A Few Thoughts on the Iran War

We’re now about one month into the war and I wanted to share a few thoughts on it. When the US and Israel attacked Iran, I was hoping that it would be short because Trump would end the war after a few days and the Iranians would agree not to continue, but that didn’t happen and, despite the fact that Trump is saying that Iran really wants to make a deal and that some diplomatic contacts to end the war seem to have taken place, I now think the war is unlikely to end soon because now both sides face incentives that will make ending it quickly difficult. If that were only up to him, the smartest thing Trump could do right now is declare victory and announce the end of the war. People would make fun of him for chickening out and say that he didn’t achieve what he initially set out to do, which in that scenario would obviously be true even if his supporters would try to deny it, but prices would go back to normal after a few months, people would move on and a year from now almost nobody would remember it.

Why I think the war is unlikely to end soon

Unfortunately for Trump, the Iranians also have a vote and they have a strong incentive to keep the war going until they have inflicted so much economic pain that any US president will think twice before pulling that kind of stunt again, because otherwise they have every reason to think that the US and Israel will come back for more in a few months or a few years at most. Unless the Iranians can ensure that Israel and the US won’t be able to “mow the lawn” on a regular basis, they can’t even hope to have a normal economic life (let alone solve the political crisis that has plagued the country since at least the end of the 1990s but has grown even more acute in recent years), but the only guarantee they’re going to get is if they’re able to cause enough economic fallout in the US to make the idea of starting a war with Iran again politically toxic in the US. Crucially, it’s not just the hardliners who have incentives to support this strategy, because even the moderates in Iran, who criticized the policy of “forward defense” consisting in funding proxies all over the region and were in favor of engagement with the West before the war, aren’t going to agree to abandon not just Iran’s nuclear program but also its ballistic missile program after what happened.

Of course, this sort of rational calculation is easier to make when your country isn’t being destroyed and the last three people who used to have your job weren’t recently murdered, so depending on how things develop the Iranians may agree to end the war before the point where they have inflicted enough pain to the world economy has been reached. They are also under tremendous military and economic pressure and, while many people seem to think it doesn’t matter (perhaps because of the myth that US bombing didn’t force the North Vietnamese to make concessions during the Vietnam War), everyone has a breaking point and the Iranians are no exception. But at the moment they don’t seem anywhere close to it and, while Trump would probably love to end the war before the pressure from voters (who don’t want to pay more at the pump), Republicans in Congress (who don’t want to get clobbered in November), American businessmen (who want to lose their customers) and US allies (who don’t want their economy to be destroyed) becomes irresistible, he only seems prepared to do that if the Iranians agree to conditions they are unlikely to accept right now because, despite what he keeps repeating, they don’t think they have been defeated yet.

So I think that, before the war can end, both sides will have to experience a lot more pain, because until they do their positions will remain too far apart. The risk is that, as neither side can force the other to agree to end the war on its terms, one of them will be tempted to escalate things in the hope of obtaining concessions from the other by ratcheting up the pressure on it, which probably wouldn’t work and would actually make it harder to end the war because it would make the sunk cost fallacy bite even harder. In particular, I’m afraid that Trump will not resist the temptation to put US troops on the ground in Iran, which would turn into a quagmire with a pretty high probability because on the one hand they would be constantly harassed by drones and missiles but on the other hand a withdrawal would look like a debacle unless the Iranians agreed to make concessions they probably won’t be prepared to make for a while even in the best case scenario. Now, it wouldn’t be a large-scale invasion like what the US did in Iraq in 2003 (because that would require months of preparations and nothing of the sort has been done), but I think it’s quite likely at this point that the US will land troops somewhere in Iran and once this has happened there is no saying what comes next.

