A government-supported restructuring of the auto industry is urgently needed for the nation’s economic and energy security. If the government allows the auto industry to collapse, it will compound the panic that started with the bankruptcy of the banking system. Washington should seize the opportunity to begin a new era of U.S. technological leadership in the global auto industry, starting with an immediate loan.

Two of the Big Three U.S. automakers face grave and immediate peril. They are burning through their cash reserves so fast that they may be forced into bankruptcy within the next couple of months. Ford, which is in a stronger financial position than Chrysler or General Motors, may not survive much longer than its more imperiled competitors.

If any of the automakers enters bankruptcy, it is far from certain it will emerge as an intact company or as recognizable part of a different company. Assets of the company may be liquidated, and nearly all employees of the firm may be let go. The failure of any one of the Big Three would also precipitate the bankruptcy of firms that supply parts and services to the auto industry. All together, these firms employ hundreds of thousands of workers, many of whom will lose their jobs.

First, this is an opportunity to embark on a major industry restructuring to position the United States to lead the world in producing cars that get 100 miles or more per gallon. This achievement is closer than many suppose, with the path-breaking plug-in hybrid Chevy Volt set to arrive in 2010 and several new hybrid models on the way. American-made fuel-cell cars may be a large-scale reality within a decade. Success would dramatically improve energy and national security, climate security, and U.S. global competitiveness, and a public-private partnership is needed to bring about this transformation.

Second, the sudden closure of an automaker would be catastrophic, possibly pushing our economy from recession to depression. Because of the impact on parts suppliers, the shutdown of one company would imperil domestic production across the board, and the jobs at risk include not only the 1 million in vehicle assembly and parts but millions more that would be caught in the resulting cascade of failures. The industrial Midwest -- especially Michigan, Ohio, Indiana, Illinois and Tennessee -- would be devastated, and the shock waves would reverberate across the world.

Some estimates claim that the demise of the Big Three could mean the loss of over two million jobs if all of the other industries connected to the automakers are included. But with four percent of GDP and one in every 10 jobs in the United States being auto-related, the Center for Automotive Research put the figure closer to three million lost jobs. That is more than 43,000 workers, on average, in every state. While it is no surprise that Michigan is the top state for automotive-related employment, with more than 240,000 workers, even Alaska employs nearly 2,500 workers in the auto industry.  In all, those jobs generate $65 billion in income for those workers, or about $29,437 per job. Experts are predicting that if such a collapse were to occur, unemployment could jump over 10%, meaning declining revenues for the government, which would presumably then be expected to pay unemployment benefits.

UAW president Ron Gettelfinger testified before Congress that "the stark reality is that these companies would be forced into a liquidation, with their operations ceasing entirely and their assets sold for pennies on the dollar."

And who would buy up the Big Three's assets?

One strong possibility is the Chinese. The 21st Century Business Herald, one of China's leading business newspapers, reported that carmakers Shanghai Automotive Industry Corporation and Dongfeng Motor Corporation have plans to acquire GM in the event of the American company’s bankruptcy. The article quoted a senior official in China's Ministry of Industry and Information as saying that the Chinese companies "have the capability and intention to buy some assets of the crisis-plagued American automakers," and speculated that the move would be a good fit with China's plans. It would be far easier for the Chinese to enter the global auto market with well-known and established brands and technology purchased from the United States, and with 70% of Dongfeng reportedly owned by the Chinese government, which has over $2 trillion in reserves, America's cars could soon read "made in China."

Obviously a sale to hostile foreign interests could be blocked, but what about the effect on the already reeling American banking system?

GM is on the hook for at least $45 billion to its creditors according to its quarterly report filed with the Securities and Exchange Commission. It also must fork over more than $7.5 billion early in 2010 to a UAW-administered healthcare fund for retirees. Ford owes its creditors more than $26 billion and must also pay in $6.3 billion to the UAW trust fund. The financial data for Chrysler is not available since it is not a publicly traded company, but Chief Executive Officer Robert Nardelli said it owes its creditors about $66 billion. GM has lines of credit with banks like Bank of America  and JPMorgan Chase which are still trying to regain their footing in the midst of the U.S. subprime crisis and year-long recession.  However, American car company’s bondholders include not only big institutions and hedge funds, but also employee retirement plans, individual investors, and small businesses. Yet, given their dire straits, there is little hope that the American car companies can pay back all of that money, and in the event of bankruptcy creditors may have to accept less than 20 cents on the dollar.

