Jan. 25 (Bloomberg) -- Mention the words ``fiscal stimulus,'' and the reaction is predictable, dividing along party lines.

For the Democrats, the way to stimulate the economy is to ``put money back in the pockets of the people who will spend it.'' Liberals want to help low- and middle-income families and the economy by increasing the demand for goods and services.

Republicans equate stimulus with tax cuts, preferably of the marginal-rate kind (on income and capital gains). Such ``supply-side'' tax cuts increase the incentive to work, save and invest, not consume. The goal is to expand the economy's actual and potential output, or supply. It's the income from production that provides the wherewithal to spend.

The differences between the two camps can get blurred, especially when a period of slow or no growth coincides with a presidential election year. In that case, it's hard to tell who's who without a scorecard.

Ardent conservatives have been known to get funny in the head and sound like liberals. Asked on the Jan. 16 edition of Fox News' ``Special Report with Brit Hume'' about the effect of a proposed fiscal-stimulus package, Bill Kristol, executive editor of the Weekly Standard, said the following:

``Economically, it's not going to make much difference. But it won't do much damage, it's not like the deficit is so great. And people could use a little more money.''

Besides, Kristol said, it's a ``win-win'' politically for the White House. So go for it. The sky's the limit.

Temporary vs. Permanent

Just as the two parties differ -- in theory, at least -- about what constitutes fiscal stimulus, so too do they divide in their analyses of various proposals. The Democrats argue that people with no resources will spend whatever is handed to them. Republicans prefer theories, such as the ``permanent income hypothesis,'' to bolster their view that consumers don't spend money that falls in their laps, unless it alters their long-term income expectations. They cite economic research that shows temporary tax cuts don't work.

``Most studies of purely temporary, one-time changes in taxes have suggested that they have only a moderate effect on household consumption,'' the Congressional Budget Office said in a new paper, ``Options for Responding to Short-Term Economic Weakness.'' That's because it has ``a small effect on lifetime wealth.''

The 2001 tax rebate was different, the CBO said, supporting the Bush administration's claim that households spent the $300 or $600 they received in the third quarter of 2001 because it was part of a long-term reduction in marginal tax rates. Consumers got a lump-sum payment, but it was a credit for income earned since the start of that year, when their earnings were subject to withholding at the higher rate.

Two-Handed Function

In the spirit of nonpartisanship, the Bush administration and House lawmakers agreed yesterday on a stimulus package including rebates for families and incentives for business. If the goal is getting households to spend -- an objective that aggravates America's chronic savings deficit -- there's a better way than debating who spends what, when and under what circumstances. Here's what the federal government should do:

For starters, don't send folks a check in the mail, even if the Internal Revenue Service can find time in its busy tax- return processing schedule to dole out money with one hand as it's confiscating a portion of our income with the other.

Instead, send households a coupon for the desired amount, to be used for the purchase of domestically produced goods and services. (No ``Made in China,'' which doesn't help the U.S. economy.) The coupon will carry an expiration date, which could be staggered depending on when the government wants the spending to take place. Maybe a little this quarter, a little the next.

Non-Cash Equivalent

The coupon isn't cash. It can't be deposited, used to pay bills or applied to outstanding debts. Congress may want to tack on some exemptions for, say, subprime borrowers facing foreclosure.

And why stop there? The government could do its share to help struggling industries at the same time that it's giving the economy at large a lift. Like some credit-card tie-ins, the coupon could be used toward the purchase of a specific General Motors model -- the Chevy Tahoe, for instance -- whose sales are slow.

OK, so I jest about the government selecting winners and losers. I'm serious about the coupons for cash.

Why waste time arguing over whether the consumer will spend a rebate when there's an easy way to ensure that he does.

A large portion of households would exchange the coupon for goods and services, no questions asked. A few would lose, forget or not bother to spend it in the designated time. But the vast majority of consumers wouldn't let a freebie go to waste.

The proposal does have a downside, however. It may lead to job losses among economists, who will no longer have to analyze data and write papers on the consumer's response to tax rebates.

(Caroline Baum, author of ``Just What I Said,'' is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.

Last Updated: January 25, 2008 00:10 EST