A Perilous Time
Recession Risks Rise
I had started writing this post, only to find that my friends at Concord Action got there first, in this morning’s “Lookout” email. Here’s what they said, followed by a few supplementary comments:
Driving the News: The outbreak of war in Iran has sent shockwaves through global financial markets, with direct and potentially severe consequences for America’s fiscal outlook. The US enters this conflict with a (publicly held) debt-to-GDP ratio of around 100%, close to World War II levels, and deficits of $2 trillion and growing. We are at a point where analysts are starting to warn of a debt-induced economic crisis, and national security experts see the debt and deficit as a serious security risk.
By way of contrast, when the United States entered the conflicts in the Middle East after 9/11, our budgets were balanced and publicly held debt to GDP was 35%. In fact, we have never gone into a major conflict in the 20th or 21st centuries carrying the kind of debt burden we have today. What this means is that we are not in a good position to take on more debt to finance a prolonged war, much less absorb the economic and fiscal impact of an oil shock.
Since hostilities began, yields on 10-year Treasury bonds have jumped and the President has suggested he will ask for $50 billion from Congress for the initial phases of the war. Meanwhile, oil and gas prices have surged in response to supply concerns and regional instability, creating ripple effects that threaten to slow economic growth across the board.
Why It Matters: Even a seemingly small percentage point increase in interest rates on Treasury bonds translates to billions of additional dollars in annual federal debt service costs. Interest payments on the debt already consume 20% of our tax dollars, and even without a war or recession, are projected to rise to 25% in the next decade. Higher interest rates on federal debt also mean higher auto loan rates and home mortgage rates, which are now also ticking back up again as interest rates rise on Treasuries.
The indirect fiscal consequences may prove even more challenging. Rising energy prices slow economic activity and increase the risk of recession – which will increase the deficit as revenues fall and demand for safety net programs rise. At the same time if we hit a recession, Congress will face enormous pressure to respond with fiscal stimulus – tax cuts, emergency spending, or both – again adding to the debt, driving up interest rates and interest payments, and elevating the risk of a debt-induced economic crisis.
Yep. My tweaks:
$50 billion is certainly an understatement for war costs in Iran. The best cost estimates hover around $2 billion daily, and the war will extend more than a month even if it began winding down tomorrow. Iran’s aggressive position in ceasefire talks bodes ill for a very short conflict. This will exacerbate debt growth that was already ominous.
The economy seemed to be weakening before the war. GDP growth fell from a very robust 4.4% annualized rate in Q3 2025 to an anemic 1.4% in Q4. Downward adjustments in employment data showed that jobs growth had been weak throughout 2025. This weakness has intensified this year. February data showed over 90,000 net job losses, accompanied by downward adjustments to original January job growth estimates.
All told, a grim economic and fiscal outlook. Extrapolations from current jobs or growth data are always risky. The point here is that this is an inopportune time for the higher spending and energy costs described by Concord Action.
Well, yes, all true but - how do we adjust for the cost of NOT doing anything in Iran? Would it have been better for the U.S., for example, to have entered WWII earlier than to have waited as long as we did? Sooner or later, Iran would have got The Bomb and very likely would have used it; even if not using it, the threat that it might have would certainly have had economic consequences as well. Surely there are simulations out there that could help answer such questions. At least under the U.S. Constitution, national defense is a proper function of the national government. Not so much for all the social welfare spending that soaks up most of federal spending.