The Case for Faster Economic Growth

The onset of the conflict (dare we call it “war”?) with Iran is of huge economic importance to the Middle East, Europe and Asia. But because of the U.S. fracking revolution that began 14 years ago, the impact on the U.S. economy is relatively limited. In fact, the attendant increase in oil and natural gas prices benefits the U.S. (though it harms most consumers in the country), as we are the largest global producer of both commodities. This is a very different situation from 50 years ago, when the spike in these prices crushed the economy.

The Middle East holds about 48 percent of the world’s proven oil reserves and 30 percent of its production. And about 20 percent of the world’s oil supply passes through the Strait of Hormuz, most of which is bound for Asia and Europe. The fact that the U.S. has enormous shale-based reserves and is about 21 percent of global production (versus about 11 percent for Saudi Arabia, 5 percent for Iran and 4 percent for the UAE) means that our supply of oil and natural gas is largely unimpeded.

In contrast, if it had not been for fracking, we would be a huge net importer and the price of oil would have easily reached $200 per barrel. Severe adverse economic fallout in the U.S. would have occurred not only because of the bombing of Iran but also the Russia-Ukraine war.

At the time of writing, the price of oil stood at about $105 per barrel, but I believe it will revert to around $65 per barrel by year-end 2026. Fracking is available at scale, with some degree of profitability at around $45 to $50 per barrel. And this is a rare opportunity to expand output and make hay while the sun shines for Guyana and the tar sands in Canada, as they do not require usage of the Strait of Hormuz.

Therefore, as the price increases above that threshold, oil producers will continue to profitably produce. As supply increases, oil prices will come down. But producers will see substantial windfall profits for a period. Therefore, I expect to see a broad-based call for the implementation of a windfall tax. That is, if only 10 to 15 percent of the economy benefits from rising oil prices, then why not tax and redistribute to the other 85 percent who are paying higher prices at the pump? While I’m not a proponent of such a tax, I won’t be surprised when it passes on Capitol Hill, especially in the run-up to the midterm elections.

Despite a weakening labor market, the economic outlook for 2026 is brighter than widely predicted.

Looking back at 2025, significant events included the 9.5 percent drop in the federal workforce, federal taxes remaining largely unchanged, the border being effectively closed, lower inflation and events in the Middle East. None of these were easy. All were heralded by the media except the decline in the federal workforce.

And yet this decline is one of the most astounding economic phenomena I’ve seen in my life. After all, federal government employment rose by 2.6 percent during President Donald Trump’s first term and 3.8 percent during former President Joe Biden’s administration, before falling by 287,000 (a stunning 9.5 percent) in 2025. It fell an additional 29,000 and 10,000 in January and February 2026, respectively. In fact, since federal employment peaked in January 2025, it has fallen by 10.8 percent (326,000 jobs) through February 2026. Interestingly, the decline began after Trump’s election but before he took office.

I view this decline as a short-term negative but a big, longer-term positive. It will move many workers from jobs focused on restraining growth and transferring wealth to jobs that create wealth.

Despite a weakening labor market, the economic outlook for 2026 is brighter than widely predicted. Greatly reduced regulatory burdens, fewer federal workers dedicated to restraining growth, lower interest rates (at least 50 basis points this year), and less uncertainty around tariffs will fuel growth. For these reasons, I expect real annual GDP growth to be 1.5 percent in 2026 and 2027 and 1.8 percent in 2028.

As supply increases, oil prices will come down. But producers will see substantial windfall profits for a period.

While I have no opinion on the legal underpinnings of Trump’s tariffs, it’s a good thing that they’re going to be reduced as a result of the Supreme Court’s February ruling that they were not permitted under the 1977 International Emergency Economic Powers Act. And while it’s highly unlikely that Congress will re-impose the original tariffs (as it has passed fewer bills than any Congress in recent memory), Trump is using other legislative acts to temporarily impose 15 percent tariffs across the board (with exceptions). These, too, will be legally challenged, as they rely on a balance-of-payments (not a trade deficit) emergency—and there is no such emergency.

The net effect will be a reduction in the average effective tariff from around $10 per $100 of imports seen in 2025, to about $5 per $100. This is higher than the $3 per $100 average which prevailed for the seven years prior to 2025 but is massively lower than what was registered in 2025. Tariffs are effectively taxes which, like direct taxes, slow the economy. So a lower tariff will reduce the economic drag in 2026. The average tariff will fall primarily because of enormous drops on goods from China, Vietnam and Brazil.

Despite the slowdown due to the substantial tax increase on imports in 2025, the private sector has adjusted and moved the economy forward. And while tax revenue has roughly quadrupled, the amount of tax revenue raised is never a gauge of the economic effectiveness of a tax.

Dr. Peter Linneman is a principal & founder of Linneman Associates (www.linnemanassociates.com), Professor Emeritus at the Wharton School of Business, University of Pennsylvania, author of “Real Estate Finance and Investments: Risks and Opportunities,” and co-author of “The Great Age Reboot: Cracking the Longevity Code for a Longer Tomorrow.” Follow Dr. Linneman on X: @P_Linneman

Read the May 2026 issue of CPE.