On a podcast featured on Slate, the Ford School's Justin Wolfers offered his expertise in analyzing economic markets amidst growing conversations of war in Iran. He discussed the possibilities for the American and global economy with the progressing war developments. Explaining how increases in war efforts correlate with economic trends, Wolfers suggested that each new advancement in the war has a related effect on markets. "In the week where it became we were 10% more likely we would invade, the US stock market would typically fall 1.5% in a week. In which we became 10% less likely to invade. The US stock market rose one and a half percent. And so that same logic then says, well, if one tenth of a war subtracts 1.5% from stocks, then all of a war subtracts 15%, which sounds remarkably big," said Wolfers.
Wolfers also proposed that much of the fear Americans are experiencing about the economy right now is because of uncertainty about potential war events. "So should you be more fearful right now? And the answer is yes... We're so uncertain. The pandemic was much more uncertain. So this is not as bad as finding a small virus that will kill millions and shut down the global economy in terms of uncertainty. But it's worse than it has been." He noted there is reason to be apprehensive, but also that the economy has seen greater and more harmful levels of uncertainty.
Adding a glimpse of hope for the American situation, Wolfers described why American markets may be in a better place than other global economies. "It's actually the European, our allies, our traditional allies, whose economies will be hurting the most. Now you might be saying, why? And the economic logic of this is actually very straightforward. Many of us carry around a view in our head because we've seen so many State of the Unions where we've had presidents talk about energy dependence on the Middle east that we think we're dependent. We're not. The US is in fact a net exporter of petroleum products," stated Wolfers.
Rounding out the conversation, Wolfers affirmed that Americans should focus less on the oil market impacts of the war with Iran. "People have sort of been like, 'Oh, there's an Iran war that will affect oil. Let's talk about an oil shock on the economy.' But actually, this is a war, not an oil shock, and that's really different. So let me tell you a couple of things that I know. Wars leave a mark, and often a generational mark." He advised that there are more concerning aspects of a war with Iran than just the changes to oil markets.
"Maybe NATO takes a step away from the United States as we prove to be an uncomfortable partner. And if that's the case, all of the defense that was being collectively provided by industrialized countries. If we still want to be just as tough, we have to provide for ourself, which would mean literally billions, trillions of dollars of spending. Maybe a generation does end up with boots on the ground, and they come back with ptsd, and the VA has to look after them. For a generation. None of this is to say it's worth it or not worth it. It's simply to point out that going to war in Iran comes with a set of risks that are far larger than our imaginations are probably capable of and far larger than conversations about oil," Wolfers argued.
Listen to the full podcast here.
