Nobel economist Paul Krugman says the Iran war could be the 'straw that breaks the camel's back' for a fragile US economy
The Iran war upended markets this week, and economist Paul Krugman thinks the effects could ultimately be much more far-reaching.
The Nobel Prize winner hasn’t been too optimistic about the US economy recently, largely due to the impacts he sees from President Donald Trump’s tariffs. Yet, as the military conflict escalates, he sees severe consequences looming for the US economy.
Krugman highlighted several pressing factors that have kept uncertainty high in a recent Substack post, but also laid out why the war may be accelerating the economy’s decline.
“There are many stresses on our economy, and this could be the straw that breaks the camel’s back — a straw that becomes heavier the longer the war goes on,” he said.
In Krugman’s view, the chances appear increasingly slim that the conflict will be resolved quickly. He thinks the high uncertainty that has pushed markets lower is likely to persist as the Trump administration hasn’t offered a clear plan or a timeline for how long they see the war going on.
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Krugman sees the possibility that the Strait of Hormuz, a key global oil shipping route controlled primarily by Iran, could remain closed for weeks as the conflict drags on, keeping oil prices elevated.
The economist said the effects of higher oil prices and an expensive war on top of existing economic strain will make for a dangerous economic scenario. He flagged AI an one such risk already percolating through the system as markets fret over a new war in the Middle East.
“There are widespread concerns about AI — both as a bubble that might burst and as a force driving job losses,” he said. “And many people, myself included, are worried about financial stability: In many ways we have recreated the “shadow banking” risks that made the 2008 crisis possible.”
Krugman highlighted other economic concerns, such as the negative impact of tariffs and restrictive immigration policy, as major economic stress points. He argument is similar to that of fellow economist Mark Zandi, who named the same factors as having the potential to push the US into a recession.
“We’ve added a fresh level of massive uncertainty,” Krugman said. “Bear in mind that this isn’t even a war of choice; it’s a war of whim, marked by a near-total lack of planning.”