The economic consequences of the second Trump administration are emerging from the simultaneous escalation of war, protectionism, and fiscal expansion.
Three recent developments illustrate this convergence: the launch of Operation Epic Fury, the US Supreme Court’s curtailment of presidential authority under the International Emergency Economic Powers Act (IEEPA), and the passage of the One Big Beautiful Bill Act (OBBBA).
Each policy has been framed as essential to restoring American strength. Yet together they are generating a form of “triple economic attrition”.
The economic implications of Operation Epic Fury are already extending beyond battlefield costs.
Within the initial 24 hours of the operation, the US military expenditure was estimated at roughly $779 million. The deployment of 200 Tomahawk cruise missiles, individually priced at $2.2 million, alongside B-2 bomber sorties, which cost millions of dollars per mission, illustrate the costs of modern warfare.
As the campaign expanded, estimates suggested that the first week of operations could approach the $5 billion mark in direct military spending and the total costs of the strikes could skyrocket to $210 billion, with the hostilities’ monthly expenditure being close to $65-$95 billion.
These calculations lead to the implication that contemporary war is capital-intensive, meaning cost asymmetry often favours lower-tech adversaries.
This occurrence is detailed in the ‘cost-exchange ratio framework’, where defensive systems are more expensive than the weapons they intercept.
For instance, a Patriot interceptor missile costs roughly $4 million. In contrast, Iran’s Shahed-136 drones are estimated to cost between $20,000 and $50,000, meaning a single drone warrants mechanisms that cost almost 200 times the price of the attacking weapon.
The military campaign also invites scrutiny over strategic depletion. Sustained operations risk the rapid consumption of munitions like Tomahawk cruise missiles and SM-3 interceptors, characterised by their lengthy production timelines.
Also, many of these weapons have been stockpiled with potential contingencies involving China. Their use in West Asia consequently carries the strategic implication that the United States may be expending its valuable deterrence assets in a secondary conflict.
The war’s economic impact has extended beyond defence budgets. Almost 20 per cent of the world’s oil supply passes through the Strait of Hormuz, and recent instability has pushed Brent crude prices to about $80 per barrel. Energy price surges morph into quasi-taxes on consumers, and reinforce inflationary pressures. Elevated oil prices can also increase fiscal revenues for Russia, undermining the West’s attempts to levy sanctions.
However, if considered that war imposes fiscal strain externally, the administration’s trade policy is simultaneously reshaping the domestic economy.
Policy volatility
Trump’s second-term trade policy is more legally unstable. On February 20 2026, the US Supreme Court ruled that IEEPA does not authorise the President to impose tariffs, invalidating the Reciprocal Tariffs.
In response, the administration shifted to Section 122 of the Trade Act of 1974, introducing temporary 15per cent universal tariffs. Nevertheless, the potential of a $142 billion refund for firms that had paid tariffs persists.
This regulatory instability has created tariff volatility. Effective average US tariffs fell from 16 per cent to 9.1per cent after the court’s ruling, stabilising at 13.7 per cent under the new policy. Evidence theorises that markets tolerate cost shocks better than policy uncertainty, with Federal Reserve surveys indicating declining capital expenditure among import-export firms.
Tariffs also act like regressive consumption taxes. Studies from the New York Fed illustrate that 90-96 per cent of tariff costs are borne by American consumers. Tariff impact on sectors also varies. For instance, US steel producers benefited. However, downstream manufacturers in automotives, appliances and electronics have been disadvantaged.
These disruptions have further instigated manufacturing fatigue. Counter to the promise of a manufacturing boom, 108,000 manufacturing jobs were lost in 2025, with predictions that trade uncertainty could delay $490 billion in investment through 2029.
Yet, even as tariffs and military operations raise fiscal pressure, domestic tax policies shrink the government’s revenue base.
Fiscal expansion and the new American deficit
The OBBBA represents a combination of tax cuts and spending reductions. Key components of the policy include $4.5 trillion tax cuts and $1.4 trillion reductions in spending. However, such actions are comprehended to increase federal deficits by approximately $3.4 trillion over the next 10 years.
With federal borrowing rising to finance military operations and the tax reductions embedded in the Act, Treasury issuance is likely to expand.
Larger deficits tend to push up long-term government bond yields, increasing borrowing costs. In such conditions, higher public borrowing risks crowding out private investment, amplifying the investment slowdown emerging from policy uncertainty.
To finance the tax reductions, the Act depends on a significant reduction in the financing of social programmes. Consequently, the effect of the administrative action is approximately $800 billion in Medicaid cuts and $295 billion in SNAP deductions, with potentially 17 million Americans losing health coverage.
Although these spending cuts reduce federal outlays, they suppress consumption among lower-income households, which typically exhibit a higher marginal propensity to consume, partially offsetting the stimulative effects of tax reductions. The OBBBA, therefore, redistributes benefits towards corporations and higher-income households.
Taken together, the second Trump administration’s strategy seeks to assert geopolitical dominance, revive industrial production, and lower taxes simultaneously. Yet these policies are intersecting in ways that may undermine their own objectives. The combined effect is a policy triad that shifts growing economic risk onto the federal balance sheet and ultimately onto American consumers.
The paradox is clear: policies designed to restore American economic primacy may instead be weakening the fiscal foundations that sustain it.
(Deepanshu is Professor and Dean at O P Jindal Global University and a
visiting professor at LSE and University of Oxford. Saksham and Sonakshi are research analysts with CNES, O P Jindal Global University)
(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)