Debt debates like the one playing out in Washington, D.C., are as old as money itself.
So says anthropologist David Graeber, who traces deficit spending back to ancient Mesopotamia in his new book Debt: The First 5,000 Years.
"Money at that time really meant credit," Graeber says. "We think of 'virtual money' as this kind of brave new world that's just happening now. Actually, it is the original form of money, and it has been the predominant form of money for most of history."
Debt has piled up as long as there's been money. And like today, that was a problem. Graeber describes how through history, as people would fall into debt, their property would be taken away.
"People would just start running away and joining nomadic bands and periodically kings would declare debt cancellations," he says.
So for a long time it was individuals who were going into debt; actual countries didn't take on debt like they do today until much later.
"The real beginnings of the modern money system seems to go back to the Bank of England in 1694," Graeber explains. "A bunch of London merchants made a 1.2 million-pound loan to the king to conduct some war, the king thereby granted them the right to take the money that he then owed them, that 1.2 million, and loan it to other people in the form of bank notes."
So British currency, Graeber says, is simply British debt.
"If the king ever paid back the debt, there would be no money."
Graeber argues that the U.S. Federal Reserve is not that different — and he points out that the U.S. has always had a debt.
"The only person who tried to pay it down, and also eliminate the central bank, was Andrew Jackson, and it seems that that's what led to the panic of 1836 and it led to catastrophic consequences," he says.
The Danger Zone
Economist Kenneth Rogoff says there is danger in debt — and that danger can become explosive when a country's debt reaches a certain level. Last year, Rogoff and his colleague Carmen Reinhart, senior fellow at the Peterson Institute for International Economics, went through the financial data of 44 countries over the past 200 years and found that when government debt exceeds 90 percent of gross domestic product, countries suffer slower growth.
Depending how you measure it, estimates of the current U.S. debt ratio range between 65 percent and 98 percent.
"There's no hard-and-fast rule, but 90 percent seems to be a useful threshold," Rogoff, tells Guy Raz, host of weekends on All Things Considered.
Topping that threshold can slow down the economy's growth rate by 1 percent, Rogoff says. And while that might not sound like much, it can mean the difference between a robust economy and one wheezing under the weight of high long-term unemployment.
Some economists, including Nobel Prize winner Paul Krugman, say the way to speed up that growth is to take advantage of today's low interest rates. The idea being if a country spends and invests more, it will be able to make more in the long run.
But Rogoff isn't enthusiastic about that tactic.
"Interest rates can change like the weather; they change very suddenly," he says. "You can't get your debt levels down suddenly."
To Rogoff, quickly injecting more money into an ailing economy isn't a long-term solution. He would like to see the Federal Reserve promote inflation, for example by buying treasury bonds.
"Frankly this is a once in a 75- or 100-year situation when having a bit of extra inflation would be just what the doctor ordered," he says.
But that's a non-starter at a time when politicians and economists live in fear of inflation.
GUY RAZ, host: Depending on how you look at it, America's total debt is equal to more than 90 percent of our total economic output. That's the highest level of debt since the end of the Second World War. But it's not the highest level in the world. Japan's public debt, for example, is more than twice as big as its annual income.
Still, according to Ken Rogoff, a former chief economist at the IMF and now a professor at Harvard, once an economy crosses 90 percent, it's a dangerous place to be. He and his colleague, economist Carmen Reinhart, looked at the financial history of 44 countries over the past 200 years. And they found that in many cases, once a country hits that 90 percent level, there's a good chance its economy will begin to suffer.
Prof. KENNETH ROGOFF (Harvard University): There's no hard and fast number, but 90 percent seems to be a useful threshold where when you're an advanced economy, like the United States, the United Kingdom, France, Germany, when you get above that level, it starts to hit your growth. Remarkably, lower than that, it's not so obvious that it affects your growth, although I must say much more research remains to be done. But when you start getting over 90 percent on average over the last couple hundred years, that's been associated with 1 percent lower growth. Now, that may not seem like a crisis, but it really can add up. That's a lot of money.
RAZ: Now, obviously, we're talking about this in the context of the United States' debt-to-GDP ratio exceeding 90 percent, total debt of the United States. So that's a problem based on the data that you've gathered, right?
ROGOFF: Yes. The United States is certainly up at a high debt level. In fact, if you add in state and local debt - and that's sort of reasonable to do, to look at the whole government system - it's higher than it's ever been. It's even higher than at the end of World War II. And I think even more worrisome is at least up to this point, there's been no conspicuous political will to rein it in.
The deficits explode, and that's not even counting Social Security, Medicare, these old-age programs that aren't factored into the debt level. So I think we certainly have reached a worrisome level. We're not at a crisis level. We are, after all, the United States. But I do think we've reached a point where we do need some kind of idea of how we're reining it in over the next five to 10 years in a firm and credible way.
RAZ: So if we are approaching, let's say, a crisis point, you would say that you could understand some of these legislators, these lawmakers, on Capitol Hill who say I will not re-vote to raise the debt ceiling under any circumstance. We have got to take care of this now.
ROGOFF: I'm not very sympathetic to that. I mean, it's really like a completely artificial crisis. We certainly don't want to default just for the heck of it. We don't want to default, say, well, we just - we're worried about 10 or 15 years from now, so we're going to default now. I don't think creditors are going to feel a lot better about that.
RAZ: Would you argue that we need to tackle the debt issue right now immediately, even at the risk of slowing down the economy temporarily?
ROGOFF: Well, I think we need to approach the problem holistically. First of all, no, we can't dramatically bring down our deficit because tax revenues are very low because of the recession, and we need to do things fairly gradually to look at the long picture. But there's certainly a lot of things we can do.
Of course, spending exploded with the fiscal stimulus, and there's ideas to rein that in. But also, we need to improve our tax system. It's really a mess. It's incredibly complicated. Rates are low, and yet there are all kinds of loopholes and ways to get around things that really need to be removed, and we can get a more efficient tax system and, frankly, collect more revenues with less harm to the economy than we have now.
RAZ: That's Ken Rogoff. He's a professor of economics at Harvard University. His most recent book is called "This Time Is Different: Eight Centuries of Financial Folly," that's co-written with Carmen Reinhart. Ken Rogoff, thank you so much.
ROGOFF: My pleasure. Transcript provided by NPR, Copyright NPR.