It is said that public officials seeking advice are usually just seeking accomplices. However, in times of turmoil they actually want advice. Then there is a need for the likes of Herbert Stein, who is just a few months shy of 50 years as an observer of and participant in the formulation of economic policy.
Stein, who was chairman of the Council of Economic Advisers under Nixon and Ford, has two favorite propositions that are particularly germane today: Economists do not know much, and they know much more than the politicians and others who set economic policy. These propositions are today grounds for a policy of ''Don't just do something, stand there,'' meaning let markets work. Stein urges a modified form of that policy, allowing the dollar to fall, but doing something by undoing some things.
The U.S. government said it will resist the decline of the dollar, and was not believed. It promised international coordination of policies, and was not believed. There is a new chairman of the Federal Reserve Board whose inclinations are not known. We have, Stein says, an ''artificially uncertain situation.'' Uncertainty breeds anxiety, and hence volatility.
Stein recommends altering expectations by informing the world that the dollar will be allowed to fall as far as market forces drive it. Such a decisive movement would eliminate the destabilizing expectation that the dollar is going to fall farther, an expectation that is fueling the flight from U.S. assets.
The only direct way to resist downward pressure on the dollar indefinitely is by raising interest rates. But that would fuel inflation and risk stagnation. True, a declining dollar would generate inflationary pressure (by making imports more expensive), but that should be treated as an exogenous event, something not to be responded to with the anti-inflation medicine of higher interest rates.
We are, Stein says, in danger of getting into ''a kind of Keynesian trap.'' Keynes said that expanding the money supply could not propel the economy out of the Depression because the enlarged supply of dollars would only be held rather than used to buy stocks and bonds, because yields of those instruments were too low. The parallel with today's situation is this: increasing the supply of dollars might not drive down interest rates. Rather than remaining here, invested in stocks and bonds, new dollars might flow abroad because of a (for the moment) unlimited demand for non-dollar-denominated assets, such as deutschemarks or Japanese yen.
But no demand for anything is unlimited absent irrationality. Today's need is for a restoration of reason, beginning with recognition of this: the dramatic change in the stock market is not a reflection of any change in the producing economy. In the economy there is steady noninflationary growth employing more people than ever before.
It sometimes seems that all economic news is bad (or can be so construed) and all news is economic news (in that it has economic consequences). But actually, no news is economic news because all significant economic events are, at bottom, political, as the stock market plunge shows.
It dramatizes the huge psychological component of all social arrangements. Everything, from the value of economic instruments (currency, stocks, bonds) to the authority of government rests on a willingness of the public to believe. The world runs on political as well as economic credit, a word with a Latin root: ''To believe.''
When the dust and the Dow Jones settle there will be time to ask: to what extent has government addiction to borrowing foreign capital and a large portion of domestic savings contributed to a general disbelief in the soundness of current arrangements? That is, to what extent has the indiscipline of government as a budget maker, which reflects the unrestrained appetite of government's sovereign, the electorate, subverted belief in the economic instruments by which we store the values we earn. A collapse of that belief can cause our lives' works to evaporate.
Although awfully costly, it is probably profoundly good for the nation to be forced to face the fact that the foundations of its arrangements are matters of (quite literally) faith. Faith must be earned, every day, by good habits. Congress, which cannot pass appropriation bills and can be manipulated by interest groups, as in its slide toward protectionism and its vote against Judge Bork, should consider its daily contribution to the loss of confidence.
Out beyond Wall Street there is a country on which Wall Street depends, absolutely. Out there men and women are making things. And out in the larger world there is an enormous pool of money seeking profitable investments. Investors at home and abroad soon will see that here, in what is still the world's strongest economy and safest haven for money, a lot of stocks are suddenly a lot less expensive than they were a little while ago. Then a bounce back will begin.