How Trump's Iran War is Squeezing Your Wallet with Justin Wolfers

0:00Good day again from Newsweek headquarters at the top of the World Trade Center in New York City. This is the 1600, and I am, of course, Carlo Versano. This country was stone cold dead. This week marks one year since President Trump's Liberation Day tariff announcement. And if you thought that was an economic shock to the system that came out of nowhere and threatened to tip the global economy into recession, well, boy, do I have news for you. Here we are, week five of Trump's war out of nowhere with Iran. We thought that this would probably be a good time to sort of step back and look at the deteriorating economic conditions globally, but also in this country where energy costs are now spiking.

0:39The labor market is moribund. Inflation back on the upswing. Thank God. So America's golden age indeed. So, yes, forgive the sarcasm, people, because this is serious stuff. But we are talking economics today. And to help me separate the signal from the economic noise, I am joined now by Justin Wolfers. Justin is a professor at the University of Michigan's Ford School. He's co-host of the Think Like an Economist podcast. And Justin's got a brand new YouTube channel at Justin Wolfers on YouTube. You can check that out. Justin, thanks so much, man. Really appreciate your time. Made a pleasure. It sounds like we're going to have so much fun.

1:13I hope so. First of all, let me just say it's nice to get another blonde guy on the podcast. I feel like us blonde guys don't get enough attention in the media. But no, first I just wanted to say it's springtime in Ann Arbor and the Wolverines are headed to the Final Four. So it's safe to assume campus must be humming right now. Yeah, we're not that far removed from a national championship in football. Women's basketball outstanding. And I hear the economics department here is cracker jack. I've heard the same thing. Well, yeah, hopefully good luck against Arizona this weekend. But let's talk Turkey.

1:53The economy, that is. You've called the U.S. economy fragile. You've been calling it fragile long before this, quote-unquote, little excursion, as the president refers to it, began a month ago now in Iran. You wrote earlier this year that the biggest economic threat in 2026 was the chaos and unpredictability coming from the White House. Again, this is long before this war began. Basically making the argument that the economy was running hot with self-inflicted wounds before. Or now we're in this mess in the Middle East with no apparent endgame in sight. So in a word, Justin, what is the state of the U.S.

2:25economy right now? Economists and academics are not very good at these one-word answers. It could be more than a word. Oh, wait. You gave me one. Fragile. Confusing. Shrouded. Look, if you want to be incompetent, incompetent describes the status of policy. But if you wanted to be an optimist, you would also say resilient, which is despite the incompetence, we're all still on this earth. Many of us are still earning an income. The worst of the bad things that could happen haven't happened. But we are still in a place far worse than we ought to be. I feel like that's a good way to set the table here.

3:09I caught you on MSNBC last – or what do they call it now? MSNOW last week. Yeah. And you were making the point that if this thing goes longer than four or five weeks, which is what the president had originally given as sort of like a rough time frame, the week would be looking at sort of real and lasting economic damage. So we're in week five now. We're having this conversation on Monday. So we're in week five. It does not seem like this thing is close to wrapping up. I mean, we'll see. If this is an economic war of attrition, doesn't Iran have the upper hand? And how the hell do we get it back?

3:48Upper hand is sort of a complicated word. It does turn out that the US has this enormous military and can do incredible damage. So would I rather be an Iranian or an American right now? No, of course. Rather be an American. I mean, honestly, being an Australian, you're just sitting in the sun and you're not bombing anyone. That sounds quite lovely. That's another thing that people used to do actually is walk around not bombing people. Yeah, remember those days. Australia's still very good at that, by the way. So you actually get a very deep question. The shallow way of thinking about war is who can inflict more damage on the other.

4:28If I can inflict more damage on you than you can inflict on me, then eventually you'll cry uncle and therefore I'll extract something out of you. So that I think only gets half the story. The other half is can I withstand damage? Right. Now, for the people in Iran, this is existential. Their leaders have talked to them, even if their leadership is unpopular and in many ways awful. Their leaders have said this is us versus they'll describe us as imperialists, powers. The great Satan. Yep. And this is for our survival. The flip side is the president was in just a few days and then discovered gas prices went up.

