Kudlow: This is the best way to deal with skyrocketing inflation

Kudlow: Are we on the front end of a recession?

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Inflation up and GDP down. It's not a good combination. No, not yet a recession. 

However, with soaring inflation, 8% in the first quarter, from a broad-based measure of prices, it does raise a question, are we on the front end of a recession? 

Here's what President Biden tried to say about it today: 

PRESIDENT BIDEN: I'm not concerned about recession and I mean, you're always concerned about a recession. 

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U.S. President Joe Biden addresses the 76th Session of the U.N. General Assembly on September 21, 2021 at U.N. headquarters in New York City.  (Photo by Timothy A. Clary-Pool/Getty Images / Getty Images)

Got that? So, let’s be a little more specific than the president. Real GDP fell 1.4% in the first quarter ending in March and that is the first decline since the pandemic output loss in the second quarter of 2020, almost 2 years ago. 

However, underneath the hood, consumer spending did rise 2.7%, housing investment up 2.1%, and business investment up 9.2%. Those are decent numbers. That could be why stocks went up almost 700 points today. 

What some people call core GDP, which is consumption plus investment (C+I), core growth rose 3.7% at an annual rate—also very decent. 

The formal definition of recession is six to nine consecutive months of declining sales, employment, production and income. We’re not there yet. 

It was a big trade deficit that chopped off over 3 percentage points from the topline number and a slowdown in inventory accumulation that took out almost 1%. One reason for the big trade deficit is over-stimulated demand from the $2 trillion spending bill over a year ago that launched the eight percent inflation. 

Let me add that monthly job gains are still good, although it should be noted that contra Joe Biden, new jobs are not being created. The monthly gains are merely a return to work from pandemic job losses. Right now, the civilian labor force is still 1.6 million jobs below the pre-pandemic peak and if the Trump job creation trend-line were in place, the labor force would be 6 million jobs higher than it is today. So, Biden boasting about new jobs is simply wrong. During his tenure, we're just treading water. 

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Are we at the front end of a recession? Is there a recession risk? Yes and yes. Whenever inflation is significantly above GDP growth, that's one definition of stagflation and that's where we are today—stagflation.  

History shows stagflations usually lead to recessions. Or to be more direct, high inflation usually leads to recession. Remember, the Fed has not yet taken the punch bowl away. They're talking the talk, but not yet walking the walk. 

That's why recession is a significant threat and then there's Biden policies. Today he prattled on and on again about how Republicans don't pay their fair share. That's kind of a new wrinkle. He usually attacks billionaires, millionaires and corporations. Today he just attacked Republicans. 

He probably didn't mention Democrats, because there's so few that will fess up to being Biden Democrats anymore, but I digress. 

Elon Musk is a libertarian, not a Republican, but he paid $11 billion in taxes last year—the largest single tax collection in American history. Is that fair enough? 

The absolute dumbest thing the Bidens could do is follow the advice of Senator Chuck Schumer, who said, "If you want to get rid of inflation, the only way to do it is to undo a lot of the Trump tax cuts and raise rates." 

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Go ahead! Raise taxes. That will guarantee a recession and sky-rocketing unemployment. That's how dumb that idea is. 

The Trump tax cuts, especially the corporate tax cuts, are not only responsible for the limited prosperity we have (note the increase in business investment and equipment in today's GDP report) but they also paid for themselves with a gusher of record revenues, according to the IRS. 

The Laffer Curve worked again. Lower tax rates, more people working, higher incomes, more tax collections, less tax avoidance, all equals more tax revenues at lower tax rates. 

The best way to deal with sky-rocketing inflation is to stop federal spending, stop deficit finance, stop money-printing, stop choking off the supply-side of the economy with over-regulation, and the attack on fossil fuels. 

Forty years ago, Art Laffer and Robert Mundell argued the best fix for inflationary recession was tighter money to vanquish inflation and tax cuts to rejuvenate the economy. That was the policy backbone of the Reagan boom that lasted over two decades. 

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Former President Donald Trump speaks at the White House, Thursday, Nov. 5, 2020, in Washington.  (AP Photo/Evan Vucci / AP Newsroom)

The Trump tax cuts accompanied by a strong dollar worked wonders during his brief tenure. Strong growth, low inflation.    

If Democrats and/or Republicans are going to keep spending and taxing and printing, then they will guarantee even higher inflation, and ultimately a very deep and painful recession. Food for thought. The cavalry's coming. Hope they get it right. 

This article is adapted from Larry Kudlow's opening commentary on the April 28, 2022, edition of "Kudlow."

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