Increase logging levels in hack/local-up-cluster.sh

As per the suggestion in docs/logging.md, increase log levels in development up to 3. You could argue for 4 but that might be too much for average development, and the env var LOG_LEVEL can be specified as well. Also changed the indentation in docs/logging.md to make it a little clearer what's going on.

(This was triggered by me no longer seeing HTTP requests in apiserver logs when running hack/local-up-cluster.sh and not understanding why.)