5:10Surprising, I know, to invade a Middle Eastern country and discover gas prices go up. Right. Had Susie Wiles running around the White House saying, could someone get the gas prices down, forgetting about these forces called supply and demand, and has shown every sign of the taco. Trump always chickens out. So the thing is we could have the toughest soldiers in the world, but if we have got a president who's unwilling to accept any political harm or unwilling to talk to the American people in a mature and adult way and say, here's the case for the war, here's why we should suffer, here's what I'm going to ask you to do, then in fact we could have the greatest military in the world and he'll cry uncle first.

5:57the point there being that america's power depends as much on the president's willingness to endure pain as his ability to inflict it and look i'm going to tell you my favorite thing about the president this is absolutely not sarcastic it's totally serious he hates war yeah well so we thought at least yeah he likes to be liked i mean there's a lot about him i don't like but he likes to be liked, leads him then to want to do things that other people do. What that translates to, though, in this case is enormous cowardice and unwillingness to accept the pain that might come our way. And what that means is that his political calculations undermine the very real sacrifices made by the men and women in uniform.

6:45So coming back to your point, look, I don't want to say who has the upper hand. What I want to say is that Iran is not without cards. The most important is, I know this is super confusing. You have to look at a map, sometimes for up to eight seconds in a row, and you'll discover there's a little thing called the Straits, Strait of Homoz. And I know how confusing it is because in fact, it's crooked.

7:11But that's an economist joke right there. I appreciate it. Continue. That was my 11th grade geography teacher. Yeah. But, you know, it does give Iran enormous power over a commodity that we understand has enormous implications for the global economy, including the United States, even though we are energy independent. Right. There's that. There's also so far been an utter lack of planning. They forgot to get Americans out of the Middle East before they invaded the Middle East. they forgot to fill up the strategic petroleum reserve before spiking the price of oil. Right. They also forgot to articulate why the hell we're there.

7:56Now, at the moment, the president is suggesting he might declare victory when he opens the Strait of Homoz, which, by the way, was open before he went to war. But so, you know, what do we learn from all of that? We learned that Iran's willingness to accept pain gives it real bargaining power and its ability to inflict economic pain gives it real power as well. Well, yeah, that is the thing. And they clearly can withstand, I think, a lot more pain than both we thought and that we can. But I want to stay on this topic of oil, which is really the reason why I wanted to bring you on today. So I was just checking the WTI.

8:35So crude oil settled above$100 for the first time today, first time of this war, I should say. So my big question as just sort of a – I mean I'm not an economist, obviously. I took economics in high school. That was the last time, so that's why I wanted to come to you about this. You are handsome enough to be an economist. You are our most handsome economist, Justin. What was I going to ask you? I wanted to ask you about oil. What is the price? What is the price of a barrel of oil at which things really start getting hairy in terms of not just prices at the pump, but you talked about how we're energy independent.

9:17But even though we're a net oil exporter, oil is an input on basically every good there is, right? So you're going to feel the pain even if you're driving an electric car, even if you don't use gasoline at the pump. Am I making sense there? Yeah. So you started by asking the question, what is the price at which this becomes problematic? I'm going to attack the question and the questioner and then go ahead and answer it. Please. And the attack is not in any serious way. I just want to always make sure that we sort of talk to our audience about what's the right way to think about these things. You're sort of looking at me like, oh, great oracle.

9:53There's some number out there that makes the difference between good and bad. What is the number O oracle? My people are not oracles. We have models. We have understandings. we have history, there's no reason to think anything is an on-off switch. If you want to impress friends, say, why not think it's linear? Which is just to say, the higher the oil price, the more the pain. And it probably continues to go up the whole way. Roughly speaking, if there's a 10 % rise in the price of oil, you can expect the price of gas to go up 10%. So far, we've seen the price of gas go up 30%, 40%, but the price of oil is up around 60%, 70%.