A lot of people seem convinced that any kind of ground operation is out of the question, that’s certainly what the supporters of this idiocy promised when it started, but I don’t think it’s as obvious as they think. When NATO decided to bomb Serbia in 1999, decision-makers were convinced that it would only take a few days for Milosevic to cave. Except that it didn't happen, the Serbs refused to cave and, several weeks later, there was no end in sight and the Clinton administration started drafting ground invasion plans because the alternative was to suffer a total loss of face if the campaign ended before Serbia had agreed to NATO's conditions. If you had asked US officials before the war whether they would ever launch a ground invasion of Serbia, they would have categorically rejected that possibility, yet toward the end they were seriously considering it and, had it not been for the fact that Russia brokered a deal that ended the war on NATO's terms, it's possible they would have done it. The point is that, even when a war seems low-risk, you never know where it will take you because war has a way of creating a dynamic you don't control by changing the incentives in ways that can make things you would never have considered possible at the beginning seem inevitable later.

Moreover, while Trump may have started the war, it’s not just about him anymore and not only because the Iranians also have a vote. Indeed, most people in the US national security establishment probably wouldn’t have supported Trump’s decision to attack Iran, but they care a lot about “credibility” and this makes them uniquely vulnerable to the sunk cost fallacy, so now that the US is at war you can be certain that many of them will push to continue until Iran has caved and will oppose ending the war before Washington has obtained enough concessions from Iran. It’s also likely that, even if the US offered to end the war by returning to the status quo ante now, the Iranians would not agree unless the US gave them formal guarantees against another attack and nobody in Washington will ever agree to that. People in Washington’s foreign policy establishment also understand that, if the US caves before Iran agrees to make concessions, the Iranians will have established deterrence on the US and that’s not something people in Washington will easily accept. As I explained above, that’s precisely the reason why Iran has an incentive to continue the war until the US caves. This is not a recipe for a quick resolution of the conflict, to say the least. Now, it doesn’t mean that Trump won’t give up if or when the economic situation reaches a boiling point and the pressure becomes untenable, but it’s a powerful factor that will push him toward intransigence and may lead to further escalation.

I have no idea how this war is going to end and I don’t think anybody else does either. I just don’t think it will end soon and, precisely for that reason, I think it’s very hard to know how it will end because it means that a lot of unforeseeable things can happen and probably will if I’m right and it lasts for a while. It’s possible that, by keeping the Strait of Hormuz closed and attacking energy infrastructure in the Gulf, Iran will manage to impose such economic pain on the US and the rest of the world that it will be able to force Trump to give up without obtaining significant concessions. Unless the US can reopen Hormuz soon, it will definitely be a shitshow. A lot of people seem to think that you can make more than 10 million barrels of oil per day disappear from the global market overnight, not to mention a large share of the global supply of natural gas, without any major consequences, but that’s completely delusional. Unless traffic resumes soon, this will result in a monumental energy crisis and it will be even worse if things get out of control and both sides start going after each other’s energy infrastructure. The only question is whether the US will manage to reduce the threat posed by Iran to shipping in Hormuz enough for traffic to resume before the shit hits the fan and Trump’s stupidity triggers a global economic meltdown.

Why I think it’s a stupid war

There was no reason to risk such a disaster by starting a war with Iran. It’s a relatively weak country that posed no threat to the US as long as it stayed out of its business, which it had no reason to get into. The only issue with respect to Iran that the US has reason to be concerned with is the possibility that it might develop nuclear weapons, though not because it might use them to nuke the US, Europe or even Israel (which of course would never happen because, whatever you think of the Iranian leadership, they have not demonstrated a desire to commit national suicide), but rather because it might trigger a nuclear arms race in the region and undermine the non-proliferation regime. However, not only was that issue on its way to being solved before Trump withdrew from the JCPOA in 2018, but negotiations on the issue had resumed when the US and Israel attacked Iran and there was plenty of time to try to find a peaceful solution because Iran had no way to quickly produce nuclear weapons. Apart from that, the US had no reason to get involved. I understand why Israel or Saudi Arabia doesn’t like that Iran is getting a foothold in their neighborhood through its proxies, but I don’t see how that’s America’s problem, let alone something Europeans or Asians should care about.

