What Next: TBD | War in Iran, Shockwaves in Markets
Host: Lizzie O’Leary
Guest: Justin Wolfers, Professor of Economics and Public Policy, University of Michigan
Date: March 6, 2026
Episode Overview
In this episode, host Lizzie O’Leary speaks with economist Justin Wolfers about the economic repercussions of the recent U.S. and Israeli attacks on Iran. The conversation breaks down real-time data from financial markets, oil prices, and consumer indices to make sense of the war’s impact on America and the wider world. The theme is understanding how wars send shockwaves through markets and what those ripples mean for everyday people, beyond headlines and panic.
Key Discussion Points & Insights
How to Measure War’s Economic Consequences
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The Challenge of Metrics:
- Wolfers stresses that every statistic answers a specific question, but war complicates which answers are meaningful. Immediate traditional economic data isn’t useful for future-looking questions.
- Quote:
"I want something forward looking. I want something in which people have an incentive to tell the truth...why don't we look at markets and in particular, let's look at financial markets." — Wolfers, 02:43
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The Wisdom of Crowds:
- Markets aggregate the bets and fears of millions, making them the “least imperfect” forward-looking tool for gauging economic impact.
Market Reactions: What Is and Isn't Priced In
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U.S. Market Response:
- President acted when markets were closed, so reaction measured by futures. Upon opening, S&P futures dropped 1%.
- Wolfers assesses this by breaking down the meaning of a 1% market move:
- It's both "small" and "big": small in percentage, but translates to ~$2,000 loss per average American in theoretical wealth.
- Some of this was likely “priced in” as markets anticipated conflict.
- Quote:
“The typical listener on average lost $2,000… Did we open a door into a future that could make each of us a hundred dollars worse off for 20 years? I don't think it would be implausible to believe Iraq did that.” — Wolfers, 05:02
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Historical Parallels:
- During the build-up to the Iraq War, every 10% increase in invasion likelihood dropped stocks by 1.5%. Extrapolating, a full-blown war could mean a 15% market drop.
- Memorable Moment:
"If one tenth of a war subtracts 1.5% from stocks, then all of a war subtracts 15%, which sounds remarkably big." — Wolfers, 07:47
The VIX: Measuring Fear and Uncertainty
- Understanding the ‘Fear Gauge’:
- The VIX index, which reflects market volatility, is up 11%—not record-breaking, but noticeable.
- Wolfers explains:
"If the next 50 seconds bores the crap out of you, just call it the fear gauge… So should you be more fearful right now? And the answer is yes." — Wolfers, 08:59
- It’s higher than in recent months, but below levels seen during the pandemic or severe trade wars.
Global Disparities: U.S. v. European & Asian Markets
- International Asymmetry:
- European and Asian markets fell two to four times as much as the S&P, indicating regional vulnerability.
- The U.S. is less exposed economically, partly due to energy independence.
- Humorous Interlude:
"The pain in Spain will be mainly on the plane. It is telling us that the pain will be bigger." — Wolfers, 12:49
- President Trump historically responds more to U.S. market drops than foreign warnings.
Oil Prices and Energy Independence
- Shifts Since the 1970s:
- Unlike in the past, the U.S. is now a net exporter of petroleum products. Price spikes in oil hit Europe much harder.
- American oil drillers benefit from higher prices; consumers pay more, but the pain is balanced within the U.S. economy.
- Quote:
"For the United States as a whole, we neither get richer nor poorer because we have the oil. The oil gets more expensive. Good if you're the producer, bad if you're the consumer." — Wolfers, 19:37
- Wolfers notes:
"So much of Europe, not Norway, but much of Europe is oil dependent... they're taking a hit." — Wolfers, 20:30
Inflation, Consumer Impact, and The Difference in Measurement
- Prices That Matter to People:
- Energy and food are the most volatile and most felt by consumers, but economists and the Fed mostly look at “core inflation,” excluding those items for policy.
- This can cause disconnect; people perceive rising costs more sharply than policymakers.
- Quote:
"So economists argue these prices are uninteresting for figuring out the future of inflation. But when people think about the cost of living, they actually maybe overemphasize it." — Wolfers, 25:35
Political Reactions and the ‘TACO’ Factor
- President Trump’s Sensitivity to Markets:
- TACO (“Trump Always Chickens Out”) describes a pattern: Trump backs down if U.S. markets fall sharply but not otherwise.
- With the current crisis, U.S. markets aren’t flashing strong warning signs, so Trump may not feel pressured to change course.
- Quote:
"Markets in Europe are flashing bright red, but markets in the US are ringing the faintest of alarm bells." — Wolfers, 14:18
- If the President cared as much about European market stress, his calculus might differ.
Lessons from History: Oil Shocks in the 1970s and 2022
- Stagflation vs. Inflation:
- Unlike the 1970s, the U.S. now faces inflation but not stagflation; Europe faces greater risks of both.
- The post-2022 energy shock (Ukraine war) is the better parallel, when the U.S. economy fared well despite disruptions.
Wars as Real Economic Shocks (Beyond Oil)
- Broader, Long-term Consequences:
- Wars echo across decades: loss of life, trauma, increased defense spending, isolationism, and possible shifts in alliances (e.g., strains in NATO).
- Wars are nearly always more costly and last longer than expected.
- Sobering Reflection:
"Once we open the can of worms and realize it's more likely things are worse than we expect than better, just because that's the historical, empirical fact of war, then we have to start thinking about what are the worst scenarios." — Wolfers, 29:12
- Ripple effects may touch everything from budget priorities to personal futures:
"I know there was a generation of men who saw their careers destroyed or fundamentally transformed by going to Vietnam." — Wolfers, 32:33
Notable Quotes & Memorable Moments
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On choosing the right metrics (01:29):
“Every number answers a question. It's up to us to decide what question we want to ask.” — Wolfers
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On collective wisdom (02:43):
“Why don't we look at markets and in particular, let's look at financial markets... what people are doing there is they're betting literally billions of dollars on the... future profitability of American companies.”
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On the ‘TACO’ pattern (13:21):
"Trump always chickens out. This is a view that throughout the Trump Term, he does something outrageous and then he backs off, which is true approximately half the time."
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On energy independence (15:14):
"We basically are energy independent... The world dictates what the American oil price is, effectively because American oil companies could sell to the world."
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On political economy (26:09):
"...President Trump makes decisions...based on how US Markets react... So if we look at the data that we’re getting now, oil prices going up, markets... down. What does that tell you about the taco phenomenon?"
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On war’s persistent risks (29:12):
"Wars leave a mark, and often a generational mark... Once we open the can of worms and realize it's more likely things are worse than we expect than better... just because that's the historical, empirical fact of war."
Timestamps for Key Segments
- 01:29–03:43: How to measure war’s impact – why markets matter
- 04:21–07:39: Breaking down the initial market reaction, historical comparisons
- 08:37–11:28: The VIX explained; context for current market fear
- 11:28–15:14: How global markets responded; U.S. vs. Europe and Asia
- 15:16–20:55: Oil prices, U.S. energy independence, Europe’s vulnerability
- 21:02–25:35: Inflation, consumer prices, public vs. policy focus
- 26:09–29:10: The TACO factor, political feedback loops, historical analogies
- 29:10–33:17: Wars’ deeper, longer-term economic and social consequences
Tone and Takeaways
The episode blends Wolfers’ signature humor, clear analysis, and an economist’s realism for a frank and illuminating take on the intersection of war, markets, and public policy. Listeners come away understanding how market data reflects collective anxieties, why the U.S. is less exposed than Europe today, and why the true shocks of war often ripple far beyond oil prices or the stock ticker.