Third, bankruptcy would be a death knell. Yes, in some industries, bankruptcy can provide breathing space. But according to GM executives that is "not an option" since, they claim, nobody would buy a car from a bankrupt firm. Car buyers are not purchasing a product they expect to consume immediately or within the next couple of months. They choose vehicles in part on their expectation of the long-term health of the companies that make them, which they rely on for parts, service, and resale values. They expect their cars will last half a decade or more. Nearly all of them hope the car's warranty will be honored, its parts will continue to be available, and plenty of mechanics will be around to take care of the vehicle. An auto company's impending or actual bankruptcy would severely shrink demand for its products, and the effect would not be temporary. What is the value of an auto company when its customers think the firm might disappear soon?

For the automakers, bankruptcy would accelerate the collapse of consumer demand and the mass closure of parts manufacturers.

Bankruptcy will needlessly kill a U.S. automaker that could survive and thrive with a restructuring loan from Washington. If one or more of the Big Three should disappear, the country would also lose hundreds of thousands of jobs, both in the auto companies and in firms that produce parts for U.S.-made cars. Firms would ultimately spring up or expand to fill the hole in the car market left by the disappearance of a major automaker. But there is no guarantee the cars would be produced in the United States or with the deep pool of skilled manpower that has been developed here.

Two developments have pushed U.S. automakers into their current fix. First, the surge in gas prices made it hard for them to sell many of their most profitable cars and trucks. For years after gas prices fell in the mid-1980s, profits of the Big Three depended on healthy sales of gas-guzzling vehicles, including pickup trucks and sport utility vehicles. The higher gas prices of the last few years made these vehicles much less attractive to consumers. Both auto sales and profits went into the tank.

Second, the U.S. credit crisis has made it harder for the Big Three to arrange car loans for their customers and to obtain credit to fund their own operations. In addition, the financial meltdown has reduced the value of the assets that back promised pensions and retiree health benefits. The companies must now find the resources to make up for the losses in their pension fund reserves.

The industry does not need a shakeout but a change of technology for long-term energy and climate security. The recent collapse of annual sales, from 17 million vehicles to 11 million, is not permanent but cyclical.  The US is experiencing the steepest temporary decline in consumer spending since the Depression. Consumer financing for autos has collapsed. Households are retrenching after the greatest wealth loss in equities and housing in history. In this environment, the normal market test of consumer demand can't be used to judge which industries should survive.

Over time, sales will increase, especially as people in China, India and other emerging markets become buyers. A forecast of U.S. sales of 15 million to 20 million units a year is justified by normal replacements among the 240 million passenger vehicles Americans now own, and the U.S. market will also grow along with population and income.

However, automakers cannot turn to ordinary borrowing to tide them over until that happens because of the ravaged capital markets. The credit crisis which was so severe the government embarked on nearly $1 trillion in direct interventions has also made it difficult or impossible for the Big Three to obtain private loans to maintain their operations. For this reason, if for no other, the auto industry deserves a small part of the bank bailout funds as emergency federal credit to preserve their operations in an orderly way.

A transformation of the type that's required for long-term sustainability of the automakers will require both the market and government. Public policies and funding are needed to support the research and development of high-performance batteries and fuel cells and, especially, to modernize the national power grid and other infrastructure. These are steps that individual auto companies (and even the industry as a whole) could not accomplish on their own.

Some want to see the industry punished for its neglect of energy and environmental realities, but we should acknowledge that the SUV era reflected poor judgment across society. Yes, the industry ignored warnings about energy insecurity and climate, but so did the public and politicians. Rather than kill the auto industry, and destroy the U.S. economy in the process, the industry be fixed with a sense of national responsibility and purpose.

There are many crucial issues for the design of a long-term restructuring. The government needs the authority to steer a public-private consortium to create a high-mileage-vehicle economy in the coming decade. Public and private funding will be needed for research, development and demonstration of breakthrough technologies. During the restructuring, taxpayers will need protections, including warrants or equity shares, limits on industry compensation, and an equitable restructuring of worker benefits, a process that has already begun because of market hardships.

This is a time of unprecedented financial calamity, energy crisis and environmental threat. A vibrant, growing U.S. automobile industry should play an essential role in solving all three. The technologies that will win the day are in sight; industry has already made important advances. A partnership with government is vital and should begin this week.

Sachs, Jeffrey. "A Bridge for the Carmakers” Washington Post, Monday, November 17, 2008

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Jeffrey D. Sachs is director of the Earth Institute at Columbia University and the author of "Common Wealth: Economics for a Crowded Planet."