WASHINGTON, DC - JANUARY 16: Former U.S. Labor Secretary Robert Reich (L) testifies before the Joint Economic Committee January 16, 2014 in Washington, DC. Reich joined a panel testifying on the topic of 'Income Inequality in the United States.Ã (Photo by Win McNamee/Getty Images)

Former U.S. Secretary of Labor Robert Reich urges us to save capitalism from its own excesses. He sat down with Martin Eiermann of the European recently to discuss austerity, inequality and our return to the gilded age.

The European: Inequality has finally become a big political buzzword: It’s pervasive, it’s persistent, it’s pernicious. Isn’t now the time to ask the big question: Is capitalism impossible without inequality?

Reich: But it isn’t persistent! Between 1934 and 1978, the United States had much more equality than we have now.

We wouldn’t want to go back to the equality that we had in the 1930s. It was based on the Great Depression and represented a downward leveling. But in the postwar period we actually did quite well and had a greater degree of income and wealth equality than we had seen before and than we have seen since. The economy did not suffer.

In fact, average growth was faster in those decades than it has been since. Taxes were quite high, especially for people at the highest income levels. It wasn’t perfect, but we were striving to achieve prosperity. We passed the Voting Rights Act in the mid-1960s, expanded opportunities for women, and continued to make large investments in education and infrastructure.

The European: What happened?

Reich: We took a giant U-turn. Some of the recent trends have to do with the effects of globalization, but some of it was also a failure of politics. Rather than dealing with the challenges posed by globalization and technological change to the labor market, we turned our backs on the problem.

The European: It seems to me that we can distinguish two basic schools of thought: the one arguing that rising inequality is the result of a deregulated free market, and the one arguing that the market has been regulated in favor of big business. I suspect that you’d fall into the latter camp?

Reich: The word “regulation” assumes that the government intrudes on the market. But actually, you cannot have a market without rules. Governments make those rules. The problem is that after the 1970s, and with increasing intensity since the 1980s, those rules have helped people at the top and have provided less and less help to those in the middle and below.

The European: In other words: You want us to return to the years of the postwar boom.

Reich: I don’t think there’s any sense in going backwards. I want new rules that are better adapted to the 21st century. The European: Let’s get specific. Reich: For example, wage subsidies for low-wage workers. Profit-sharing and gain-sharing in corporations between shareholders, executives, and workers. Bequests to newborn children predicated on the idea of future productivity, so that they already have a solid foothold by the time they turn 18. The next generation has to have the chance to own a share of their future.

The European: At the moment, the next generation is losing out: In Europe, youth unemployment has skyrocketed in many of the countries that were hit the hardest by the eurozone crisis. In the U.S., student loan debt has nearly quadrupled since 2003. Reich: Exactly. It has gotten much worse since the 1980s. “We should not become economic determinists”

The European: Politicians like to talk about the “middle class” or the “working class”. It almost seems that we’ve got a new social group here: the class of the indebted.

Reich: Yes, but with a caveat: Debt levels have come down for most of the middle class, with the exception of student debt. The huge mortgage bubble of 2007 and 2008 has been whittled down considerably. The biggest burden today is student debt rather than debt from real estate.

The solution is to finance higher education based on a model that has students pay back something like 12 percent of income for the first 12 years of full-time work. At the end of that period, regardless of occupation, their student debt should be deemed paid. That’s not as ideal as a truly public option. The public used to pay the entire cost of tuition thirty or forty years ago, and it still does in many European countries. But it’s a step in the right direction.

The European: You write: “where the U.S. goes, the world follows.” Can we expect American levels of inequality in Europe?

Reich: It’s possible for nations to avoid what is happening in the United States. We should not make the mistake of becoming economic determinists. It is simply not true that the American model must become the model of global capitalism. But nations that want to avert this trend have to do so consciously and purposely. The forces of inequality are very powerful: They split the population between a relatively small number of owners of capital and a large number who receive less and less of national income and wealth and become less secure. The trend in Europe has been towards “flexible workplaces”. But flexibility has been defined in a way that gives companies more power to fire workers, to take people off regular payrolls, to outsource work, to give more power to those who already have a great deal of economic power. Austerity furthers this danger.

