A quarter century later, it’s not easy to argue that the bailout of Chrysler Corporation in the dying days of the Carter administration wasn’t a success.

Chrysler is still in business, albeit as a unit of a German firm, Daimler. It has chalked up a long string of design successes, starting with the “K” cars in the 1980s that helped resurrect the company. And the federal government long ago sold at a substantial profit the warrants it received in return for its $1.5 billion loan guarantee.

But sometimes, the downside of such industrial policy, as tempting as it may be for politicians to pick winners and losers, is difficult to see and a long time manifesting itself. One of the biggest downsides may have been the perverse legacy that the bailout left to the rest of the American auto industry. If the market had been allowed to work in the case of Chrysler, it seems fair to argue, General Motors and Ford might not be flirting with junk-bond status today.

To be sure, there are many reasons for the problems at GM and Ford, starting with their own ineptitude at producing cars that people want to buy. But if Chrysler hadn’t been artificially propped up, at least some of the over-capacity in the worldwide auto market – 20 million vehicles a year in terms of production capabilities – might not exist. Equally important, allowing Chrysler to go belly-up would have sent a strong signal to the auto unions – and management itself – to get real about the threats they were facing from Japan and elsewhere.

Yes, Chrysler workers had to make concessions – equal to about $2 an hour – in order to get the bailout package. But only a few years later, GM was signing contracts guaranteeing lifetime wages and benefits for its hugely overstaffed factories.

Even after the concessions, wages, and benefits have continued to outrun the American average.

While auto manufacturing provides 1.8% of private sector jobs (about 5% if you include suppliers and dealers), according to the Center for Automotive Research at the University of Michigan, it accounts for 2.6% of private sector compensation.

Some suppliers are now having to renege on retiree health-care promises in an effort to stave off bankruptcy, and the United Auto Workers has finally agreed to lower wage rates for beginning employees in a few places.

But it may be too little, too late. The lesson learned in many quarters – in particular among workers enjoying a virtual monopoly over labor within the U.S. auto industry – from the Chrysler bailout was that government would protect the auto companies from serious harm.

Chrysler management, led by blunt-speaking Lee Iacocca, did a masterful job selling the bailout. But the bailout may have averted a better solution in the long run. Facing certain bankruptcy, Chrysler might have arranged a purchase of its viable assets by Ford or GM, strengthening those companies while reducing overcapacity.

Yes, Ford later spurned a merger feeler from Mr. Iacocca once Chrysler had stabilized, but Mr. Iacocca by then may have developed an inflated sense of the company’s worth. In any case, Chrysler would ultimately be purchased by a foreign company.

The auto industry is still America’s biggest single industry. But output by the former Big Three is little higher now than it was in 1978, before the twin recessions and oil crisis that drove Chrysler to the brink. Virtually all the increase in output has come from foreign owned companies.

Meanwhile, once-mighty GM’s capitalization is a shadow of its former self – half that of Caterpillar Incorporated, for example, which endured – and won – a seven-year strike by the United Auto Workers in the 1990s and is now prospering. And Michigan has the highest unemployment rate in the country.

As a Wall Street Journal front-page story pointed out last week, there is little talk these days of a Chrysler-style bailout. But there is still lots of talk about an indirect bailout – say, through shifting retiree health care and other “legacy costs” to the taxpayer. But as we should have learned from the Chrysler bailout, the legacy costs of intervening in the marketplace can be very high, even if they are not immediately obvious.

Mr. Bray is a Detroit News columnist.