Business should be allowed the freedom to fail. The US is the closest economy I know of to a free market economy. Many people will tell you this kind of economy leaves some as "winners" and some as "losers" in the game of money. I'll talk about that in a minute. I think it's more important to consider that a free market economy is like a democratic government: consumers have the freedom to "vote" on products with their money which they feel best suit their needs. This way, businesses will have a good understanding of what they are doing right and wrong. Healthy businesses meeting the needs of consumers will be able to continue, while unsustainable businesses not meeting the needs of their customers will fail. Think of it as natural selection.
Over time, a free market society should create more wealth for -everyone- by creating an incentive to be better: better than your competitor, your fellow employee, and yourself. It encourages taking risks by starting your own business or trying out new ideas (and offering big pay-outs for those who are successful). Unfortunately, human beings are fallen and selfish creatures. Completely unregulated by government, human-created businesses may make decisions which do not benefit consumers. In some cases, these decisions are downright harmful (e.g. China's dairy industry), in others, these decisions violate fiduciary duty (e.g. the recent credit crisis), or do not demonstrate trustworthy behavior (e.g. Enron...).
Government should absolutely protect consumers (and employees) from business decisions which cause harm. This is government's right and true purpose: the protection of its citizens.
However, government does not exist to protect businesses from their own bad decisions. If a business is making bad decisions, they should change their behavior. In my opinion, the US auto industry falls into this category. If the auto OEMs cannot produce vehicles which meet the needs of consumers, they should change what they offer consumers or fail.
Instead of bailing out the auto industry, the government should consider assisting the employees of at-risk business in educating themselves for other industries, and bringing new businesses into regions affected by a potential auto OEM failure (Detroit!).
But,... what do I know?
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