Beware the Economic Costs of a Long War in Iran
Iran and the economy: the danger is not the shock. This is the Duration.
Randolph Bourne said that war is the health of the state. GOOD. So let’s say the other part out loud: war is a disease in the economy.
This is the real economic question hanging over the Trump administration’s war against Iran. A short, limited conflict can be absorbed. A prolonged crisis not only increases the risks of a recession. It can lower the speed limit of the economy by diverting real resources, depressing investments and extending a permanent emergency policy. We saw this movie. We even gave a name to the intermediate act: secular stagnation.
The costs of war don’t stop at the price of oil
The first thing markets do in a Persian Gulf war is watch crude oil prices. Energy remains the fastest way for geopolitics to show up in household budgets and corporate margins. This week we saw a daily dynamic: when oil surged, stocks plunged. When oil prices fell, stocks rose. But oil is only the most visible channel.
A trader works on the New York Stock Exchange on Thursday, March 5, 2026. Oil prices surged amid fears of a prolonged war in Iran. (Michael Nagle/Bloomberg via Getty Images)
The deepest channel is the one that doesn’t feature a flashing price screen or ticker on financial TV: the diversion of real resources. War draws scarce resources—highly skilled labor, industrial capacity, managerial attention—into the war apparatus and its national support ecosystem: procurement, intelligence, logistics, contracts, compliance, security, and “temporary” architecture that has a habit of becoming permanent.
Keynes summed it up in a sentence that should appear on every war credit: “Every use of our resources comes at the expense of an alternative use. » In wartime, he writes, the “cake” is effectively fixed: if we fight better we can’t eat more. This is the part of the war economy that gets lost when we only talk about budget lines. War is about more than spending money. This repurposes the country’s scarce capacity and the civilian economy becomes smaller than it otherwise would have been because “alternative use” never occurs.
Milton Friedman, coming from a very different tradition, reinforces the same central point from another angle. He argued that inflation was not an inevitable consequence of war; it depends on how the war is financed. This is useful because it separates two questions that people constantly confuse. A country can finance a war without an immediate explosion in inflation. But it still pays the basic price described by Keynes: lost civilian production and lost investments. Even when the CPI performs well, the opportunity cost is real.
The economy in one unglamorous issue
If war spending made the economy richer, one would expect defense spending to generate large multipliers. But economic research shows otherwise.
Robert Barro, the Harvard economist best known for his work on growth and fiscal policy, and Charles Redlick attempted to answer a simple question with hard data: When Washington increases its defense spending, how much additional economic output do we actually get? They measure what economists call the “multiplier”: the ratio between the variation in GDP and the variation in public spending. If the multiplier is one, a dollar of defense spending adds about a dollar to GDP. If it is less than one, the government buys real things – labor, steel, fuel, industrial capacity – but total output increases less than the amount spent because other activities are sidelined.
Barro and Redlick’s estimates for temporary defense spending are well below one: about 0.4 to 0.5 for impact and still below one over a few years. This is an academic and polite way of saying war spending displaces civilian productionand what tends to get displaced is precisely what you would least like to sacrifice if you care about the standard of living five years from now: private investment.
This is the heart of the danger of the long war. The economy can appear active while investing less in machinery, infrastructure and innovation that increase productivity. It is “evict” without the morality play of interest rates. Interest rates can stay low and you can still be squeezed out in the only way that ultimately matters. Actual resources are limited.
Distortion is the rule, not the exception
If you want to see what “diverted production” Seems like when it’s real, you don’t need economic theory. You need a history book.
During World War II, war-related production in the United States exploded. Economic historians note that it grew from a fraction of national output before the war to something like two-fifths of GNP at its peak. It was not a stimulus package, even though it seemed to make headlines. It was the economy being reoriented. World War I did the same thing, on a smaller scale but with the same logic: production shifted from civilian goods to war goods, labor was recruited or redirected, and the financial mix – taxes, borrowing, money creation – created its own aftershocks.