10:28So it says there's more to come. More to come, yeah. The hard question is how do you reconcile the statement that there's so much pain felt in the US from oil with the other statement that we're energy independent? So let me just unpack that. Please. Just in case not everyone in the audience is an economist. So, look, here's the thing. We basically think of this the way a macroeconomist would. A macroeconomist looks at the country as a whole and says we produce as much oil as we use. So therefore, it doesn't really matter what's going on overseas. On average, we come out the same. That's a really important observation.

11:05I'm going to make the case in a moment that it's only half the story, but I want to make the case for why it's important. It's an important observation because that was not true in the 1970s. So when people – During our last big energy shock, right? When people talk about oil prices, they're used to their grandmother or grandfather telling them about the Carter years, about the OPEC oil shock. It came at a time when the US was enormously dependent on foreign oil. And so what that meant was we each had to spend however much, you know, we're going to spend on gas. The price had gone up. There was less money left for the rest of the week.

11:37That higher price basically went to the oil-producing nation. So the U.S. as a whole was poorer. That was a big part of the story in the 1970s. And that's the basis on which we got stagflation. Beautiful word. No, it's an ugly word. Stagnation and inflation. Okay. So the first thing you get out of understanding that we're roughly energy independent, that's the same thing, by the way, saying we export when net export is because we export a little bit. And then real nerds will tell you we import some kinds and export other kinds. It doesn't matter. It's all oil. Right, right. So basically the country as a whole gets neither richer nor poorer.

12:13Okay, that's one part of the story. And then you'd be like, wait, I'm really struggling with this because it just cost me$20 more to fill up. And you just sit on – and that's true for most Americans. you just said the country as a whole is neither richer nor poorer. Well, see, the thing is when the price goes up, the buyers are by$10. The buyers are$10 poorer, but the seller is$10 richer. And the thing is the United States, all of us who drive cars are buyers. Well, who are the sellers? It's the oil drillers. So they've got a whole bunch of oil they're bringing out of the ground and that oil just became more expensive.

12:51Your beauty, they're really profitable. So what you're seeing, therefore, is on average, the average well-being of Americans isn't changing or the average wealth. But we're seeing a huge redistribution from mums and dads to oil companies. Some of the money from oil companies will spill over that, you know, some of the workers will get an extra overtime shift. And I bet if you own a subway right near an oil well in Texas or Alaska, you'll probably sell more sandwiches. but basically most of us are not going to see much of it. So that means, so the political pain is large numbers of people got a little bit poorer, small number of people, the oil companies got a lot richer, oil companies don't vote and we all feel pretty miserable about this.

13:37And then the third observation to make is I just told the story for gasoline but that story gets told actually for many oil dependent commodities. So gasoline is the easiest one to tell but now that you understand that story, realize you can tell that story for fertilizer, for plastics, for groceries, which have to get in trucks or planes across the country and so on. And then you start to see that the whole country runs on oil again to a much smaller degree in the 1970s. So I don't want people to be as alarmist as they were in the night about thinking about the 1970s story. But that's, you know, that's that's the basic economics of this.

14:16But at the same time, in the 70s, we weren't as – and tell me if I'm wrong here. But we weren't as dependent on some of these other commodities like fertilizer and aluminum and helium that we are now, were we? You're asking me to remember individual commodity usage in the 1970s in the U.S. And the problem is I've only got those data memorized for Australia. I'm going to take a guess. Sure. I'm going to say if you take the bucket of oil and oil-related commodities, we're vastly less dependent today than we were then. Yeah. Let me – now, a lot of people might say, oh, that's terrific. All those years of drill, baby, drill have borne fruit.

14:57That's actually not what's done it. I mean that matters but only a little bit. Drill, baby, drill is a small part of it. What's actually changed is the amount of oil we use per unit of output. But what's really, really changed is we moved from working in factories to working in offices. And my guess, Carlo, is you didn't use much oil today. But if you had been in a factory or if you'd been in the mining industry or agriculture, you would have used a lot of oil. And so it's that the composition of what we do, of course, the president doesn't like this modern service-oriented economy. But that modern service-oriented economy is why we need less of all of those things.