Iran is relatively weak country and not a serious threat to the US, but it’s still a country of 90 million with a real state and industrial economy, not a militia or a fragile personalistic regime that will crumble at the first push. Due to its geographic position and the importance of Hormuz, it also holds a gun to the global economy’s head. Since it can’t possibly hope to win a conventional war against the US and Israel, it was obvious from the moment they made it clear that it was an existential war for the regime that it would use the only weapon it has with a chance of forcing the US to back off, which is to close Hormuz and blow up the global economy. Thus, the cost-benefit structure of a war with Iran was highly asymmetric, which is why it was stupid. Even if everything had gone perfectly well and the regime had quickly collapsed and been replaced in short order by a pro-West government, which was never particularly likely, the benefits for the US and the West in general would have been minimal, but any scenario short of that was bound to result in massive costs.

Again, unless Hormuz is reopened soon, we are talking about one of the worst supply shocks in history. The costs that are already baked in the cake at this point outweigh any benefits that might accrue to the US later, at least relative to what it could have obtained without a war, to say nothing of what it will cost the rest of the world. And that’s just for what is already baked in the cake, but it’s almost certainly going to get worse and possibly a lot worse, because again it doesn’t look as though the war is going to end soon. This stupidity is probably going to shave half a percentage point of global economic growth this year even in the best case scenario and, if things go bad enough, we’ll even have a global recession. If they go really bad, it will cause a civil war in Iran and destabilize the entire Middle East for years, possibly resulting in another refugee wave. I would really like the people who constantly blabber about Iran’s proxies to explain how exactly they were such a threat to the world that it’s worth risking such a disaster in the unlikely event that it would permanently eliminate them. But they won’t, because they can’t, since Iran’s proxies were completely irrelevant to anyone who doesn’t live in the Middle East and except perhaps for Israel people in the Middle East are obviously not going to end up better off because of this war.

The truth is that it’s a stupid war that obviously wasn’t the result of careful deliberation. Trump painted himself in a corner in January by threatening to intervene militarily if the regime killed protesters, he was under pressure from Israel and probably let himself be convinced that he could get another easy win by pulling the same stunt as in Venezuela. But Iran isn’t Venezuela, so instead he just got himself into a mess and now he has no idea how to get out of it. He wanted to achieve maximalist goals, such as regime change or at least capitulation by the Iranian leadership, at very low cost, but instead he’ll probably achieve much more modest goals at best and only at a very high cost. Most of the people who supported this stupidity thought the same thing, which is why they’re now moving the goalposts and coming up with preposterous arguments to justify it. For instance, they explain that the fact that Iran closed Hormuz shows that it was a threat that America couldn’t live with, but the Islamic Republic had never closed the strait before and never would have if the US and Israel had not attacked it, so what they're saying is that the war is justified because it was the only way to prevent something that only happened because of it.

The fact that people can use such circular logic without fear of ridicule speaks volumes about how completely broken the public debate is on this topic due to nonstop propaganda. We're supposed to believe that, because the regime is "terroristic", "genocidal" and other meaningless epithets people apply to it, it's totally incapable of even minimal instrumental rationality. Of course, anyone who knows anything about the history of post-1979 Iran also knows that, however counterproductive some of the policies the Iranian deep state insists on pursuing may be (such as wasting inordinate amounts of money to prop up various armed groups in the region and piss off everyone in the process), even hardliners in the IRGC aren’t completely stupid and wouldn’t self-immolate by closing the Strait of Hormuz or launching ballistic missiles at London for no reason. This is just meaningless propaganda, but it’s so ubiquitous that it’s impossible to have a rational debate about Iran, because before you can even start to discuss the issues about which rational and well-informed people can disagree about, you have to go through all that nonsense and it just drowns the signal into noise.

Why I don’t think the US will learn anything

A lot of people assume that Trump will eventually cave and call it a day before he’s obtained any significant concessions from the Iranians on their nuclear program, support for proxies or ballistic missile program. As I explained above, this may well happen, but it’s hardly obvious. A lot of people are making apocalyptic predictions about the consequences of this war for the US, but I think they seriously underestimate how powerful and secure the US is. The truth is that, even in the worst case scenario for the US, Americans will mostly be fine. They will be harmed, but much less than almost everyone else and very little in comparison to the amount of destruction and economic pain they will unleash on Iran and the rest of the world, because the US will be relatively insulated from the both the energy shock and the economic slowdown it will cause since it's a net exporter of energy and is probably the least trade-dependent major economy. Even if Trump ordered a ground invasion of Iran and it turned into a quagmire lasting years, the aggregate cost would be very large even for Americans, the felt cost per capita would be small relative to how rich they are because it will be very diffuse and most of it will be invisible.

