The American auto industry is in a terrible slump and is continuing a decade-long trend of losing market share to the Japanese. Although total car sales in the United States have been falling over the past year, the number of Japanese cars on American roads continues to rise rapidly. The three U.S. automakers are now producing and selling 25 percent fewer cars in the United States than they did a year ago. In contrast, sales of Japanese cars in the United States are higher than they were a year ago and will soon account for more than 40 percent of the total U.S. automobile market.

It's easy to draw wrong conclusions from these facts. One conclusion that we hear frequently on both side of the Pacific is that the poor performance of the U.S. auto industry shows that the United States no longer has what it takes to make internationally competitive consumer products. In particular, the critics say, there's something fundamentally wrong with the American labor force that gets in the way of making high-quality, sophisticated consumer goods.

The critics of our work force point out that American workers are less well educated than their Japanese counterparts, that they lack the Japanese devotion to their work and to their companies, and that they are more likely to use drugs or alcohol at the workplace.

The super-pessimists conclude from this that U.S. industry is doomed. Others who are less pessimistic conclude that the American economy can be saved only by a massive campaign to transform the American work force by revamping elementary and secondary education, retraining older workers and eliminating drugs and alcohol from the workplace.

But all of this pessimism about the quality of the American labor force misses a key fact: many of the Japanese cars are now made by American workers. The Japanese automakers are rapidly increasing their production of cars in the United States. In addition to their imports from Japan, the Japanese auto makers are now turning out and selling nearly 1 million cars a year in the United States.

American-made Japanese cars now account for nearly one out of every six U.S.-made cars, double the share of a year ago. While the production of the Big Three American firms has fallen 25 percent from a year ago, our Japanese Big Three -- Honda, Nissan and Toyota -- are producing 53 percent more cars in America than they did a year ago.

The Japanese cars made in America appeal to American car buyers as much as the cars that are imported from Japan. The Japanese auto companies are also convinced that their American-made cars meet the same standards as the cars they produce in Japan.

The important point is that these 1 million American-made Japanese cars are being made by American workers.

The experience of the Japanese auto makers in the United States shows that American workers can produce autos that are every bit as good and every bit as appealing as the autos made by Japanese workers.

The success of the Japanese auto transplants should be seen as an enormously positive indicator of the potential of the American economy. It shows that, with the right management and the right technology, the American worker can compete fully with Japanese imports. Improving U.S. education and work attitudes and health habits are all worthwhile goals. But they are not a necessary prerequisite for American firms to produce high-quality products.

The Japanese example makes clear that the key to improving the competitiveness of U.S. industry lies with improved management. It is management that is responsible for the design of products, the organization of production and the motivation of workers. Although a better educated and motivated work force would make management's task easier and would lead to even higher productivity, it's a mistake to blame the poor quality of many U.S. products on the inadequacies of the work force.

The auto industry is of course something of an extreme example of America's loss of industrial leadership. In many industries, the United States remains the world leader. But in others management needs to learn what it is that the Japanese are doing better and get on with the task of improving their own performance. It's by improving management and not by transforming the labor force that American industry must improve its performance.

Martin Feldstein was chairman of the Council of Economic Advisers from 1982-1984. Kathleen Feldstein is an economist.