15:36Interesting. I never really thought of it that way because I always just assumed that it was the fracking boom. You're saying that was only one of – that's only one of the – It's a little bit. I mean it's part of the story. It's a little bit. But really it's that the economy has changed shape. We live in – sometimes people call it a weightless economy. The US GDP today is far greater than it's ever been in human history. But the weight of it, literally the physical weight of it hasn't changed much. Right.

16:03I read the New York Times this morning. The New York Times weighs less today than it did 20 years ago because today it's bits and bytes and it used to be pieces of paper. Right. And so almost certainly the New York Times uses less oil today than it did in the past. Interesting. So if we want to expand this out a little bit to not just commodities but just talking like the stock market, right? So I don't have much money, but I have a little bit of money in the stock market. That's our – supposed to be our house down payment, assuming mortgage rates ever come down and we can afford a house. Not holding my breath there.

16:34But my question as somebody who has a little bit of money in the market, is the volatility that we're seeing, is this short term? And again, I'm asking you these questions as though you're an oracle. I know that you're not, so we'll put that out there to start with. And I know that you could make a lot of money if you knew the answer to this question. The question is, are the stock market and energy markets actually underpricing the disruption that could be coming? Because if you look at the price action, right, S &P is down – it's not even in correction yet for this month. I think it's on like, I don't know, 8 % or 9%.

17:08I think Nasdaq is down 10%. Oil is obviously higher. We just talked about it. But it's not higher than it was a few years ago when the Ukraine war started. If this is really going to hurt, if this war is going to take longer than we think or than we hope, and there's going to be a global energy shock, even if it's not as bad as in the 70s, wouldn't that be priced into the markets by now? Yeah, absolutely. So first of all, let's talk about the risk because I think it's really important to get a sense of the scale of the risk. Sure. I'm going to do it through storytelling, but it's a story you could tell from many different wars.

17:43So remember the last Iraq war? At the beginning, Donald Rumsfeld, as an astute of a defense analyst as any, said this war could last six days or six weeks, but I doubt six months. No, I remember that. We weren't out six years later. what that says and you can that story in one form of another exists for almost every major american conflict we always underestimate the cost of war and when you say oh underestimate let me correct for that let me add 10 or subtract 10 or something like that no rumsfeld said six days it was more than six years the error was more than 365 times what he was suggesting.

18:31And so now when we talk about the possibility of underestimating the cost of war, just, you know, what should I multiply by based on this story multiplied by 365? So the scale of how bad this could get is enormous. That's the first thing, right? So the uncertainty here is absolutely completely and utterly first order. Second thing, you said, oh, boy, you'd really expect the markets to be freaking out. You'd expect this to be a big deal. Okay. So last I looked, markets had fallen about 6%, the US market had fallen about 6 % since the start of the war. Let's just agree that that's roughly the right number.

19:14It might be second by now. Well, the market cap of the S &P 500 is$60 trillion. The 6 % of$60 trillion is$3.6 trillion. Given that now I'm going to make my math a little bit easier,$3.6 trillion if there's 360 million Americans is$10 ,000 per American. Or how many people are in your household color. I'm a family of four. We're a family of three. Okay. So for your family, $30 ,000. $30 ,000. That's the cost of the war for my family is what you're saying. As currently priced into the S &P 500. Right. Right. For my family,$40 ,000. Now, remember, now we could keep going a little further. We could say, well, some of this was already priced in before the war started.

20:12So if half of it was already priced in before the war started, that means that that$10 ,000 per person is half of the total cost. Now we're up to$20 ,000 per person. Right. And remember the S &P 500 just tells us what happens to large established American corporations. If you think what happens to Coca-Cola also happens to my local corner deli, then instead of multiplying by 60, looking at$60 trillion as the base, we should be looking at a much, much larger number being the total capital stock of the United States. I don't have those numbers in front of me, but let's say that we can multiply by at least two and possibly 10.

