INTELLIGENCE
ROBERT REICH


The United States is reputed to be the most free-market-oriented nation of all, the country that best epitomizes sink-or-swim capitalism. So it may seem odd that a furious debate is going on not about whether big companies should be bailed out by the government, but about which companies deserve to be. And the debate has worldwide implications.

Citigroup, once the biggest American bank, has been given tens of billions of dollars by the United States government to avoid bankruptcy, yet questions arise about whether General Motors, once the biggest automaker in the world, should be bailed out at all - beyond the money that Congress is providing to keep G.M. afloat until January.

Americans don’t like the idea of bailing out any big company. They’ve gone along with the Wall Street bailout mainly because they don’t understand finance and are easily intimidated by words like“credit default swaps”or“collateralized debt instruments.”Yet when the nation’s highest financial officials warn of dire consequences unless taxpayers keep Wall Street going, Americans reluctantly agree.

But they know cars. Most people have one. And they believe that over the last several decades the Big Three have done a lousy job making them. So why bail them out- In reality, though, the Big Three probably have a better case for bailout than the big banks, while global financial markets would do better if Wall Street were subject to bankruptcy.

Chapter 11 of America’s bankruptcy code allows companies that can’t pay their bills to reorganize themselves under court protection, pay off what they can, and clean up their balance sheets. This is the best way to get global credit moving again. Even if it means that global creditors of Wall Street have to settle for 30 cents on the dollar of debt they’re owed, they’re better off getting paid something than continuing to endure a worldwide financial freeze.

Wall Street’s own shareholders and executives may have to sacrifice even more. But why shouldn’t they- Wall Street’s creditors, shareholders, and executives were paid to take risks. It turned out that their bets were terribly bad. There’s no apparent reason why American taxpayers should rescue them.

Chapter 11, alone, might not work as well for the Big Three and their parts suppliers. If they were to shrink as a result, many millions of people could lose their jobs. The potential social costs would include unemployment insurance, lost tax revenue, pension benefits that would have to be paid by the government, families suddenly without health insurance, and entire communities whose infrastructure and housing could become nearly worthless.

The best result, in my view, would be for G.M., Ford and Chrysler to be offered a hybrid of bailout and Chapter 11 bankruptcy. For every taxpayer dollar, the Big Three would have to come up with $2 of sacrifices from their executives, employees, creditors, and shareholders.

For Citigroup and the other Wall Street banks, though, the answer from here on should be Chapter 11.

Robert Reich, a professor of public policy at the University of California, Berkeley, is the author of “Supercapitalism.” Send comments to intelligence@nytimes.com.