Obscure Economic Indicator: The Guns-to-Caviar Index.

Commentary about business and finance.
Dec. 14 2006 2:26 PM

Obscure Economic Indicator: The Guns-to-Caviar Index

Good news! It's going down.

Reading the news, it's easy to get the sense that the world is at war: strife in Afghanistan, chaos in Iraq, genocide in Darfur, upheaval in Lebanon, and a variety of insurgencies and border squabbles around the globe. Reading the news, it's also easy to get the sense that the world is in the midst of a golden age of peaceful prosperity. Each year, tens of millions of Indians and Chinese join the middle class. Latin America and South America, previously dominated by authoritarian regimes and civil wars, are now generally democratic and enjoying steady growth.

So, which is it? Is the world more peaceful or more warlike? Since Americans are doing the lion's share of the fighting and military policing, it's difficult for us to answer the question objectively. Fortunately, there is an unbiased global economic indicator that sheds some light on the question: the Guns-to-Caviar Index.

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The index is the brainchild of Richard Aboulafia, an analyst at the Teal Group. For the last 17 years, Aboulafia has been charting a relatively simple relationship: how much money the world spends on fighter jets (guns) versus how much money the world spends on private business jets (caviar).

The index measures the ratio between the resources spent by governments arming themselves and the resources spent by really rich private individuals making themselves more comfortable. It measures the relative levels of anxiety among large governments and elation among the global economic elite. When countries are at war, or when they're girding for it, they spend money on the great desideratum of military officials—expensive military jets. When things are going swimmingly and the rich are confident, they buy the most luxurious of luxury goods: private jets.

Aboulafia says both components are actually lagging indicators of peace and prosperity. "Defense budgets rise with threats and perception of threats, and cash filters down, with planes typically delivered two years after they are ordered," he said. And business jet orders tend to rise in tandem with profits, with deliveries typically coming a year after the profit surge.

The index tells the story of geopolitics and global economics in the last decade and a half. In 1989 and 1990, when there were still Cold War-era defense budgets, spending on fighters outpaced spending on private jets by a huge margin: nearly 10-to-1. During the 1990s, the ratio plummeted, in large part because the two biggest consumers of fighter jets—the Soviet Union and the United States—stopped building so many. Between 1989 and 1995, the amount spent on fighter jets annually fell by two-thirds while business aircraft grew steadily but not spectacularly. By 1996, the ratio fell to about 2-to-1.

The dynamic shifted more dramatically in the late 1990s, amid the dot-com boom and a general sense of global calm, despite flare-ups in the Balkans. Between 1995 and 2000, spending on fighters stagnated while spending on private planes tripled. In 1999, when Thomas Friedman's paean to happy globalism, The Lexus and the Olive Tree, was published, spending on business jets outstripped spending on fighters for the first time. The ratio fell to record lows in 2000 and 2001, when spending on private jets was nearly twice the spending on fighters.

The events of 9/11 and its aftereffects temporarily reversed the trend. Spending on fighter jets doubled between 2001 and 2004, while a recession, scandals, and low business confidence knocked down spending on business jets sharply in both 2002 and 2003. The ratio popped back in favor of guns.

The recession in business jets proved to be temporary. The last few years have seen a global orgy of wealth creation in the developed world (hedge fund managers, CEOs, overpaid sports stars), in the semideveloped world (Middle East petro-sheikhs, Mexican tycoons), and in the developing world (Indian software moguls, Chinese industrialists). Spending on business jets rose about 47 percent between 2003 and 2005, and 2006 is shaping up to be a record year. As a result, the Guns-to-Caviar Index fell in 2005 and is likely to fall again in 2006.

For much of the last 17 years, spending on fighter jets and business jets seems to have moved in opposite directions: When one was up, the other was down. But that may no longer be the case. Just as President Bush has chosen a strategy of guns and butter, spending on both guns and caviar has risen in the past few years. And in the current geopolitical/economic climate, that makes sense. Heightened spending on fighter jets indicates heightened concerns about security, generally. And in recent years, that has translated into measures that make flying commercial more of a hassle—which has pushed more and more rich people to seek private aviation.

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