* Iconic political economist Robert Reich urges fundamental change

SPIEGEL: The world is mesmerized by the spectacle of the government shutdown in Washington. To you, however, this must seem like déjà vu.

Reich: When I was secretary of labor under President Bill Clinton, we lived through the last shutdown of the US government, in 1995. I had to tell 15,000 people that they had to go home, and I didn't know when they would be paid. It was terrible, and we didn't know how long it would last.

SPIEGEL: Since then, the political culture in the US has become even more radicalized.

Reich: The members of the Tea Party are much more radical and extreme. Some of them really have contempt for the entire process of government. They're followers of people who say that we ought to shrink government down to the size that it can drown in a bathtub. They hate government viscerally. They're not in Washington to govern; they're in Washington to tear it down.

SPIEGEL: The shutdown is hurting the entire country, and there is no telling how this will effect financial markets and still-shaky economic growth. Will President Obama ultimately have to aim for a compromise?

Reich: This bill passed both houses of Congress, was enacted by the president, signed into law by the president, certified as constitutional by the Supreme Court. But instead of going through a normal legislative process of amending a piece of legislation to delay it or change it or even repeal it, the Republicans simply say: "We are going to hold the entire government of the United States ransom unless we get our way." You can't negotiate with extortionists.

SPIEGEL: Clinton won re-election after the last shutdown because the American public largely blamed the Republicans. Could Obama eventually end up the big winner in all of this, as well?
Reich: It's much more difficult. Today, you have many more Republican members of Congress in safe districts, so they're not worried about the voters being angry with them. And many of them are bankrolled by some of the richest Americans, often billionaires. They have the resources to support the demand to shrink the government. America has become the most unequal society among advanced countries, and rich people are now free to spend as much money on political campaigns as they wish.

SPIEGEL: That is the main theme of your documentary "Inequality for All," which is already being touted as an Oscar contender. In it, you paint a grim picture of the US as a country torn apart, and you warn about dramatic consequences for the economy. Are things really that bad?

Reich: The economic divide has rarely been as pronounced. The typical male worker in the US was making $48,078 (€35,400) a year in 1978; now this average annual salary is down to $39,000. At the same, the net worth of the 400 richest Americans is higher than that of 150 million Americans combined.

SPIEGEL: The idea of getting rich used to be a basic element of the "American Dream." Whoever succeeded in becoming a millionaire was admired rather than reviled.

Reich: We used to be so proud that our country offered far more economic opportunities than the feudal system in Great Britain, with its royal family, princesses and dukes. But today, social mobility in the UK is higher than in the US. Our social rift is as big as it was in the 1920s.

SPIEGEL: This didn't happen overnight; it has been decades in the making. Why was the protest against it muted for so long?

Reich: Most Americans stopped looking at what was happening through a variety of coping mechanisms -- starting with women entering paid work and then everyone working longer hours and using their homes for raising equity and generating more money through debt. The typical household basically staved off the day of reckoning. But all those coping mechanisms are now gone, and we have an economy where the median household has got to face the reality that wages are actually declining in real terms adjusted for inflation. The second reason has to do with the direct consequences of wealth in politics. The super-rich not only poured their money into politics directly but poured money into think tanks and public relations campaigns.

SPIEGEL: To say what?

Reich: To tell the public big lies, for example, that if you lower taxes on the wealthy and allow them to become even wealthier, the gains will trickle down to everybody else.

SPIEGEL: But didn't President Kennedy say "A rising tide lifts all boats"?

Reich: Well, that sounds very nice; but it never actually happened. And people are beginning to catch on to the fact that it was a big lie. The super-rich also insisted that income from investments should be taxed less than wages. That is why Warren Buffett pays a lower tax rate than his secretary. And there were related lies, like the message that you have to reduce taxes on corporations and the super-rich for them to create jobs.

SPIEGEL: But the top earners are also responsible for the largest share of tax receipts. And when wealthy people spend more, the whole economy benefits.

Reich: Only that they do not. A super-rich person featured in my movie puts it this way: "Even the richest person sleeps on only one or two pillows." The reality is that the major job creators in any economy are the people who buy, the vast middle class and the poor; if you reduce their share of the economy and yet productivity gains continue, they simply are not going to be able to buy enough to keep the economy going at or near full employment unless you have a huge net export market, which we do not have.

