How Does War Affect the Economy? Iran vs. Afghanistan vs. Iraq

Is war good for the economy? The evidence points decisively toward the contrary. Military conflicts impose substantial costs through government debt accumulation, resource diversion from productive sectors, and long-term fiscal strain. The wars in Iraq and Afghanistan added trillions to U.S. national debt while disrupting global trade and energy markets. Though defense spending creates activity in military contracting, this represents reallocation rather than genuine economic growth. The U.S.-Israeli war with Iran, which began in February 2026, continues this pattern. It drains resources from domestic investment without delivering broad-based employment benefits.

A financial advisor can help you understand how world events could impact your finances.

How War Impacts the Economy

Military conflicts reshape economies through multiple channels that extend far beyond immediate defense spending. Wars divert government resources from productive civilian sectors like infrastructure, education, and healthcare toward military operations and equipment. This reallocation often crowds out investments that generate long-term economic returns and technological innovation applicable to commercial industries.

The financing method determines much of war’s economic footprint. Governments can fund military operations through taxation, which reduces consumer spending power and constrains private investment. Alternatively, deficit spending increases national debt, creating obligations that burden future taxpayers and potentially limit government flexibility for decades. A third approach involves printing more money, which historically has caused inflation that eats into purchasing power and destabilizes prices.

Wars also disrupt trade relationships and commodity markets. Military operations in resource-rich regions frequently spike oil and commodity prices, creating ripple effects throughout global supply chains. For example, the Iraq War contributed to a significant rise in oil prices. Oil rose from $30 per barrel in March 2003 to nearly $130 in July 2008. ¹ These price shocks do benefit exporters. However, they slow economic growth in importing nations.

Labor markets also face distortions as workers enter military service or defense industries, sometimes creating skills gaps in civilian sectors. The duration and intensity of conflicts amplify these effects. Prolonged wars generate compounding economic consequences that persist long after fighting ends.

Iran War (2026): Early Economic Impact

The U.S.-Israeli war with Iran began on Feb. 28, 2026, with joint airstrikes targeting Iranian leadership and military infrastructure, triggering immediate market volatility reminiscent of previous Middle Eastern conflicts.

Within days, Iran closed the Strait of Hormuz. This move disrupted approximately 20% of global oil supplies and significant liquefied natural gas volumes. ² As a result, energy markets saw increased volatility. Bent crude oil prices surged to nearly $120 per barrel for the first time since the Covid-19 pandemic, ³ creating inflationary pressures across the global economy. U.S. consumers face higher gasoline prices, while economists warn that sustained energy disruptions could add measurably to inflation rates worldwide.

Financial markets have reacted with significant volatility, experiencing sharp declines as investors assess the conflict’s duration and scope. The war arrives amid already-elevated U.S. debt levels, raising concerns about how military operations will be financed.

The U.S. reportedly spent upward of $1 billion a day on the war during it’s first week, according to CNN. ⁴ Proposed increases in defense spending could further strain government budgets. This may require either tax increases or additional deficit spending. As with the Iraq and Afghanistan wars, much depends on the conflict’s duration and the financing methods ultimately employed.

Afghanistan War (2001–2021): Economic Impact

The war in Afghanistan cost the United States $2.3 trillion over 20 years, according to the Costs of War Project at Brown University. ⁵ Unlike previous conflicts, the war was entirely financed through deficit spending rather than tax increases. In fact, the government borrowed to fund operations while simultaneously cutting taxes.

Meanwhile, research from Brown University suggests that veterans’ care costs will reach between $2.2 trillion and $2.5 trillion by 2050, most of which has not yet been paid. More than 40% of post-9/11 veterans (including the Iraq War) are entitled to lifetime disability payments. This proportion is expected to increase to 54% over the next three decades. By comparison, fewer than 25% of veterans from World War II, Korea, Vietnam and the first Gulf War received service-connected disability certification. ⁶

These ongoing obligations will burden federal budgets for decades beyond the conflict’s end. This creates fiscal constraints similar to those experienced after previous wars but extending over a longer time horizon due to modern medical advances that enable veterans to live longer with their injuries.

