Reciting CLRS is not useful. Knowing why a greedy algorithm like Dijkstra's is optimal can be both beautiful and insightful. A fundamental understanding of these algorithms and data structures only add tools to an engineers arsenal. Of course, code should be the medium through which the interviewee expresses these to make sure she/he is not simply a mathemetician
A good engineer should have a good base in algorithms, know which one to use for which problems, and when the algorithms matter and when they don't. And be able to research literature for appropriate ones when the need arise. That's not the end of what qualifies a good engineer, but it certainly is part of it.
CS and math researchers write papers (partially) so that engineers can pick them up and use them to improve on what's possible to build.
The vast majority of programming jobs are such that the people working at them will never need to understand these things. It's a sad state of affairs, but it's how the world is.
Along those lines, most people feel that their programming jobs don't fall into that category.
The types of "good engineers" that exist are numerous and varied. For many, possessing (and retaining) detailed knowledge of algorithms is a waste of time that will practically never be useful.