View of the B-24E Liberator bomber production line being assembled at the Ford Motor Company’s massive Willow Run plant in Ypsilanti, Michigan, during World War II. (PhotoQuest/Getty Images)
There is no need to romanticize mobilization to learn the lesson. The lesson is that when war drags on, the economy reorganizes around it. And the reorganization of an economy has consequences that linger long after the first headlines have faded. When the economy is operating well below capacity, with lots of idle and underemployed labor, mobilization can increase production. It is basic history of WWII. But when unemployment is low and production is already starting – as is the case now – the effect is mainly reallocation rather than expansion: more guns, less butter and a thinner future.
Modern research has begun to capture this reallocation cost more directly, not only in GDP aggregates, but also in the bottlenecks, relative prices, and frictions associated with converting civilian industry to war production. The more specialized and complex the economy, the more painful the reorientation becomes. This is another way of talking about “malinvestment” without making it a slogan: resources and capacities are injected into production lines that do not generate general prosperity. THE the war machine devours what our wealth should have been.
The Iraqi bill was not a number. It was a system.
The Iraq War is a useful analogy, not because it was the same conflict, but because it shows how quickly costs cease to be a line item and become a condition.
On the tenth anniversary of the war, the Costs of War Project at Brown University estimated Iraq’s ultimate prize at least $2.2 trillion once you include long-term obligations like veterans’ care and interests. A decade later, the Twentieth Anniversary Update has pushed the total expected fiscal cost to more than $2.89 trillion, with much of the rest coming from obligations that span decades.
These totals, however, do not fully capture what makes a long war economically corrosive. The most damaging part is often the part that does not appear to be “war spending” at all: postponed investments, diverted talents, a shortened horizon and a private sector that limps rather than taking great strides towards the future.
This is how you can live through a decade where interest rates are low, the central bank is trying to revive growth, and yet the economy still feels like it’s pulling a chain. This is how you go from mission accomplished to secular stagnation.
President George W. Bush addresses the nation aboard the nuclear aircraft carrier USS Abraham Lincoln on May 1, 2003, in front of a banner declaring “Mission Accomplished” after the invasion of Iraq. (STEPHEN JAFFE/AFP via Getty Images)
In the years following our invasion of Iraq, productivity growth collapsed, followed by rising wages. This slowdown is generally blamed entirely on the housing bubble and the financial crisis. But the trail of Forever Wars contributed significantly to what became known as secular stagnation.
The Pottery Barn Rule and the Economics of Mission Drift
Iran is particularly dangerous because it offers many entry routes that look like exit routes. Even though the objectives are clearly defined at the outset – destroy Iran’s nuclear capability, cripple its military, break the regime’s ability to project power –the fog of war tends to blur things. There is always a “right”. Just protect shipping lanes. Just tap on proxies. Just restore deterrence. Just stabilize yourself. Just help rebuild institutions. Just one more month, one more quarter, one more year.
Then comes the rhetorical device that turns mission diversion into moral obligation: the so-called “Pottery Barn rule”: if you break it, you own it. Peter Schweizer’s point is worth emphasizing: Trump rejects this nation-building reflex. Destroy the threat; do not commit yourself to rebuilding society.
This rejection is as important economically as it is strategically, because the “Pottery Barn Rule” is a machine for creating duration. And it is the duration that transforms a conflict from a shock into a structural brake.
Plumes of smoke rise from explosions in Tehran on March 3, 2026, after Iran’s Supreme Leader Ayatollah Ali Khamenei was killed in joint US and Israeli strikes on February 28, triggering a wave of Iranian retaliatory missile strikes in the region. (Negar/Middle East Images/AFP via Getty Images)
It is also worth remembering that this “rule” is not ancient wisdom. This is a relatively recent slogan that has acquired the status of doctrine primarily through repetition. Worse still, the retail story behind it all – the famous “you break it, you bought it” politics – was itself an urban legend. We whitewashed the mission through a catchy metaphor, then acted with surprise when reconstruction turned into occupation, and occupation turned into a war with an economic shadow that lasted ten years.
War will not make America great again
A short war hurts. A long war changes the type of economy we have and the type of country we are.
While Iran remains a limited military problem, the U.S. economy can adapt. If it is a prolonged political project, the cost will not only be budgetary. It will be structural: lower investment, lower productivity growth, and a private economy that learns to live with lower expectations.
War is the health of the state. It is also the disease of the economy. Sometimes what doesn’t kill you just keeps you weak.