Indeed, Americans are so rich that even if the war ended up costing them a trillion dollars (which it might), they wouldn’t feel much pain from it. Sure, they won't like it when the price of gas at the pump keeps rising and it may even force Trump to TACO eventually, but that's still a very small cost in comparison to what the US attack is going to wreak on Iran and the rest of the world and, apart from that, most of the cost for Americans will be hidden. That’s because while most Americans will be made worse off than they otherwise would have been in a counterfactual where the US and Israel didn't attack Iran, they won't observe that counterfactual, nor will they think about it. As Frédéric Bastiat noted more than 150 years ago in a little book called What is seen and what isn’t seen, which everyone should read, people only focus on the visible effects of policies and ignore their invisible consequences, which is why they often embrace bad policies. Except for the higher prices of gas, Americans mostly won’t feel the cost of the war, at least not in a way they will clearly attribute to it.

In practice, the direct monetary cost of the war will take the form of higher fiscal expenditures, which for the most part are going to flow right back into the US economy. Of course, this will have a large opportunity cost, which is why the argument that defense spending is good for the economy because it goes back into it is dumb. But it’s still the case that it’s not as if spending a trillion dollars on a war with Iran were the same as literally destroying a trillion dollars worth of value. Now, the problem with opportunity costs is that, as Bastiat noted, people don’t see them. The median income of Americans may be 1% less than it would have been without the war in 5 years, but Americans won’t see that, because unless things go catastrophically wrong it will still be higher than today and they won’t think about the counterfactual. Even the Iraq War, which is widely seen as one of America's worst foreign policy blunder, only had minimal effects on the average American despite the fact that it destabilized the entire Middle East for more than a decade and cost trillions of dollars.

Similarly, even in the worst case scenario, the Iran War will have a small impact on Americans relative to the cost it will impose on the rest of the world, not to mention Iran whose economy will suffer for years because of this war even if the Iranians can force Trump to TACO. I also don't think it will have the effects some people think on US influence in the world in general and in the Middle East in particular. It's not going to end the role of the dollar and I don't think Gulf states will abandon their alliance with the US either. Where else would they go? It's not as if China was going to protect them from Iran or as if they had a lot of attractive yuan-denominated assets to buy with their earnings from oil and gas exports. Frankly, I think Americans would be lucky if this adventure led to the end of their military presence in the region (because it doesn’t really do them any good and regularly tempts them into this kind of ill-considered adventures), but I don’t think it’s going to happen no matter exactly how it ends. Republicans will get clobbered in the midterms over it and people will mention for years how stupid it was, just like what happened after the invasion of Iraq, but at the end of the day it will not be experienced as a personal disaster by Americans and they won't learn any lesson from it except very temporarily.

Eventually, the fiscal irresponsibility will probably catch up with Americans and they will have to wind down their military spending (unless AI massively increases productivity and they can just grow out of that problem), so I’m not saying they are invulnerable. But I don’t think that moment has come yet and it’s not as if the US were the only Western country with that problem. It’s also not as if, when the music finally stops and they have to cut public spending, the economic crisis this will cause was going to turn the US into a third world country. It will be a costly adjustment, but it will remain a very rich country. It’s only against China that, if they act stupidly, they may really pay a serious price, but hopefully it won’t come to that because, even if you don't care about Americans, a war between the US and China would likely result in a global economic meltdown that would make even a prolonged closure of Hormuz look like a picnic. Critics of US foreign policy keep expecting that Americans will experience some blowback for the stupid decisions they make, but the world isn’t fair and the truth is that Americans are largely insulated from the consequences of their foreign policy blunders, which is part of the problem. In fact, the US is so rich and powerful that, except in dealing with China, it can do the dumbest shit imaginable and it won't really matter that much for Americans in the grand scheme of things, which is why they never learn. This will be no different.