We are in the midst of two historic global events with major macroeconomic effects that will linger for well over a generation. Both have at their core the failure of American foreign policy, coupled with a once-in-a-century revolution in warfare.
I write of course about Ukraine’s historic, courageous and remarkable reversal of fortune in the war against Russian invaders. I also write about the developing strategic and operational defeat of the U.S., Israel, Jordan, Kuwait, Saudi Arabia and Bahrain by Iran.
Ukraine’s success will form the basis of contemporary military studies for two decades and will be the stuff of military and political history for much of the next century. The comparisons of Volodymyr Zelensky to Winston Churchill, which once seemed far-fetched, now do credit to both men.
In contrast, Iran’s victory over the U.S. and our “allies” holds very few lessons. No young person who seriously aspires to military leadership, foreign policy or international affairs would’ve made the mistakes we made in this war. The lessons about Iran are mostly for American voters, and they are harsh.
Both wars are dominated by technology as revolutionary to warfare as gunpowder, machine guns, tanks and airplanes. Drones (either cheap, long-distance suicide drones or local fiber-optic-guided) now dominate the battlespace.
The U.S. once dominated this technology, creating precision-guided munitions and unmanned aircraft that could remain aloft for days, watching the enemy, poised to strike as opportunity arose. These were so expensive that only we could afford them.
The new drones are so much cheaper that even small countries can defend themselves and defeat great powers.These events have macroeconomic consequences that will affect every American.
Russia’s inevitable loss and the seemingly inevitable victory of Iran mean that energy prices will rise and remain elevated for some time — years, if not decades. This risks slowing productivity growth globally. But, it will reward places that develop renewable energy — wind, solar and nuclear.
This energy shock is part of the strategic focus in both conflicts. Russia is an oil-exporting nation, with nuclear weapons and an economy that would’ve embarrassed Mississippi in the 1970s. Destroying Russia’s energy infrastructure is a great way to defeat it.
Iran has closed the Strait of Hormuz, stopping 20% of global oil flows. Gas prices have remained (reasonably) low because most of the world has used strategic petroleum reserves. That ends in the coming weeks. Iran is demonstrating dogged intransigence in the face of near-total capitulation by the U.S. because it wants to humiliate us.
I mention this because the inevitable shift in American politics will make life hard for Russia, but it will not make life easier for Iran. Russia and Iran are our enemies. Improved leadership in Washington, D.C., makes them both worse off — but only Russia knows this. That is why Russia meddles in our elections.
The Iranian leadership that survives is not competent. It doesn’t need to be. Iran only needs to survive to score a historic victory.
So, what are the macroeconomic effects? The energy shock is probably sufficient to push us into recession, especially if tariffs again rise. But we have three major challenges of equal importance.
The U.S. military is made for a war we are unlikely to fight. The good news is that China is too, so global military engagements by large powers are likely to moderate. I think most Americans are ready for this. But, it is not all good news.
Both the war in Ukraine and our failure in Iran mean that smaller nations with drone-making capacity will be freer from big nations and more likely to fight local wars. Despite what you might hear from political rhetoric, the world was much safer after the Cold War ended.
The world is about to get a lot less safe and a lot more expensive.
Our first challenge is refitting our armed forces for a new world of cheap, massed, AI-operated drones. This will be at the scale of the Reagan military buildup, costing trillions of dollars over the next few years, and require a vastly different force structure.
We need maybe 10 brigades (50,000 soldiers) who deploy drones. That is roughly the size of all the infantrymen now in the Army and Marines, including active duty, national guard and reserves. It is three times the size of the Space Force. This will cost a trillion dollars a year for several years.
This hits us at a bad time.
Presidents George W. Bush, Barack Obama and Joe Biden made major foreign policy mistakes, but none like President Donald Trump. We have largely erased our global network of alliances. It is for good reason that no one trusts us. Gone are the days when we could count on a network of skilled and nimble forces, like those who fought alongside us in the Persian Gulf and Afghanistan.
This places a much bigger burden on the backs of American troops and taxpayers. To illustrate that, I note that there are now tens of thousands of U.S. troops in the Mideast who’ve faced 80 to 100 nights of drone and missile attacks since February. This is a heavy burden.
For taxpayers, funding this war will cost each family about $6,000 per year for each of the next three years to five years. That is the cost of a trillion dollars a year.
We cannot raise taxes as much as we need to, so we are going to have to cut spending elsewhere. The next Congress will need to cut the growth of Social Security, Medicare and Medicaid. State and local governments will need to spend more as our federal government shifts its focus to defense.
The same forces that foist a big tax increase and high energy prices upon us also weigh on our economy. Inflation is not vanquished, and borrowing costs will rise and remain elevated, through the foreseeable future.
Even if we get a sudden burst of productivity from AI, which is very plausible, our debt, the need to expand military spending and the global uncertainty our weak policies have delivered will make us poorer and less safe for a generation to come.
Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University.