20:51Now we're up from 20 ,000 per 10 ,000. We doubled it to 20 ,000. Now we can double it to 40 ,000 per person. So now I've told you that the cost of this water, a typical American is probably measured in the... Now I want to take none of my numbers seriously, but take them as seriously as they should be taken. The cost of this war to the typical American family ranges from... Typical American person ranges from thousands of dollars per person to tens of thousands of dollars per person. And that's just based on what the market's done so far. So actually, I'd have the opposite reaction to the one you had.

21:30I said, if you can think about how to interpret what the market's saying with a little bit of sophistication, you will discover what the market is saying is, holy, this is a big deal. This is the biggest economic deal the administration faces. So now, okay, great. Boy, that was a dramatic moment. I got into this business, so I did have to do math, Justin. You're making me do numbers. I believe multiplication, I think, is the thing I'm doing. It's very hard. Again, I want to come back. The conclusion is markets are telling us this war is costing the typical American between thousands and tens, plural, of thousands of dollars.

22:11So it's a really, really big deal in terms of the economics. Now I want to come back to your audience and say many people at this point are like, apart from like, nerd, nerd, they're saying something else. They're saying, wait, we're talking about war. What the hell are you guys doing talking about the stock market? You disgust me. Let me answer that because I think it's a totally serious objection. In a moment like this, should we be off checking our portfolios? Should we be checking how much gas costs at the gas station? Are these really the first order human issues? And I think they're not.

22:44I want to concede that. So here's the thing. I, like you, want to be an informed citizen. I want to figure out when the government's making good choices and bad choices so I can speak up against the bad ones and in favor of the good ones. I want to figure out is going to war in Iran a really good idea or a really bad idea at the economic stakes, positive or negative, large or small. Well, one thing I could do is I could read a bunch of government reports, except for this administration doesn't release any. Another thing I could do is I could interview one of them on the front lawn of the White House, but it turns out they all just smile a lot and lie.

23:21I could tune into a major cable network where they'll have a person from the left saying whatever the White House did was bad and a person from the right saying whatever they did was good. And at the end of this, I end up no smarter than I otherwise was. So the point, I could look up economic statistics, but it turns out four weeks into a war, we haven't seen any of the impact in our economic statistics yet. So what we want is some indicator that's forward looking. And then when you buy stocks, you're betting on the future of a company, you're betting on its future profitability. And you want something where people have skin in the game rather than just repeating the same old tired partisan lines.

23:58And the thing about the stock market is people are betting literally billions of dollars. You might not like the stock market. You might tell me it's hopelessly inefficient. And I'm just going to say in response, I think it's the least biased, least bad, least flawed indicator that we have right now. And it's screaming, this war is very, very costly. There's something else we've seen, which is every week of this war, the stock market has fallen, which is the stock market saying each and every week, oh, my goodness, we thought it would be bad, but it's turning out to be worse. And it's done that every week in a row through the war so far.

24:37So I want to press you on one thing that you said about the first order effect shouldn't be your portfolio or gas prices, because I agree with you in theory on that, right? And there is something a little bit gross about talking, oh, you know, right, Like, Apple was down 3 % today. Like, I'm so mad because of this war. It's like, no, Americans are losing their lives. Iranians are losing their lives every day. Innocent Iranians. Children, right, that we are killing. The problem with that for me is that it goes to what you just said before. They didn't get any buy-in for this, right? So even during Iraq 20, whatever, 25 years ago, 22 years ago, there was a sense that, like, look, we're doing – it was obviously all bullshit, right?

25:20But there was a narrative that, look, there's going to be some pain here, but we have to do this. We have to get this guy, Saddam, off the chessboard. He was somehow involved in 9-11, or if he wasn't, then he's got weapons of mass destruction. Or if he doesn't have that, then he's just a bad guy and we've got to get rid of him. They didn't even bother with that at this time. It was just like, yeah, we're going to go in. And so as a consumer now, I didn't have an opportunity to say, OK, well, maybe I need to take a little bit of pain at the pump to do X, Y, Z. We don't even know what X, Y, Z is, right?