Built into major US wage contracts over the past few decades, says Paul A. Volcker, was a kind of ''euphoria - an expectation that everyone's standard of living would rise by 3 percent a year.''
Well and good, adds Mr. Volcker, the chairman of the Federal Reserve Board, so long as American productivity increased by 3 percent yearly to justify such wage hikes.
But US productivity growth - or output per manhour of work - has slumped far below 3 percent a year. ''With declining productivity and higher oil prices,'' said Mr. Volcker, ''there is no way you can give everyone a higher standard of living.''
For years this basic lesson in economics was ignored by the men who sat down in Detroit - union leaders on one side, managers on the other - to negotiate contracts in the automobile industry.
The result, according to economist Barry P. Bosworth, was disaster, compounding the big three's tardy swing from large cars to small.
''Detroit,'' says Mr. Bosworth, ''finds it can sell its cars if it rebates from $500 to $1,000 per model. So American producers can compete if the price is right.''
That price differential, says Bosworth, former director of the Council on Wage and Price Stability (COWPS) in the Carter administration, stems largely from labor costs - ''$20 an hour for a US car worker, $12 for a Japanese.''
How did this come about, since both have the same technology and the Japanese work force is at least as well educated as the American?
''In a way,'' concludes Bosworth, ''it was an accident, which neither American management nor the UAW (United Auto Workers) planned.''
Since 1948, he says, autoworkers have signed their ''usual'' three-year contracts, based on the assumption of a 3 percent yearly productivity rise and including COLA - a cost-of-living increase indexed to inflation.
A decade ago this pattern gave auto workers a 25 to 30 percent premium over the average manufacturing wage in the United States, a premium not too high to damage Detroit's ability to compete in the domestic market.
In the 1970s, however, says Bosworth, two things happened - productivity collapsed and inflation, spurred by skyrocketing oil prices, soared. Still UAW contracts were based on the old 3 percent formula, plus COLA.
''Finally,'' says Bosworth, now a senior fellow at the Brookings Institution, ''UAW wages rose to a 65 to 70 percent premium above the average American manufacturing wage. This was simply too high and meant that Japan could sell its cars more cheaply in the US.''
The combination of high labor costs and management's inability to design, produce, and sell small cars of high quality quickly helped to bring the US industry to its present plight, in which all American manufacturers lose money and Chrysler is forced to turn to the government for a bailout.
Roger B. Smith, chairman of General Motors, weighs in with a strong warning that this situation represents a massive threat to jobs and to ''America's entire strategic industrial base.''
''America,'' he says, ''has survived the virtual loss (to foreign imports) of its home electronics industry, its optical, shoe, and sports goods industries. But this is a threat to America's core industry.''
What is the solution? Detroit is beginning to put quality, fuel-efficient cars on the road and the UAW - out of grim necessity - is moderating its wage and benefit demands.
Recession, says Bosworth, is not the answer, because ''it would take five or six years for recession to beat down automobile wages to a competitive level'' and by that time the ''capital resources of the big three would be drained.''
Already the car industry's huge losses - more than $4 billion in 1980, close to a billion dollars in the third quarter of 1981 - force domestic makers to scale back the development of new models for the 1980s.
A widely discussed possibility has US automakers becoming partners with foreign firms - as American Motors Corporation has done with Renault - and manufacturing more parts overseas. Such a course presumably would shrink the number of American workers employed by US automobile firms.
Another possibility, suggested by Bosworth, would be for a ''third force,'' presumably the US government, to step in and ask domestic automakers to freeze wages and, equally important, to suspend all dividends to stockholders. The government then would offer $3 billion to $4 billion yearly in loan guarantees, with the assurance that every penny of earnings would be reinvested by the firms.
The loan guarantee terms would be so stiff, said Bosworth, that spurious requests for help would be ruled out and a company would appeal to the government only when desperate.
Under such a program, said the Brookings Institution expert, ''I think you would see a sharp jump in the competitiveness of the US auto industry.''