Middle East Conflicts and the American Economy
World Economy

Middle East Conflicts and the American Economy

How Middle East Conflict Affect The US Economy

In order to understand how the relationship between the Middle East and the United States can affect one another’s economy, it is important to take a deeper look into the products that tie these two economies together, as well as the output of expenses to fund conflict and maintain conflict resolution.

The two primary sources of revenue for Middle Eastern countries are oil and tourism. Oil is the tying product between the Middle East and the United States economy; which throughout recent conflict has proven to be difficult and expensive to acquire. The second economic hardship during conflict for the American economy is defense spending—both blatant as well as invisible spending.  

The politics between exports and imports between socialist economies and free market economies affects the global market directly. Sometimes the impact is large; sometimes the impact is quite small. The most immediate impact that the US economy felt during Middle East conflict was a sharp spike in the price of gas. In the summer of 2008 the price of oil climbed to $140 per barrel, which may have been a primary reason for the global economic crisis that followed shortly afterwards. Fortunately for the U.S., the price of oil is currently at its lowest point since the conflict started between the Middle East and U.S. nearly 14 years ago.  Time will tell if the ebbs and flows of the gas prices will continue to affect the U.S. economy.

 

It is important to note that the recession of 2008 also lead to a reduction in record trade deficits. According to the U.S. Bureau of Labor, trade deficits fell from $840 billion annually during the 2006–08 periods, to $500 billion in 2009. The merchandise trade deficit rose again to $670 billion in 2010 after the economy began to stabilize; however the U.S. was still actively in conflict with the Middle East. These events may or may not be mutually exclusive, but important to look at none-the-less.

A common belief is that war requires government control of business. If you look back at WW2 and the inflation surrounding the war a valuable lesson can be learnt. If no inflation had been created, rather the taxation had cut down the income of all U.S. citizens (not just the wealthy) the controls would have been excessive. Increased taxes begin to look more like a helpful burden in historic economic times… history does appear to repeat itself.

After taking a glimpse into the impact of trade during conflict, it now becomes important to look at the impact of defense spending. Conflict of any type will eventually hit the taxpayer’s pocket. When US went to war in the 1980s, President Reagan was able to stimulate the economy with a mixture of tax cuts and defense spending. Unfortunately with America’s recent recession, taxes were already incredibly low and rather than raising taxes to support the war efforts the government opted to utilize their own budget, which rapidly changed from a surplus to a deficit. Although the impact of the conflict may be felt only marginally in the U.S. currently, how long will defense money continue to be syphoned out, and what will the long-term impacts be?

According to ‘The Cost Of War’ a project headed by staff and alum of Brown University, The U.S. federal price tag for the Iraq war is about $2.2 trillion dollars.  The cost for both Iraq and Afghanistan/Pakistan calculates nearly  $4.4 trillion. These costs have not factored in the medical care and disability aid for veterans. To date the U.S. has spent about $160 billion on medical care and disability for the more than two million veterans of these wars. Past conflicts have proven that medical and disability costs will peak in about 30 to 40 years after conflict, as veterans become more and more dependent on the government. The grand total of wartime spending cannot be accurately calculated for many years for that reason.

Finally, unemployment is the last issue of note. It is a fact that war does create jobs. Throughout any major conflict, historically, government jobs increase drastically. What happens after conflict ends? Many veterans that return are unemployable due to injury, PTSD, or other war related issues. This sudden wave of unemployed veterans can cause prolonged defense spending via unemployment.  

In conclusion, there are many elements that affect an economy. In terms of the Middle East conflict the U.S. has felt immediate impact with imports and exports, and may continue to feel the effects long-term as defense spending and its repercussions begin to unfold. 

Pro-Tip

Interested in learning more about how world events affect us individually? Try our Fundamentals of Economics (Part B) course for more macroeconomics taught in a fun, simple way.

You may also be interested in reading an in-depth article on Microeconomics Vs Macroeconomics and get a better insight into how the system works.