Originally posted at the NDN Blog.

While news about high fuel prices this past week centered on disingenuous calls by President Bush and others to drill our way out of the crisis, perhaps the most significant — and ominous event — was the barely publicized action by S&P Friday to place the Big Three U.S. automakers on a credit watch. In taking the action, S&P cited “renewed concerns about the three car makers’ future cash flows.”

Given Ford’s preexisting troubles — accentuated by its announcement last week as well that it is postponing relaunch of its star vehicle, the F150 truck — Chrysler’s uncertain future under private equity management, and GM’s plummeting market share, the announcement raises real questions about the survival of the U.S. auto industry.

Domestic car sales were already down about two million vehicles this year from their high in 2006 before the current fuel crisis. Plummeting sales and oceans of red ink — as customers struggling under the weight of sky-high consumer debt payments and declining wages eschew the gas guzzling stars of only two years ago — threaten the U.S. auto industry’s very existence. The potential collapse of the Big Three — still the second largest employer in the country after the government — calls into question the very essence of the American way of life.

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What can be done? One proposal raised by Jack Hidary at a recent conference on plug-in hybrids is to offer incentives to retire old gas guzzling cars. Brazil and Japan, among others, have done this with success, incidentally strengthening their domestic car markets which benefits local car makers. Another measure that would prove greatly helpful to the industry is health care reform since America’s disproportionately high health care costs create a major cost disadvantage relative to countries with public health care. Finally, Congress needs to address the crisis in consumer debt where the steady erosion of consumer protections over the last decade, boosted bank profits, but left consumers struggling under an unsustainable load of debt. However, this is only the beginning. Car makers must understand the enormity of the shift underway — possibly from an oil-based car industry to one that will run on electricity — and the government must be ready to help in this massive transition.

If the auto industry and government get it wrong, the cost could be devastating in terms of lost equity, jobs and ultimately U.S. industrial strength. Cars are just too important to the U.S. economy to allow them to go the way of steel, ships, electronics, and so many once great U.S. industries.

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