Jeremy Warner: Keeping American dream on the road

Outlook President Barack Obama gave a number of reasons for wanting to save the core of the American car industry yesterday after rejecting the survival plans submitted by management. Unfortunately, very few of these reasons were commercial. Rather, the President referred in dewy-eyed hyperbole to the importance of the automobile as an emblem of the American spirit that had helped to build the very fabric of the nation. The car, he concluded, was the very essence of the American dream.

All this is no doubt true, but does it justify the vast government subsidy which is going to have to be poured into the auto industry to make it a going concern once more – a subsidy which may end up costing hundreds of thousands of dollars per job saved?

Many might think the blue-collar workers of Detroit a more deserving cause than the investment bankers of Wall Street. Politically, they are certainly a more acceptable recipient of government handouts. Yet is this not British Leyland all over again, with a fundamentally uncompetitive industry kept alive on a constant drip-feed of money? It is hard to see why the government should succeed in reviving these companies where all else has failed. To the contrary, governments tend to be far less effective at taking the hard decisions on jobs, perks and working practices than markets.

Mr Obama was quick to apportion blame for the auto industry's parlous state on poor decision-making and a failure in leadership. This again is no doubt true, yet the real constraint on this industry are its huge legacy costs in pensions, health care, uncompetitive working practices and inflated wage rates.

With the new scheme for guaranteeing warranties, it ought to be easier to put GM and Chrysler in bankruptcy proceedings without further poleaxing sales. The scheme means that Americans can be confident of buying these products without fear of losing their warranties. This should allow both concerns more easily to restructure and shed legacy costs and debts.

As with the banks, the toxic "assets" are to be removed so that the underlying company can begin afresh. But don't tell me that organisations whose business plans are determined by government officials stand much chance of thriving anew, as hoped, as market-driven, clean technology enterprises. Even in much shrunken form, this seems deeply unlikely.