The European: Austerity in Europe has been justified as essential to economic recovery. The argument has been: If you want economic growth and job growth, you need sustainable budgets. If you want sustainable budgets, you need austerity.

Reich: Austerity increases rather than decreases unemployment. It makes people more dependent on the decisions of a small elite that holds great economic power. But it is not inevitable: Austerity is a political decision. It seeks economic growth for the sake of growth without considering who benefits from it. It seems to me extremely important that we put the distributional issue at a far more central place in economic policy-making.

The European: Inequality in the 20th century remained relatively low partially because of the Great Depression and the Second World War, which stimulated the war economy. Were the Marxists right: It takes a cataclysmic catastrophe to turn the tide?

Reich: Those who say that it takes a crisis to change course are simply wrong. In the 1880s, Otto von Bismarck helped to develop Europe’s first welfare state. That wasn’t in response to economic depression or war. It was partly in response to the widened wealth gaps during the industrial age. The socialist movement was gaining force, and Bismarck understood that a welfare state was necessary in the long run to secure social and economic stability. In the United States, the progressive movement in the early 20th century pursued a very similar agenda: They sought a progressive income tax, limits to campaign spending, break-ups of corporate monopolies, food safety and health regulations, labor rights, etcetera. Those changes occurred not because of a cataclysm but because political reformers had enough influence to push extremely important reforms. I am looking to those historical periods for inspiration about the future. They give me hope.

“The U.S. public is weary of concentrated economic power”

The European: The U.S. Supreme Court recently ruled against what remains of campaign finance regulation. And you yourself have warned that “we have returned to the gilded age of the late 19th century, when the lackeys of robber barons placed sacks of money on the desks of pliant legislators.” Why this sudden bout of hope?

Reich: In the United States, we can already see the beginning of a populist and progressive reaction to the concentration of economic wealth. I disagree with the goals of the Tea Party, but it’s important to remember that the movement began as opposition to the bail-outs of Wall Street and rejected the establishment of the Republican Party. On the Left, you had the short-lived Occupy movement. But we can see the rebirth of progressivism in the election of people like Bill de Blasio or Elizabeth Warren. They were elected on explicitly progressive platforms. And if we are to believe surveys, the U.S. public is increasingly weary of concentrated economic power. The Supreme Court decisions on campaign finance are widely greeted with dismay and anger.

The European: I want to ask you to comment on one of the most influential economic books of recent years: Thomas Piketty argues that inequality rose in many Western countries regardless of who was in power – and that it will probably get worse. It seems to me that you agree on the diagnosis of the problem, but not on the feasibility of a cure.

Reich: I have nothing but admiration for Thomas Piketty’s book, but I think that it shows a lack of political sophistication if you believe that only crises can generate waves of political reform. I believe – and I think that history bears me out – that democratic capitalism has something like a balance wheel: The public becomes deeply offended by great concentrations of economic and political power.

That offense quickly moves to outrage, and that can have serious political consequences. Take free trade: It’s basically dead as a political issue, largely because of public resistance to initiatives like the Trans-Pacific Partnership Free Trade Agreement. People realize that free trade disproportionally helps those who already have a lot of economic power. It does not help the losers of globalization.

The European: In other words: Persistent public agitation can overcome the force of powerful and entrenched interests? Capitalism can be saved from itself?

Reich: I am optimistic because I see no alternative.

The European: That sounds more like fatalism to me.

Reich: We certainly cannot continue along the present path. We are flirting with something that is far more distasteful than mere economic crisis: Political upheaval is unpredictable. Populist insurrections can go to the right or the left, and there is no guarantee that they will result in reform.

If we look to the decades after the Second World War, or to the years before the First World War, we see a deep pragmatism to save capitalism from its own excesses. That is the ideal to which we should aspire.

Did you like the conversation? Read one with Tomáš Sedláček: “The perfect society is an illusion”