Is the impending collapse of America's Big Three automakers the next "crisis" that must be solved by a massive federal bailout? Most politicians of a certain ideological or geographic bent think so. But Dan Ikenson, the associate director of the Cato Institute's Center for Trade Policy Studies, thinks GM, Ford and Daimler-Chrysler needs a shakeout, not a bailout. I talked to Ikenson Thursday, Nov. 13, by phone from his office in Washington.

Q: Does the auto industry deserve a bailout?

A: That's any easier question than "Will they get one?" The answer is "no." They definitely do not deserve a bailout. Taxpayers, first of all, should never be on the hook to bail out private companies. They should definitely not be on the hook to bail out companies that have made terrible decisions time and again. And that's what describes the Big Three: They've made bad decisions with respect to the products they make and they've made bad decisions with respect to their labor relations and the capitulations to the unions over the years that have really landed them with an uneconomic cost structure that makes it virtually impossible for them to compete going forward.

Q: What's the worst thing the auto industry has done to put itself in this fix?

A: Well, I don't knowhow to rank them, in particular. But two things strike me as particularly problematic. On the product side, management demonstrated an egregious failure of leadership by never envisioning the day when SUVS and big trucks would fall out of favor. In the 1980s, the Big Three made predominantly cars. And over a 20-year period they have shifted to predominately SUVs and trucks. I think in 2006 about 75 percent of Ford's output were big trucks and SUVs; slightly smaller for Chrysler and GM. Now those are high-profit margin cars for them, so I can understand why they would want to produce those. But you have to diversify your products and you can't just rely on trucks and SUVs.

If you look at the top-10 selling passenger cars this decade, the Big Three offerings make that list at slots 7, 8, 9, 10 occasionally. None of them has ever been in the Top 5 this decade. Those are always occupied by the foreign nameplate products - the Honda Accord, the Toyota Camry, the Nissan Altima. I don't know if we should start this story back in the 1960s and 1970s, when the Big Three never thought they were going to face competition from anybody else and therefore they could give lavish benefits to the unions and stop caring about the products they made, or if it is something that has happened more recently.

The other big problem they have is they agreed to these ridiculous work rules. At GM, you can't really lay off a worker and therefore reduce costs commensurately. Laying off a worker at GM requires that you pay 90 to 95 percent of their salary for the period of the contract. You've heard of these job banks where people are paid not to work. So if you're in an industry and you're facing contracting demand and you want to slow down your output, you can't really get the benefits of slowing output if labor is a fixed cost. You need to be able to cut your costs. The foreign nameplates can do that, but GM, Ford and Chrysler have been sort of crippled in that capacity.

Q: Have the Big Three been victimized to any special degree by either dumb or highly fallible government policies?

A One of the examples I'm hearing from proponents of the current bailout is, "Let's go back to 1979 when Chrysler was bailed out. That was a success story. Chrysler came out of bankruptcy and paid back the U.S. taxpayer with interest after four years." Well, to me, the fact that the government stepped in back then has been an enabling implicit guarantee for the Big Three ever since. Had Chrysler gone under back then, I am convinced that the unions would not have had as much power as they had during the 1980s, because they would have been dealing with two companies instead of three. So they would have had less leverage. So had Chrysler had gone under then, the "Big Two" might not be in the position that they are in right now.

Q: They'd be a lot healthier too, business-wise, because they'd be sharing parts of Chrysler's market share.

A: Exactly, and that's why I say we shouldn't need a bailout now. All we need is a little bit of a shakeout. If GM were to go under, those companies are going to get much larger market shares. Even though demand is contracting, getting increased market share in a contracting demand environment market still could translate into increased revenues.

Q: Is there anything GM, Ford or Chrysler can do right now to save themselves?

A: I don't know if there is anything they can do in the short run. If the government is going to help them out, if they are going to ask the government to do anything, they should ask the government to make sure that the unions don't get violent when the Big Three tell the unions they are severing their contracts. They need to go back to Square One with unions and say, "Look, we're either not going to deal with you at all or we're going to deal with you on much more realistic terms." You can't pay people not to work. The average compensation at GM is $75 an hour; at Toyota it's $47 an hour. If that fundamental issue is not addressed, there's no point in thinking much further into the future. There's just no way they are going to be able to compete. That's why I think the $25 billion bailout is a complete waste of money. It doesn't address the problem.

Q: If it is OK or necessary to give money to financial companies and banks to keep them from going under, why is it not OK to prop up GM or Ford? Continued...