The Iraq War (2003–2011+): Economic Impact

The Iraq War arrived during a period of already weak economic conditions following the 2001-2003 recession. The conflict’s financing method proved particularly problematic for the U.S. economy. For the first time in American history, the government cut taxes while entering war. This meant both the Iraq and Afghanistan conflicts were entirely financed through deficit spending. ⁷

This approach created severe structural imbalances in U.S. government finances that constrained policymakers’ options for the remainder of the decade. The resulting budget deficits left the Federal Reserve shouldering the burden of maintaining economic growth through low interest rates, increased liquidity and relaxed banking regulations. ⁸ The U.S. government implemented these monetary policies to compensate for the lack of fiscal stimulus capacity. In reality, they helped fuel the housing bubble that culminated in the 2008 financial crisis.

The Iraq War and the subsequent conflict in Syria cost the United States approximately $1.79 trillion through early 2023, not including future veterans’ care, according to research from Neta Crawford of the Costs of War Project. When future obligations for veterans’ medical and disability care are included through 2050, the war’s price tag jumps to around $2.89 trillion. ⁹

The war generated significant disruption in global energy markets, with Iraq-related uncertainty contributing to substantial oil price increases. These higher energy costs dampened domestic demand in the U.S. while simultaneously increasing global inflation.

The Opportunity Cost of War

Every dollar spent on military operations represents a dollar unavailable for alternative investments that might generate greater economic returns. The trillions allocated to the wars in Iraq, Afghanistan and Iran could have funded infrastructure modernization, education expansion, healthcare improvements or debt reduction. Crawford’s research demonstrates that military spending produces fewer jobs per dollar invested compared to other sectors. Defense spending creates approximately five jobs per $1 million. The same investment generates nearly 13 jobs in education, nine in healthcare and six to eight more jobs in infrastructure and clean energy.

War spending also diverts scientific and engineering talent toward military applications rather than commercial innovation. During the Iraq and Afghanistan conflicts, increased defense budgets came at the expense of non-military programs. This eliminated investments in research and development that could have yielded broader economic benefits. The long-term fiscal burden of veterans’ care and interest payments on war-related debt further constrains future government capacity to invest in productivity-enhancing programs, creating opportunity costs that compound across generations.

How War Could Affect Retirement Savings and Personal Finances

When conflict breaks out, stock markets often experience sharp declines. Investors tend to sell off riskier assets and move toward safer holdings. These swings can significantly reduce the value of 401(k)s, IRAs and other retirement accounts. This is especially true for investors who may be heavily weighted in equities or near retirement with less time to potentially recover from losses.

Inflation is another concern. Disruptions to energy supplies and other commodities can raise prices for everyday goods. Research from Brown University’s Costs of War Project shows that military spending, historically, contributes to inflationary pressures. This can potentially eat into the purchasing power of savings and fixed incomes for retirees ¹⁰ .

Interest rate shifts during wartime could also affect bonds and fixed-income assets. When the Federal Reserve raises rates to address war-driven inflation, the value of existing bonds typically falls ¹¹ . This could create losses for anyone relying on bonds for stability and income, while also potentially increasing borrowing costs for mortgages, auto loans and credit cards.

There’s also risk for anyone holding international investments. War can affect currencies in unpredictable ways, potentially reducing the value of foreign stock holdings, overseas real estate, or international bond funds when converted back to U.S. dollars. This could be especially relevant during conflicts involving major trading partners or oil-producers.

War tends to mean higher government debt, which could result in tax increases or cuts to programs like Social Security and Medicare. According to the Congressional Budget Office, rising federal debt levels can crowd out private investment, put upward pressure on interest rates and reduce the government’s fiscal flexibility to respond to future needs ¹² . These shifts could quietly affect the financial security of retirees and workers for years or even decades after a war ends.

Bottom Line

Is war good for the economy? The historical record in the 21st century demonstrates that military spending consistently imposes net economic costs despite short-term activity in defense sectors. Wars increase national debt, trigger inflation, displace productive investment and create multi-generational fiscal obligations through veterans’ care. While defense expenditures may be necessary for national security, viewing war as an economic stimulus misunderstands both the immediate costs and long-term opportunity costs of choosing military action over alternative investments in education, infrastructure, and innovation.

Investment Planning Tips

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