Back in the 1990s President Bill Clinton and British Prime Minister Tony Blair crafted what they called a “third way” of governing. Supposedly this approach would be neither liberal nor conservative, but would split the difference.

Sounds fine in theory. It didn’t work that well in practice, though -- at least not to the satisfaction of liberals. Clinton and Blair found that, whether the issue was foreign or domestic policy, any attempt to find middle ground needed to be mostly conservative, or it would fail.

That’s important for policymakers to remember today, with our economy in recession and lawmakers determined to “do something” to pull it out.

On one side are lawmakers eager to pass the traditional liberal plan: an “economic stimulus” package that includes massive spending on public works to “create” jobs. It also involves having the government write checks to selected Americans, hoping they’ll spend the money and boost the economy. Never mind that we tried giving money away earlier this year, and it didn’t work. They want the government to throw still more dollars around.

On the other side is a group that’s proposed a more conservative approach, a “tax holiday.” Instead of having the federal government attempt to stimulate the economy through public works and rebates, these lawmakers propose suspending the collection of federal taxes for a few months. That would leave Americans with more money in their pockets.

That’s certainly a better approach than the government holding onto their money. But it’s not the ideal choice to spur the economy and generate jobs.

The third (and best) way would be the true conservative approach: Fixing the tax code so it encourages greater economic growth by improving the long-term rewards for investing in job-creating enterprises.

The best way to stimulate the economy is to make changes that will last for years, so people know they can count on those changes well into the future. That way Americans who are considering starting a business, making a major purchase or investing in the market can know what their future after-tax return is going to be -- not simply for the next three months, but for the next three years, or more.

As a start, lawmakers should extend (a good idea) or make permanent (a better idea) the tax rate reductions passed in 2001 and 2003. Most are set to expire in 2010. That’s only about a year away, so investors are skittish; they have no idea what the tax rate will be on their income in the years ahead. By reassuring them that rates will remain low, lawmakers can revive the economy. Continued...