My colleague Dean Baker has a fine post up today on one good way to stimulate the economy out of its current doldrums, but I wanted to step back a pace and discuss some basic principles of economic stimulus. I provide this public service because a) there’s a lot of misunderstanding of the basic principles regarding economic stimulus, and b) it’s a good way to avoid doing stuff I should be doing.

· Why stimulate? This one’s easy. With December’s jobs numbers in the tank, the economy appears to be teetering on recession, if not already there. Since Keynes, it has been well established that when the private sector economic engine sputters, the public sector needs to provide a jump start.

· What are the best policies for the job? The usual competition here is between temporary tax cuts and a shot of direct spending. When the tax cuts are appropriately targeted (like Dean’s), that’s fine—they can provide a direct form of stimulus by putting more money in consumers’ pockets, but you’ve got to be careful here. Tax breaks for rich people are unlikely to generate much stimulus because those folks are not income-constrained.

For example, analysis of this point has found that a dollar of revenue sacrificed for a dividend or capital gains tax cut yields a measly nine cents.

You get a much better bang-for-the-stimulative-buck from direct spending. A dollar spent shoring up Unemployment Insurance yields $1.73; a dollar spent on fiscal relief to the states yields $1.24. This last idea—ratcheting up state grants from the Feds—is particularly important right now, since many state and city coffers are coming up short due to the local revenue impacts of the housing meltdown.

In short, especially given the ideologies of the folks in charge, we should favor direct spending stimulus ideas over tax cuts.

• How do we pay for it? We don’t. There is a time for worrying about deficit spending, but this ain’t it. To pay for stimulative spending, say by raising taxes or cutting spending elsewhere, is to fully counteract it.

• Which presidential candidate has the best stimulus plan? It’s a trick question. The candidates can and should use their bully pulpits to amplify the importance of a correctly crafted stimulus package. But one of them won’t be in charge until 2009 and hopefully much of the lifting on this will be done by then. We also don’t know where the economy will be a year from now. If we get the right stimulus package in play, the economic engine could be humming on its own by then.

The other confusing thing you’re starting to hear in this debate is the accusation that the Democratic candidates will deepen the recession by raising taxes. But their tax plans have nothing to do with temporary, short-term stimulus; they’re talking about permanent restructuring of the tax code (basically, they’re resetting the code to look more like the Clinton years, which were a lot better than the Bush ones for the vast majority of families). It’s also the case that the only tax increases they’re talking about are at the high end, and again, those folks are less relevant in terms of targeting stimulative tax cuts.

• When should we pull the stimulus trigger and how big a jolt is needed? We should be getting the policy package ready now for implementation in the very near future, optimally the first half of this year. Economic indicators lag, and we never learn that we’re in a recession until after the fact. Policy makers need to take the economy’s temperature in real time, and all signs suggest it’s feverish. Some big states are likely in or all but in recession, including Michigan, California, and Florida. And since it takes time to get the medicine through the system, we’ve got to get right on top of this.

House Speaker Nancy Pelosi has directed a team of senior legislators to design a $100 billion jobs and investment plan that can be quickly implemented. That’s less than a percent of GDP, but it sounds about right to me.

As far as I can tell, the Bush team has been talking solely about making their tax cuts permanent. That’s precisely wrong for all the reasons given above. Presumably, once they read this post, they’ll drop the idea.