what's the best way to setup logging in sharepoint?

If you want to crank logging up as much as possible then you need to select "All Categories" from Diagnostic and Logging in Central Admin, and then set both the logging dropdowns to Verbose.

More details:

    http://technet.microsoft.com/en-us/library/ee748656.aspx

I wouldn't recommend turning on verbose logging unless your actually trying to debug a problem - it will have a performance impact!

Some tips here: http://www.andrewconnell.com/blog/archive/2008/06/11/SharePoint-Debugging-and-Logging-Tips-and-Tricks.aspx

I wouldn't put on all logging as you will see your log files grow insanely fast. What is it that you are trying to achieve?

Without issue, don't enable the logging.

I want to audit what everyone does and clicks on. I don't want a txt logging, I want to be able to run reports.

In that case you want usage analysis rather than logging as such. Try the instructions here for enabling it:

    http://support.microsoft.com/kb/825541

You need 3rd party tool

http://www.avepoint.com/sharepoint-reporting-docave/

Or if you want to use it for auditing, you can enable the auditing policy:
http://office.microsoft.com/en-us/sharepoint-server-help/introduction-to-information-management-policies-HA010173529.aspx

which one is best for usage reporting? isn't there something with built in reports that tell me what sites people are using and what searches they're running?

I enabled usage analysis like carl said and advanced analysis reporting. were do I go to run reports?

the last post looked like what I wanted, but I'm running sharepoint 2007. How do I get reporting on the behavior of users using sharepoint 2007?