In 1979 the federal government bailed out Chrysler Corp. on the premise that it was too important a piece of the American economy to be allowed to fail.

A quarter century later, President Bush appears to have decided that neither General Motors – once the target of federal trustbusters – nor Ford is too big to fail. He didn’t flatly rule out federal aid, but in an interview he pointedly suggested that the American automakers need to develop “a product that’s relevant.” And, he added, “I think it’s very important for the market to function.”

He’s right about all that. But then it has been the federal government itself that posed the biggest impediments to the functioning of the marketplace, particularly in the American auto industry.

To be sure, there are other reasons: mismanagement and the recovery of Europe and Asia industry from World War II and communism, for example. But GM and Ford are doing fairly well overseas. The big problem is here at home. And the reason is that over the decades, federal policy has reduced the American automakers to the heavily regulated status of utilities.

Though the government doesn’t directly set the rate of return, it does so indirectly through the action of mandatory labor laws that allow unions to ratchet up wages whenever there is a profit – or even when there is little or no profit.

This reflects the “progressive” theory that the workers need a union to balance the supposedly ruthless, unchecked power of the corporation. This might have seemed to make sense in a market dominated by just three companies.

But in the age of what Bill Ford Jr. last week rightly termed the Big Six, it makes no sense at all. The requirement to negotiate with the unions has made it all but impossible to adapt quickly and flexibly to sudden changes in the marketplace.

Unless the underlying problems are fixed, American automakers will always be operating with one arm tied behind their back. Cost-cutting is simply the slow road to extinction. The 14 plant closings announced by Ford last week won’t actually be implemented for several years, and the 25,000 laid-off workers will be shuffled into the “jobs bank,” where they will continue to draw full pay and benefits indefinitely – because of the existing union contract.

Bankruptcy is widely seen as a way around this problem. Federal judges can abrogate contracts. But threatening an airline attendants union in such a fashion is one thing; threatening the United Auto Workers is another. A strike, or even work-to-rule, would be potentially fatal, leaving the market to the tender mercies of competitors. Fear of just such a showdown at its chief parts supplier, the bankrupt Delphi Corp., has caused GM to commit a substantial chunk of cash for Delphi’s pay and benefits – even as GM itself was reporting an astonishing $.8.6 billion loss for 2005.

Miracles do happen. The no-longer-so-Big Three are starting to produce some fine products. When it was at death’s door in the 1980s, Ford put everything it had behind the peanut shaped Taurus – and enjoyed a spectacular return to profitability.

Alas the profits were soon eaten up by new union contracts. Even Chrysler’s bailout was only a temporary palliative; it’s now part of Daimler. Unless the political will is somehow found to create policies that are “relevant” to the 21st century, the prospect is that some day the Big Six will once again become the Big Three – and headquartered somewhere else than Detroit.

Mr. Bray is a Detroit News columnist.