In a midterm election characterized by negative ads and harsh, personal attacks, the campaign for Congress in Arizona's newly created 5th District is one to make democracy smile.

National party leaders rate it one of the best in the country. It features two fine candidates, Democrat Jim McNulty, 57, and Republican Jim Kolbe, 40, two well-organized campaign staffs and a debate focused on how to get the economy moving.

McNulty's literature describes him as a "fine and decent man," and in person, he lives up to that image. Soft-spoken, direct and substantive, he has none of the frills of many of today's blow-dried politicians.

Asked to give a nonpartisan speech before a Rotary Club in a retirement community, he delivered a crisp analysis of the social security system and outlined ways to help make it solvent. There was no hysteria and no demagoguery.

He charges that the economy has been badly mismanaged, but refuses to attack the president.

"That's not my style," he says. "I believe in raising holy hell on an issue, but not touching people."

McNulty still carries the accent of his Boston birthplace. A friend and ally of Democratic Rep. Morris K. Udall, he served in the state Senate, lost the primary race to run against Republican Sen. Barry Goldwater in 1980 and long has been active in party politics.

Kolbe is equally energetic and articulate. Although he is a founding member of the Young Americans for Freedom, he calls himself a moderate-liberal who will disagree with the president, especially on social issues.

He grew up on a cattle ranch in southern Arizona, was elected to the Arizona Senate in 1976 and chairs the Judiciary Committee, a position he used to help draw the district in which he is now running.

A defender of the president's economic programs, Kolbe has attempted to keep the debate focused on restoring economic growth, rather than Reagan himself.

"I refuse to say this is a race on Reaganomics, but it clearly is a race on economic issues," he says.

Kolbe argues that the direction set by Reagan is essentially correct. "It's not worked as rapidly as we hoped," he says. "But it's far too early to make a judgment that it's a failure."

As for the Democrats, Kolbe says they are "utterly bankrupt."

Athough Arizona has benefited from the sun belt boom, the economy is as much an issue here as in the northeast because of the depression in the copper industry. In one rural county, the unemployment rate is estimated at more than 50 percent.

Kolbe originally planned to run against Udall, who has represented Tucson since 1961, but redistricting cut Tucson in half. Udall chose to run in a district that runs from Tucson to Phoenix, leaving the new 5th District vacant.

McNulty, in a new ad, accuses Kolbe of drawing the lines for his own benefit. The district is Democratic in registration but conservative in philosophy.

While the district qualifies as Reagan country, Kolbe is not running as a Reagan cheerleader.

"No Republican can look forward to being carried into office on Ronald Reagan's coattails," says Gary Sitton, Kolbe's press secretary.

Geography may decide this race. Ordinarily, Kolbe could expect to win a majority of the rural Democratic votes in the district because of his conservatism, but McNulty's home is in rural Bisbee, Ariz. If McNulty gets a strong vote in Tucson, which comprises about 60 percent of the district, he could upset national Republican expectations of using redistricting to gain new House seats.