What Clinton and Sanders Are Really Fighting About

The Democratic candidates have revived an old progressive debate about whether big business can be regulated, or must be broken up.

Hillary Clinton says she welcomes the “rare” opportunity for a “real contest of ideas” with Senator Bernie Sanders. Though Sanders remains a longshot for securing the nomination, the battle of ideas between the two candidates is very real. But the debate between Clinton and Sanders does not just pit pragmatism against idealism, it also reflects a deeper divide within progressive politics over fundamental theories of governance.

Clinton takes a managerialist view of how government works, embracing the idea that, with sufficient expertise, government can fine-tune the economy to prevent crises. Sanders, by contrast, is skeptical of expert oversight, and instead seeks to radically restructure the economy itself.

Take their positions on financial regulation and the problem of “too big to fail” financial firms. Sanders wants to restore the New Deal-era Glass-Steagall Act, which mandates a separation between commercial and investment banking, and proposes to break up financial firms that are too big to fail into smaller entities, to limit their economic and political influence. As Sanders has argued, “if a bank is too big to fail, it’s too big to exist.” Clinton, by contrast, seeks to extend and deepen oversight of by strengthening the Dodd-Frank financial-regulatory overhaul passed in 2010. She argues that the financial crisis itself was caused not by big banks, but by so-called “shadow banks” like Bear Stearns and Lehman Brothers. These financial firms play a critical role in an interconnected financial system, but exist outside conventional financial regulation, and would be relatively unaffected by either a re-instatement of Glass-Steagall, or by breaking up banks like Citi or Bank of America. Clinton’s critique is sound, and several economists and commentators have warned that Sanders’s approach will not address shadow banking. But it misses the broader implications of Sanders’s position, which is not just about financial regulation policy, also concerns the underlying approach to governance more broadly.

Clinton’s managerial approach would apply better resources, data, and personnel in support of top-down regulatory oversight, to mitigate the worst excesses of the economy. So for Clinton, if Dodd-Frank is flawed, the answer is to reform and expand regulatory oversight, not to abandon it. This view of governance can extend beyond financial regulation, and by invoking it, Clinton is referencing a venerable progressive tradition. For all his campaign rhetoric in 2008, as President Barack Obama largely governed in this managerial, expertise-oriented tradition. His administration’s approach to financial reform prioritized the expansion of oversight by the Federal Reserve and the new Financial Stability Oversight Council. This tradition goes all the way back to the New Deal and its faith in technocratic, expert governance.

This managerialist view of governance orients progressive policy towards a particular approach to economic regulation. First, it presumes that, by and large, the current economic structure is mostly working well, needing only some judicious fine-tuning to prevent crises or harmful effects. It also presupposes that the United States possesses sufficient regulatory capacity, expertise, and faith in its agencies to deliver on this kind of fine-tuned oversight.

But the experience of the last decade calls both of these assumptions into question. As viewers of Adam McKay’s and Michael Lewis’s The Big Short might notice, there is a very real question as to how much of the modern financial sector truly serves the economic needs of the public rather than manufacturing both profits and long-term risk. Simon Johnson and James Kwak, key voices arguing for more robust financial regulation since the crisis, have raised questions about how much and what kinds of financial innovation are actually beneficial for the economy. Meanwhile, despite their best efforts, financial regulators face a steep challenge in exercising the kind of public-spirited oversight envisioned by Clinton. As a number of recent studies suggest, even in the absence of literal corruption, good-faith regulators often skew policies to favor financial-sector interests as a result of the complexity of financial markets; regulatory dependence on financial firms themselves for information and data; and the shared social, cultural, and educational backgrounds of many financial regulators and financial-sector leaders.

Sanders’s approach to financial regulation, by contrast, rests on a theory of governance that takes these concerns seriously—something that the critique of Sanders’s specific policy positions often misses. His invocation of Glass-Steagall and push to break up banks are not naïve returns to a pre-modern form of financial regulation. Rather, they flow from skepticism toward the benefits of financial innovation and the capacity of regulators to be sufficiently independent to resist financial-sector influence. Sanders’s proposals represent a shift to a structuralist mode of governance, aiming to promote the public good by altering the fundamental dynamics of the market itself. If, as Sanders has argued, “fraud is the business model” and not just an exception on Wall Street, then there is no need to tiptoe around financial firms through minimalist fine-tuning. And if both the economic and political influence of the financial sector are problematic, then policies that depend less on managerial discretion and instead shift the dynamics of the market itself are preferable.

So “breaking up the banks” serves as a shorthand for a variety of proposals that have been advanced to prevent the rise of systemically risky financial firms in the first place. Without firms of that size and interconnectedness, the kind of ripple effects caused by the collapse of Lehman Brothers may not repeat. Glass-Steagall similarly enforced a firewall between traditional, core banking functions of depositories, and riskier trading of investment banks, reducing the danger that trading could bring down a firm holding the assets of ordinary depositors.  Sanders’ proposal for a financial transaction tax offers another mechanism for limiting financial speculation that does not depend on managerial oversight.

Critics take issue with some of Sanders’s specific proposals, and the specifics are worth debating. Indeed, several financial regulation scholars like Morgan Ricks have suggested a different reform path that is nevertheless structuralist rather than managerial, seeking to prevent runs in the shadow-banking system by regulating money-like instruments like repo or mutual funds in the same way that cash and cash depositories are currently regulated. Regardless of the policy specifics, this basic structuralist approach is worth taking seriously.

Nor is Sanders alone in shifting to this structuralist approach to governance.  Elizabeth Warren has suggested a similar shift. In her April, 2015, speech on the “unfinished business of financial reform,” Warren called for an end to the problem of institutions that are too big to fail, by capping the size and systemic importance of these firms and reviving Glass-Steagall. As Warren argued, “too much reliance on a technocratic approach plays right into the hands of the big banks.” Instead, she said, a different approach to economic governance is required.

The argument that Sanders and Warren and others are making extends beyond financial regulation. Although the managerial tradition is the one most-often associated with post-New Deal, “big government” liberalism, the structuralist view evokes its own progressive tradition. A century ago, as the country first began to grapple with industrialization and the rise of monopolies, economic elites, and new forms of corporate power, progressive reformers battled over how to respond to what Louis Brandeis called “the curse of bigness.” Many favored structural measures like antitrust limits to firm size and concentration.

The financial crisis has reignited the debate among progressives over how aggressively to regulate the modern financial sector. But it also reveals this underlying tension between different progressive visions of governance. Mainstream progressives have tended to take the same line as Clinton and Obama, emphasizing an approach to economic regulation that prioritizes pragmatic, expert oversight. By invoking a different progressive tradition that offers an alternative to both an overly optimistic faith in top-down technocracy, and to the scorched earth deregulatory zeal of conservatives, Sanders is shifting the terms of the debate. Progressives may share a desire to redress the problems of private power and economic inequality, but they will have to also address these questions about how best to accomplish those aims. By renewing an older progressive tradition in the spirit of Brandeis and the antitrusters of the first Gilded Age, Sanders has raised a challenge that progressives will have to grapple with, whatever the outcome of this race.