Israeli attack on Iran could be disaster — for U.S. economy

By Louis Galambos

Israel will not be complicit in a second Holocaust. If Iran or any other nation that has called for the destruction of Israel is about to acquire nuclear weapons, the Israelis will attempt to destroy that nation's uranium-enrichment facilities. In June 1981, Israel launched a successful air attack on an Iraqi nuclear reactor, and in 2007 it bombed a Syrian factory suspected of producing plutonium warheads.

But Americans should be aware that when Iran becomes the next target, it will be a blow to the U.S. economic recovery.

In an effort to prevent a military resolution to the problem, the nuclear club has tried to persuade Iran to stop its weapons program. But President Mahmoud Ahmadinejad responded recently by threatening to build 10 new enrichment sites. There is no evidence that sanctions will persuade Mr. Ahmadinejad to abandon the opportunity he foresees to destroy his hated enemy. That leaves Israel with no choice.

The economic repercussions of an attack will be far reaching and painful. The price of oil will quickly shoot through the roof. Judging by what happened in 1973, the price could easily go above $300 a barrel in the short term. There will be long lines at U.S. gas stations again and probably a rationing program. The long-term outcome will depend to a considerable extent upon what the Saudi position is, but in the short run, the lack of oil will be a severe and immediate shock to the U.S. economy. Unemployment would quickly exceed the post-World War II high of 1980-81. Financial institutions that have barely recovered from the Great Recession will again sink toward the crisis level.

The immediate impact on the European economy will be traumatic. More dependent than the United States on Middle Eastern oil supplies, the European Union will very quickly see output sag and unemployment increase again. In France, where unemployment sparked riots in 2009, the social and economic crisis will deepen and could threaten the stability of the current government. Germany is especially vulnerable to anything that closes off the country's export markets, a change that will very quickly take place.

Europe's decline will send those American companies dependent upon foreign markets into a new downward spiral. U.S. exports to Europe remained relatively steady in 2009. They are substantially below the figures for 2008, but they have hovered in the $19 billion to $23 billion range through this difficult year. A sudden fall-off in Europe's capacity to buy American goods and services would provide a second shock to many American firms and communities.

That blow will be all the more telling if Russia responded to the crisis by cutting back or cutting off the gas and oil that it supplies to the EU economies. It is difficult at this point to predict how the Russian government would respond to an Israeli attack, but there is no reason to believe that its leaders will fail to take advantage of this opportunity to strengthen Russia's position in the world.

If U.S. output shrinks and unemployment shoots up, the economy will once again experience stagflation. In the 1970s, two oil crises undercut American prosperity and left business vulnerable to the deficit financing of the 1960s. Recall: The 1960s were when President Lyndon Johnson announced grandly that the United States could afford both guns and butter. It didn't work then, and it won't work now.

The "stimulus plus" is hanging over the economy today. The stimulus worked, but then Congress added an incredible array of earmarks and other measures designed to please well-defined groups of voters and financial friends. When the Republicans controlled Congress, they did the same thing. Now they all have to figure out how to get out from under the avalanche of debt hanging over the country's economy. The next stage of America's economic recovery will be a difficult passage, even under normal circumstances. Following an Israeli anti-nuclear attack, the circumstances will be anything but normal.

Given the potential for another economic collapse, voters and their interest groups should be clamoring for more decisive action. But they're not. Focused on domestic issues - almost always the first priority in the United States - they aren't paying much attention to Iran.

The administration and Congress need to move quickly - before the fact - to alert Americans to this latest threat to their economic security. The people, as well as their leaders, need to understand that the clock is ticking on this crisis.
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Louis Galambos is an economic historian and editor at Johns Hopkins of President Eisenhower's papers. He has just written a study of "The Creative Society – and the price Americans paid for it." His e-mail is galam bos@jhu.edu.

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