SPIEGEL: Your suggestion is to dramatically increase taxes. But would that not curb demand as well? In Germany, that is one of the strong arguments against government plans to raise taxes on wealthy citizens after the election.

Reich: It is a myth that higher taxes lead to less demand and slower growth. In the first three decades after World War II, US top tax rates on the wealthy were never below 70 percent. Under President Dwight D. Eisenhower, it rose to 91 percent. And the economy grew faster in those years than it has grown after President Reagan radically lowered taxes on the wealthy, partly because we heavily invested in infrastructure and education back then, which is essential to economic growth.

SPIEGEL: These days, the top tax rates are drastically lower, average earners have sinking incomes and the middle class has more and more burdens. Why hasn't a group of fed-up Americans taken to the streets to express their outrage?

Reich: There was one. It was called the Occupy movement.

SPIEGEL: But it petered out quickly, while the Tea Party is still a political factor. Has the American left lost its fighting spirit?

Reich: The Tea Party movement was bankrolled by some very wealthy people. And that bankrolling enabled it to do what the Occupy movement could never do, and that is develop a political strategy and organization. But there is some fatalism, true. One of the goals of the right in America is to make the American public so cynical about government that they give up caring.

SPIEGEL: That strategy appears to be working.

Reich: It works to a point. Social change occurs when the gap between the ideals that people hold and the reality that they see every day gets too large. So even though people may be cynical about government, there will soon be an upsurge of demand for change.

SPIEGEL: Are you trying to accelerate that process with your movie?

Reich: Look. I am a person of short stature; I was bullied constantly when I was growing up. Therefore, I have always wanted to stand up for the little guy. I am not so self-important to believe that I can solve this huge problem alone. The question is if my movie can help catalyze something that's just below the surface. If you look at the mayoral campaign of Bill de Blasio in New York, you'll see social inequality is front and center ...

SPIEGEL: The Democratic candidate has pledged to raise taxes on the rich to finance better schools for everybody else.

Reich: And that in New York, the financial capital of the world! And de Blasio is likely to win! Also, if you look at the strikes of Wal-Mart and fast-food workers around the country, there are a lot of indications that people are fed up with where things are and want fundamental change.

SPIEGEL: Still, that's far from meaning that these sentiments will also lead to political outcomes. Directly after the financial crisis erupted, there was an enormous amount of rage at the complex of Wall Street, corporations and Congress. Obama had a unique opportunity to tackle that complex …

Reich: … and he squandered it. Obama should have put far more conditions on the banks that received the bailouts. He should have told them: "You've got to agree to some severe regulations like resurrecting the Glass-Steagall Act" -- which separated investment from commercial banking -- "and you've got to refrain from providing big bonuses for your executives."

SPIEGEL: Why wasn't Obama able to get his way?

Reich: His administration has been too close to Wall Street. Too many Obama administration officials have worked on Wall Street; too many are leaving to go to Wall Street. And Wall Street is simply not attuned to the needs of average working Americans.

SPIEGEL: Wall Street is no longer the dominant industry in the US. Silicon Valley and brands like Google, Apple and Facebook have become the backbone of the American economy.

Reich: I am not so sure if that is a great development. Look more closely where the jobs are created and the profits flow. You would think that a hugely profitable company like Apple employs hundreds of thousands of people in the US. Actually, it's not even 50,000. You would also think that software giant Microsoft would pay taxes on its profits in the US. But Microsoft just bought Nokia. Why? Well, Microsoft has a huge amount of money offshore. It doesn't want to bring it home because it doesn't want to pay taxes. So buying another company is a better way to spend that money. But that doesn't help American middle class families, and it aggravates inequality here.

SPIEGEL: But isn't a certain degree of inequality also the price a country has to pay for innovation? Doesn't the incentive of great wealth foster risk-taking and creativity?

Reich: A little inequality fosters innovation, true. But there are limits. Does somebody need an annual income of $20 million to be innovative? Somebody's going to be very innovative at $10 million a year. And I am sure Mark Zuckerberg did not create Facebook to become a multi-billionaire.