The American dream shudders to a halt in Motown

Money, that's what they want. The Big Three carmakers based in the US industrial heartland are passing the bowl round Capitol Hill, desperate to save their industry. Stephen Foley reports from New York

The men and women who built this Buick in 1954 really need you to go out and buy a new Vauxhall this weekend. Why? Well, the Detroit workers who bent the Buick's fenders, placed its windscreen, polished its mirrors and sent it out into a decade obsessed with the motor car – they are retired now, old and frail, drawing their pensions from Buick's parent, General Motors, and relying on the healthcare plans that this employer-for-life promised them until the day they die.

And GM – whose other global brands include Vauxhall, Chevrolet and GMC – is running out of the cash to pay them.

Given that you too are probably worried about your job, your savings or your chances of getting a car loan to buy a Vauxhall or any other car right now, GM is in real trouble – and its woes look set to present the first major test of economic and industrial policy for Barack Obama.

The credit crisis and the oncoming recession are final straws for a US car industry that bestrode the globe. What once represented the best in US engineering and the aspirations of a burgeoning consumer class, has been in decline for at least two decades.

GM and its peers in the old Motor City say they have been hamstrung by the legacy of those expensive, retired workers. It is a legacy of generosity that stretches back to the day in 1914 when Henry Ford doubled his workers' wages, bringing the best and most productive workers flocking to him and helping to bring the company's cars within reach of the average American. But it is a legacy that modern-day executives say meant they could never be as competitive as newer rivals from overseas without entrenched union contracts for current workers or thousands of pensioners to look after.

Just as many others say that GM, Ford and Chrysler – the so-called Big Three – were simply too slow to respond when the likes of Toyota built more reliable cars or, in recent years, more fuel-efficient and environmentally friendly vehicles.

In the first nine months of this year, GM sold 6.65 million vehicles when you add together all its global brands, including Chevrolet, GMC, Vauxhall and, yes, still Buick. That is about 400,000 vehicles fewer than Toyota, ending GM's 77-year run as the market leader in global auto sales. But that is a minor embarrassment compared to the humiliation being endured by Rick Wagoner, GM's chief executive, and his peers, Alan Mulally at Ford and Bob Nardelli at Chrysler, who have been passing the begging bowl around Capitol Hill.

When GM and Ford posted their latest quarterly results on Friday it became clear why. GM, having burned through $6.9m (£4.4m) in three months is going to go bust before the middle of next year unless it can miraculously find buyers for its junk-rated debt, sell the Hummer brand that no one appears able to afford – or gets a hand-out from the US government. Heavily indebted Chrysler is owned by the private equity firm Cerberus, so it's finances are opaque, but bondholders say its situation is also dire. Ford, which mortgaged everything up to and including its blue oval logo two years ago, has a little more cash on hand but it, too, burned through $7.7bn in the quarter to September. Since then, global car sales have dived, with the worst of it being felt in their most important market, the US. In October, GM's sales were down a staggering 45 per cent on a year ago; Ford was down 30 per cent and Chrysler fell 35 per cent.

There is little reason to expect a rebound that will pull these companies back from the brink. They are lobbying for "bridge loans" from the government, but some are already calling them a bridge to nowhere. For free-marketers and for their opponents who believe state intervention can be justified, this is an important first test of President-elect Obama's economic world-view. The Democrat Congress has already pushed through $25bn of low-cost loans to help the Big Three fund the research and product development and the factory retooling required to produce greener, more popular cars. According to the latest rumours on Capitol Hill, the auto makers and their lobbyists have asked for $50bn more.

The existing loans should be accelerated, Mr Obama said at his first press conference this week, and he lavished enough praise on the auto industry to suggest he could offer more once in the White House. The industry, he said, "is the backbone of American manufacturing" and the US could not meet its goal of becoming energy independent unless the industry is able to produce more fuel-efficient cars. "I have made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis, and succeed in producing fuel-efficient cars here in the United States," Mr Obama told reporters.

These are strange times indeed that there should be such a consensus over federal assistance for Detroit. Why is it so? First off, there is the collapse of free market policymaking in a nation whose government now owns large stakes in its biggest banks, owns or guarantees half of its citizens' mortgages, and has nationalised the biggest insurance company in the world. And the economic consequences of letting one of the big carmakers fail could be enormous.

According to a report by David Cole at the Centre for Automotive Research, "the automotive industry has long been, and continues to be, one of the most important sectors in the US economy. The motor vehicle and parts industries employed 732,800 workers directly as of September 2008, and the industry has one of the largest economic multipliers of any sector of the US economy."

That multiplier means that 2.5 million jobs could be lost if one of the Big Three goes bust, Mr Cole calculates, rippling out from the direct redundancies, through the bankruptcy of hundreds of suppliers, to the effects of higher unemployment on consumer spending and tax receipts in affected regions across the US.

That would have a measurable effect on already-depressed US GDP, which might be reason enough to offer those bridge loans, to help Detroit restructure and downsize more slowly. The prospect of bankruptcy also means that some of the Big Three's 775,000 retired workers and their dependents and survivors could be dumped on the federally backed Pension Benefit Guaranty Corporation – but that insurance scheme already has a $14bn black hole that would then need to be plugged by taxpayer money in any case.

One way or another, those men and women who brought us the original Buicks are going to cost the US taxpayer money, even if a President Obama lets GM go bankrupt. The likelihood is he won't, says Ken Goldstein, an economist at the Conference Board in New York, but mainly because that is the pragmatic approach, not the ideological one.

"We have been through waves and waves of restructuring of the auto industry, and this is another big wave, not a little ripple, but I would hesitate to say this is curtains for US carmakers. If it was clear there was nothing to be saved, then, sure, why pour money down a rat-hole. But I think Mr Obama will say that, while this is absolutely not going to be painless, there are things that can be done to make sure it is not nearly as painful as it could be.

"He is going to be listening to Paul Volcker, former Federal Reserve chairman, who is hardly a flaming liberal, and to Robert Reich, Bill Clinton's labour secretary, who is a flaming liberal. There is one thing that you will not get from an Obama administration, it is groupthink."

The Big Three have focused research budgets on new hybrid and electric vehicles. All of them have been shutting factories and introducing stoppages across the globe. All of them have announced white-collar lay-offs in the past month. The loans they have received so far will get them some distance towards becoming the right-sized, right-focused industry that is required, but they are lobbying for additional help and are getting a receptive hearing.