The Economic Cost to the U.S. from its War with Iran: Why a Swift and Peaceful Resolution to the Conflict Remains in the Best Interest of Everyone.

As the conflict between US-Israel and Iran continues into its fourth week, it is becoming apparent that the US is having to bear an economic cost that will have far-reaching consequences.

The escalation of the war in the Middle East following joint US-Israeli strikes on Iran on 28 February and Iran’s consequent retaliation, comes with a devastating cost to the world - both in terms of widespread civilian causalities and deep economic devastation. To the U.S. that entered the conflict on a narrow fiscal footing; - worsened economic prospects, high defense spending, likely impacts on budget deficits, debt levels, inflation and cost of living, could result in American tax payers ultimately bearing the price of the war further down the line. Prolonging the conflict could escalate significant economic risks in the U.S. as well as in other parts of the world. A swift and peaceful resolution to the ongoing conflict remains in the best interest of every party involved.

Global Repercussions:

Early days of the crisis itself unfortunately took many innocent lives in Iran and the neighboring region, including that of innocent school children in Southern Iran during an airstrike. The number of human causalities, the consequent loss of peace and the right to live, the trauma and psychological effects of war - particularly on innocent civilians in Iran and the neighbouring region, are devastating in every sense.

The economic consequences of the US-Israeli war on Iran are global in nature and stretch well beyond the Gulf. Global oil prices have soared amidst the crisis, surpassing $100 per barrel. The blocking of the Strait of Hormuz by Iran, a key waterfront through which one-fifth of the world’s oil shipments transit through,  and overall reduction in oil production in the Middle East region due to the escalation of war, are adding further upwards pressure on global energy prices.

The ripple effects of higher energy prices and shipping costs will likely translate into higher cost of living across the world and heightened global inflation concerns in the days ahead. Uncertainty around maritime and air connectivity (particularly around some of the most important shipping routes and busiest transit hubs) is dimming global investor sentiments and already impacting global supply chains. Global food production also faces significant risks as a third of the global trade in the raw materials for fertiliser passes through the straitand Gulf countries are significant exporters of urea. Continued uncertainty around the strait would lead to potential losses in harvests across the world including in some of the poorest and vulnerable parts of the world. The effects of a prolonged crisis are likely to be felt in every corner of the world and are likely to be uneven. The International Monetary Fund (IMF) notes that though it is too early to assess the exact impacts of the war, that they are so far observing disruptions to trade and economic activity, surges in energy prices, and volatility in financial markets; while the impact will depend on the duration of the conflict.  

Cost to the U.S.

The war on Iran is estimated to have cost Washington $3.7 billion in the first 100 hours or $891.4 million a day, as per the estimates of the Center for Strategic and International Studies (CSIS). The additional strain on defense spending adds significant pressure on the fiscal position of the U.S. that entered the war on a narrow fiscal footing and high debt levels. Prolonging the conflict would add further strain on budgets, widening deficits.  IMF estimates reveal that the U.S. general government debt in 2024 rose to 121 percent of GDP (from 119 percent). Although there is no immediate stress owing to U.S. debt levels, major rating agencies have already downgraded the top-tier AAA/Aaa rating of the U.S. on the back of long-term debt sustainability concerns. Therefore, refraining from adding further strain on its fiscal position features as an important economic priority for the U.S. at this point in time.  

Further, inflation expectations owing to the war and uncertainty around deficits and debt, have started adding upward pressure on yields on 10-year US Treasury bonds since the war broke out; reflecting higher risk levels and weaker US investor sentiments. The commonly cited cost estimate of $1 billion a day for the U.S. due to its military operation against Iran, is weighing on budget deficits and gradually adding up to the already elevated debt position of the U.S. Dragging on the conflict would worsen these concerns. Recent reports that refer to statements from Senator Elizabeth Warren, D-Massachusetts sums up the argument – ‘’While there is no money for 15 million Americans who lost their health care, there's a billion dollars a day to spend on bombing Iran."

Additionally, despite being the largest oil producer, the U.S. already faces significant repercussions from global energy shocks emanating from the war. Gas prices have already soared, with it being increasingly difficult to shield American consumers from the ripple effects of global commodity shocks from the war on Iran (given the interconnectedness of international trade).  The global impacts on energy prices, international trade and investment is expected to weaken the developing bullish economic growth outlook forecasted for the U.S.

Although the actual cost of the war on Iran to the U.S. is difficult to estimate at this point, early signs are not promising. The US economy, including its stock market, currently remains resilient amidst a challenging situation, but given its narrow fiscal space, the additional cost of military spending due to the war remains quite costly and potentially challenging for the Fed to bear, especially for a prolonged period.  Therefore, dragging on the conflict would inevitably lead to the cost of the war being passed on to American consumers down the line in terms of higher inflation, cost of living, wider deficits and debt – potentially challenging the popularity of the current administration. Therefore, the need to refrain from prolonging the conflict in the Middle East should be felt as strongly by Washington as it should be anywhere else in the world. Working towards a swift and peaceful resolution to the ongoing conflict remains in the best interest of every party concerned.

DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of IIPA and this platform.

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Author

Nipuni Perera is a PhD Candidate from the Department of Political Science and International Relations at the University of Canterbury in Christchurch, New Zealand

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