As news about the U.S. economy gets worse, expect to hear more about a stimulus package. What should such a package include? Economists agree any stimulus measures – usually tax rebates or reductions and increased government spending – must produce quick results and be temporary. That means tax rebate checks make sense but long-term tax cuts do not. Increased unemployment or food stamp benefits will help but large government infrastructure programs won’t.

This week the federal government reported that inflation, pushed mostly by rising energy costs, rose 4 percent last year, one of the largest jumps in decades. Unemployment also rose while consumer spending was stagnant, furthering fears that the U.S. economy is headed into a recession.

Despite general agreement that some sort of stimulus is needed, there is no broad consensus on what it should include.

In a report released earlier this week, the Congressional Budget Office provides good guidance. The stimulus must increase demand for goods and services at the time when economic activity has slowed. Getting additional money into the pocketbooks of people who are most likely to spend it – the lower and middle classes – is the most immediate and low-cost way to do this.

In a 2003 analysis of stimulus plans, Mark Zandi, chief economist for economy.com, found that extending unemployment benefits has the largest positive effect by generating $1.73 for every dollar of cost. Second was state fiscal relief at $1.24, followed by a one-time uniform tax rebate which returned $1.19 for every dollar of cost. Tax rate reductions returned only 59 cents, costing more than they generated, largely because lowering tax rates results in the largest financial benefits to those with the highest incomes who are likely to invest or save that money rather than spend it.

President Bush has pushed to make tax cuts enacted in 2001 and 2003 permanent. The cuts are set to expire in 2010, so extending them now would do little to stimulate the economy.

A better approach would be to increase federal support for unemployment benefits, food stamps and other programs that put money into the hands of people who are most likely to spend it quickly. Tax rebates targeted to those with low to moderate incomes would have a similar effect, although a more politically palatable across-the-board rebate would also help.

Increased federal spending on state programs has also been proved to help. Many states, like Maine, are facing a budget shortfall, leading to reductions in programs such as health care and education, which further weakens the economy. Increases in Medicaid matching funds, for example, could help counter this.

Incentives or tax breaks for businesses have mixed results because companies typically make decisions about production and hiring based on demand, not how much money they have on hand. Targeting federal funds to small businesses, which Sen. Olympia Snowe calls for, could help because such companies tend to be financially leaner and make decisions more quickly.

As they craft a stimulus package, members of Congress must stick to the “timely, targeted and temporary” guidelines to help ensure any additional federal spending they approve will have the biggest return.