Where I grew up in the Midwest, cars were keys. Owning one marked maturity and provided a passport to liberty. All of my friends had cars and I had some pickups, my first a 1931 Model A Ford for which I paid $35 drove 100 miles home. Presaging future problems, the first Volkswagen had just appeared, brought from Germany by a returning soldier.

With hubris trumping foresight, Detroit’s auto executives argued that there was a natural upper limit to the market share of foreign cars. A few professors might drive Volvos and Saabs, wealthy folks on the coasts Mercedes and Jags, and for the eccentrics and the poor there was Volkswagens—at most this would be ten percent of the market. And Detroit didn’t perceive Japanese vehicles as a threat until the 1970s.

Detroit’s problems are the predictable consequences when economic evolution is constrained and distorted by politics. Financial commitments for retirement and health care, cumbersome labor practices, and inflexible CAFÉ (Corporate Average Fleet Economy) standards created today’s financial disasters.

In 1975, under the guise of conserving energy, Congress enacted CAFÉ. It mandates a "two fleet rule" that protects UAW jobs by forcing Detroit to make small cars in high-cost UAW factories. Absent this rule, the UAW would compete for jobs within each company, their rivals being that firm’s less costly foreign workers, for example GM’s workers in Poland.

Rather than a bailout, free the Big Three. Dump CAFE altogether and replace it with an honest and surely more efficient energy tax. Mr. Obama could transcend stalemates and end the 30-year-old fraud of our CAFÉ fuel-economy rules.

It seems ironic that the often anti-business New York Times supports an auto bailout while the supposedly pro-business Wall Street Journal counsels Darwinian economics. The Journal criticizes management blunders, union contracts that stifle innovation, legacy costs, poor car design, and dysfunctional corporate cultures. The Journal perceives the market as a discovery process, an ecological system that identifies and attacks flaws and inefficiencies, while the Times urges politicians to fix things with subsidies and more mandates.

In return for a bailout, Congress demands that Detroit build “green” cars, such as the Chevy Volt. Allegedly this is to “help address the energy crisis and ultimately combat global warming.” The projected price of a Volt is $40,000, with each buyer receiving a $7,500 tax benefit. Yet, GM will lose money on each unit. The Volt claims to get 100 MPG. This helps their CAFÉ “fleet average” and permits GM to build big vehicles. An identical logic prevails at Ford and Chrysler as they promise future “green” vehicles.

How did we get here? The Big Three had an effective oligopoly by 1950, while the UAW held a labor monopoly. By 2007, GM’s average wages were nearly $40 per hour, with benefits adding another $33 per hour or $73,000 per year. The increased costs of labor contracts were simply passed on to customers.

Detroit is now high centered on promises to labor and regulations that they supported, or short sightedly accepted. According to the Detroit News, “One blue-collar Delphi worker makes $103,000 a year operating a forklift. ...(The average American forklift operator makes $26,000.)” UAW workers’ medical insurance with no co-pay continues long after retirement at 55.

Over the years this opened an ever-widening niche in the American market and created a distinct auto industry outside Detroit. Now there are at least 16 foreign plants in the U.S.—including BMW and Mercedes.

Here’s another problem: competition has caused cars to get ever better and longer lasting. As Click & Clack frequently proclaim on NPR’s Car Talk, with proper care, today’s cars are good for 250,000 miles, more than twice the old lifespan.

There are important lessons in this saga. Managers of companies (and governments) are tempted to yield to unrealistic wage demands with promises of unsuitable future benefits. Ultimately, however, they face the relentless reality of arithmetic and demography.

Few politicians respond to economic or ecological logic. Rather, they are selected to understand the calculus of power. Let’s hope the new Obama administration is a rule probing exception. We’ll have cause for optimism and celebration if it taxes fuel (or carbon) and eliminates the UAW’s “green” CAFÉ charade.