they hadn’t done that stimulus, it looks like the Fed would have done a more aggressive stimulus, as they seem determined to keep core inflation in the 0.6% to 2.0% range. And thus if we’d never done the 2009 fiscal stimulus, we’d probably be about where we are now–9.1% unemployment and 2% core inflation. But with a much smaller national debt.

I have made no secret that I have an abhorrence of debt. There’s a simple reason: low debt mitigates the risk of a variable income forcing you to change your lifestyle. As the interest on the debt rises, paying it absorbs more and more of your income. If it rises high enough, you’ve got to cut back in other areas.

But interest rates are low! (I hear somebody protest.) They will not stay low forever, how high they rise are not within your control (even if you’re the federal government), and when they do rise it can have a disastrous effect on even the most meticulously planned budget.

We may be entering a very new period in our history. For the last half century or more despite the many tax rate changes (or because of them!) federal revenues have maintained a remarkably constant 20% of GDP. If GDP remains flat or grows very slowly over time, either federal revenues must increase relative to GDP, we’ve got to constrain our spending to federal revenue, or we’ve got to borrow the difference indefinitely into the future. A very small difference every so often isn’t terribly concerning. I’m not a balanced budget crank. However, a permanent difference of 50% (or more) will inevitably bring ruin.

Clearly, I’m missing something in Martin Feldstein’s op-ed in the New York Times. Isn’t the most straightforward way to halt the drop in home values to allow them to decline to the market clearing prices? Contrariwise, won’t any other solution merely be postponing the inevitable?

I understand his point: that the loss of wealth reduces consumer spending which in turn reduces total economic activity. But the loss has already occurred. We can’t reinflate the bubble. There are inelasticities that prevent prices from changing rapidly so we see a (relatively) slow motion drop.

And the solution he proposes, reduction in principal, has the defect I mentioned yesterday evening: it will reveal how many banks are actually insolvent.

I was shocked when I read this post at Calculated Risk which contains a comparative breakdown of home sales in several different markets. Just to cite the extremes, in Las Vegas three quarters of all home sales were either foreclosures or short sales, i.e. distressed sales, while in the Mid-Atlantic, a region that includes Baltimore and DC, three quarters of all home sales were non-distressed. That’s an enormous difference and fully supports the claim I’ve been making for a long time: there’s a local problem with national implications billed as a national problem. One size does not fit all. We should be paying a lot more attention to the areas of the country that are in serious straits rather than diluting our efforts trying to find a solution that doesn’t give those areas preference.

As I read the analysis of the global economic crisis and prescriptions for turning the situation around written by Daniel Alpert, Robert Hockett and Nouriel Roubini (hat tip: Marc Schulman), my hopes were first raised and then dashed. Many of the things the authors had to say about how we got into the mess we’re in and the contours of the necessary remedies, e.g. the long term structural character of the downturn and the global factors involved, are things I’ve been harping on here for a long time. Unfortunately, like so many other commentaries, their analysis of how we got here is significantly better than their prescriptions for digging ourselves out of the hole.

Their proposals consist of three basic “pillars”:

Pillar 1

A $1.2 trillion targeting high return investment in energy, transportation, education, research and technology development, and water treatment infrastructure

I won’t nitpick this. However, I take great exception to this statement:

We also emphasize the substantial element of “self-financing” that such a program would enjoy by virtue of (a) massively current idle hence low-priced capacity, (b) significant multiplier effects, and (c) historically low government borrowing costs.

The authors are apparently unaware of Davis-Bacon wage requirements which entirely negate point (a), (b) is a matter of some controversy with no dispositive empirical proof, and (c) will not remain true forever while the debt which would be incurred will be on the books forever. We’re still paying interest on the debt we incurred during World War II. We’ve just grown and inflated to the point that it’s not particularly significant any more. I do not believe we can expect the rate of growth we experienced for the twenty years following the war again. Do the authors expect high inflation?

Pillar 2

Debt restructuring and regulatory capital loss absorption

This “pillar” is discussed at greatest length, see especially the appendix. I find two basic problems with this. First, I think the authors are underestimating how much of the debt is actually on the part of the highest decile of income earners. Forgiving that will require Olympic gold medal caliber rationalization. Second, don’t the banks that hold the debt need to acknowledge that they’re insolvent in order to effect the second component? And isn’t the banks’ refusal to acknowledge that insolvency what has caused the failure of each of the several past debt restructuring measures? There’s a time inconsistency problem here.

Pillar 3

Global rebalancing—a new G-20 commitment to currency realignment, domestic demand growth and reduction of current account surpluses, and IMF and G-20 coordinated recycling of East Asian and petro-dollar surpluses to support economic recovery in Europe and the Middle East

The short version of this is that Germany and China need to let wages and personal consumption to rise and China needs to implement a social safety net to reduce “rainy day” saving. There are no prospects whatever for either of these things happening, at least not on a timetable that will produce near term economic recovery in Europe or the U. S. It’s like a 12-step program. The beginning or recovery is acknowledging that you have a problem and neither Germany nor China believe they have a problem. In addition the Chinese oligarchy would need to choose the good of China and the world over lining their own pockets and those of their family members. Ain’t gonna happen.

Nonetheless the article is highly recommended. Read it and weep.